Topic 4: Economic Efficiency and Government Intervention

Question 1

If income increases by 10% and the quantity demanded of a good increases by 5%, the good is [ ].
(Note: the missing term required for this question is a word, not a calculated number.)

Answer 1

normal

Question 2

If a product has a price elasticity of 1.5, then raising the price will increase Total Revenue. True or False?

Answer 2

False

Question 3

A local drama theatre company decreases its ticket price by 20%. The quantity demanded of tickets increases from 1000 tickets per week to 1, 100 tickets per week. What is the price elasticity of demand? Use the percentage change method ( Ed = %∆Q / %∆P ). (Note: you are given the percentage change in Price in the question but you need to firstly calculate the percentage change in Quantity from the numbers given. )
You must put the absolute value in. (In other words, do not put negative sign, even though it is an inverse mathematical relationship here b/w P and Q.)

Answer 3

0.5

Question 4

Assume that you are selling something on E-bay (i.e. you are the seller or producer). Your minimum selling price is $200. You actually sell it for $450. Your producer surplus is therefore:

Answer 4

$250

Question 5

If Peter’s maximum willingness to pay for a course is $800, and the fees Peter actually paid are $300, then Peter’s consumer surplus in dollars is:

Answer 5

$500

Question 6

When a local drama theatre company decreased its ticket prices by 20%, the amount of sandwiches sold by a nearby cafe increased from 100 per day to 110 per day. Calculate the cross-price elasticity of demand ( Ec = %∆Qa / %∆Pb ). (Hint: You need to firstly calculate the percentage change in the cafe’s sandwhich sales.) Remember for this elasticity the negative or positive sign is very important so you need to put the correct sign in front of your number. (Do not put a space between the sign and number; e.g. not - 2.5 but -2.5).

Answer 6

-0.5