microeconomics

Question 1

assumptions underlying the law of demand [2] HL

Answer 1

1. income and substitution effects
2. law of diminishing marginal utility

Question 2

non-price determinants of demand [5]

Answer 2

1. income
2. tastes and preferences
3. future price expectations
4. price of related goods (substitutes and complements)
5. change in demographic

Question 3

functions of price mechanism [2]

Answer 3

1. resource allocation
2. rationing

Question 4

substitution effects

Answer 4

change in quantity demanded of the good from its substitute when price changes

Question 5

assumptions underlying the law of supply [2] HL

Answer 5

1. law of diminishing marginal returns
2. increasing marginal costs

Question 6

non-price determinants of supply [6]

Answer 6

1. change in costs of factors of productions
2. changes in technology
3. future price expectations
4. government intervention (indirect taxes and subsidies)
5. prices of related goods (joint and competitive supply)
6. number of firms

Question 7

2 types of indirect tax

Answer 7

1. excise tax- imposed on particular goods and services
2. taxes imposed on all (or most) goods and services

Question 8

determinants of ped [4]

Answer 8

1. number of substitutes
2. closeness of substitutes
3. degree of necessity
4. proportion of income spent on good

Question 9

ped yed / pes greater than one

Answer 9

elastic

Question 10

normal good yed

Answer 10

greater than 0

Question 11

luxury good yed

Answer 11

greater than 1

Question 12

necessity yed

Answer 12

0-1

Question 13

inferior good yed

Answer 13

negative
more inferior more elastic

Question 14

primary commodities are more…

Answer 14

• demand + supply inelastic
• more price volatile
  ped- necessities, no substitutes
  pes- perishable and takes long time to grow

Question 15

determinants of pes [5]

Answer 15

1. length of time
2. spare productive capacity of firms
3. ability of store stocks
4. mobility of factors of production
5. costs of factors of production

Question 16

purpose of indirect taxes [2]

Answer 16

1. increase tax revenue
2. correcting market failure

Question 17

purpose of subsidies [5]

Answer 17

1. increase producer revenue
2. make necessities more affordable
3. encourage production and consumption of socially desirable goods (correcting allocative inefficiency)
4. support the growth of particular industries
5. encourage exports

Question 18

analysing subsidies [8]

Answer 18

before and after:
1. equilibrium p and q
2. consumer expenditure
3. price received by firm
4. firm’s revenue
5. subsidy’s expense
6. cs
7. ps
8. dwl

Question 19

stakeholders

Answer 19

1. consumer
2. producer
3. foreign producer
4. workers
5. government
6. society

Question 20

why have dwl when gov subsidises producers

Answer 20

producers become too complacent- reliant
- misallocation of resources

Question 21

why price floor [2]

Answer 21

1. provide support for primary products
2. protect low skilled low wage workers
   - resource and labour market

Question 22

consequences for the economy (subsidies)

Answer 22

• when government buys the surplus- dumping, ppl may get upset

Question 23

when MC bigger than MB at a certain quantity…

Answer 23

cost>benefit
- not efficient at that specific quantity
- overallocation of resources

Question 24

why government imposes price ceiling [2]

Answer 24

1. make goods and services more affordable
2. protect low income households