Section A: Answer ALL TWENTY questions using the Excel spreadsheet

1. Consider the market for bus travel, where equilibrium price and quantity is determined by demand and supply. If bus travel is an inferior good and there is an increase in income and at the same time, the government subsidises bus travel, which of the following will occur? (3 marks)

(a) The equilibrium price and quantity will be lower.

(b) The equilibrium quantity will be higher, but the impact on price will be unknown.

(c) The equilibrium price will be lower, but the equilibrium quantity will be higher.

(d) The equilibrium price will be lower, but the impact on quantity will be unknown.

2. Which of the following statements is true for a Giffen good? (3 marks)

(a) Following a fall 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.

(b) Following a fall in the price of the good, there will be an increase in the quantity

demanded due to both the substitution and income effect and the two effects will

therefore reinforce each other.

3.

Consider a firm’s demand equation, which is given as: ⃞ = 100 − 5⃞ where Q is the quantity demanded and P is the firm’s price. What would be the price elasticity of demand when the price is £10? (3 marks)

(a) 1− = ⃞ߝ⃞

(b) 5− = ⃞ߝ⃞

(c) 40.0− = ⃞ߝ⃞

330− = ⃞ߝ⃞

4.

If we have a cross-price elasticity of demand of ,5.7+ = ⃞ߝ⃞which combination of products would best fit with this ⃞ߝ⃞value? (3 marks)

(a) Cabbages and cauliflowers

(b) iPhone and iPhone charger

(c) Washing powder (for clothes) and washing up liquid (for crockery/cutlery)

(d) A chicken microwave meal and a vegetarian microwave meal

Quantity of Labour

Quantity of Capital

Output

0

5

0

10

5

100

20

5

250

30

5

450

40

5

575

50

5

650