Introduction to Economics - I    (Midterm)

 SECTION A

1. Short Answer Questions:

a) Distinguish between positive and normative statements by giving an example of each as far as economics is concerned. 

b) State the law of demand and the law of supply

c) Explain how profits can effect resource allocation

d) Explain the law of diminishing returns

e) Define marginal product end marginal cost

2. True - False Questions:

a) Economic profits are the same as the profits defined by accountants

b) A firm that is producing at an output is more than the point of minimum average total cost has excess capacity in the short run

c) Marginal cost curve cuts the average total cost curve and average variable cost curve at their maximum level.

d) In the short run all factors of production can be varied.

e) We can say that when the price of a good increases, the quantity demanded will increase and quantity supply will decrease (other things being equal)

SECTION B 

3. Explain how production possibility curve illustrates opportunity cost, choice, scarcity and inefficient use of resources

4. Suppose that market price and the quantity traded are determined by supply and demand at the equilibrium. Now illustrate by using graphs (one for each case) what happens to the price and the quantity traded in the following cases:

a) a fall in consumer income

b) a decrease in the cost of production (input prices)

5. Suppose that the individual spends some of his income on good X (shown on horizontal axis) and the rest of his income on the other goods (shown on Y axis). Assume that the price of X falls  (other things are constant) from P0 to P1, further from P1 to P2, and finally from P2 to P3. From this information, derive the individual's demand curve for good X by using the indifference curves and budget lines.

6. By using the price and quantity information from the following table, calculate price elasticity of demand for each good and comment on the coefficient of price elasticity of demand for each case:

Price and quantity information:

7. What determines the quantity demanded? List five of more important factors and explain how change in each factor will affect quantity demanded.