Answer Happy

Section A: Answer ALL TWENTY questions 1. If there is a shortage in the market, which of the following correctly explains the situation and solution? (3 marks) (a) The price is above the equilibrium, leading to demand exceeding supply, so the price must fall. (b) The price is below the equilibrium, leading to demand exceeding supply, so the price must fall. (c) The price is above the equilibrium, leading to demand exceeding supply, so the price must rise (d) The price is below the equilibrium, leading to demand exceeding supply, so the price must rise. 2. Which of the following statements is true for an inferior, but non-Giffen good? (3 marks) (a) Following a rise in the price of the good, there will be an increase in the quantity demanded due to the substitution effect; a decrease in the quantity demanded due to the income effect; the substitution effect will outweigh the income effect. (b) Following a rise in the price of the good, there will be a decrease in the quantity demanded due to both the substitution and income effect and the two effects will therefore reinforce each other. (c) Following a rise in the price of the good, there will be a decrease in the quantity demanded due to the substitution effect; an increase in the quantity demanded due to the income effect; the substitution effect will outweigh the income effect. (d) Following a rise in the price of the good, there will be a decrease in the quantity demanded due to the substitution effect; an increase in the quantity demanded due to the income effect; the income effect will outweigh the substitution effect. 3. Consider the market for chocolate, where we currently have equilibrium and assume that chocolate is a normal good. In which of the following situations would the impact on the market price of chocolate be the biggest? (3 marks) (a) A tax is imposed on chocolate at the same time as consumer incomes rise. The price elasticity of demand for chocolate is PED = -0.4. while the price elasticity of supply of chocolate is PES = +3. (b) A tax is imposed on chocolate at the same time as consumer incomes rise. The price elasticity of demand for chocolate is PED = -14, while the price elastioty of supply of chocolate is PES = +0.3. (c) A tax is imposed on chocolate at the same time as consumer incomes fall. The price elasticity of demand for chocolate is PED = -04, while the price elasticity of supply of chocolate is PES = +3 (d) A tax is imposed on chocolate at the same time as consumer incomes fall. The price elasticity of demand for chocolate is PED = -04while the price elasticity of supply of chocolate is PES +0.3.