Part A.

MULTIPLE CHOICES

1. The law of demand states that an increase in the price of a good

a. increases the supply of that good
b. decreases the quantity demanded for that good
c. decreases the demand for that good
d. increases the quantity supplied of that good

2. A normal good can be defined as one which consumers purchase more of as

a. Prices rise
b. Incomes fall
c. Incomes increase
d. The prices of other products increase

3. A substitutes can be defined as one which consumers purchase more of as

a. Prices rise
b. Incomes fall
c. Incomes increase
d. The prices of other products increase

4. Price elasticity of demand is defined to be

a. The change in quantity demanded resulting from a 1 cent change in price
b. The percentage change in price resulting from a 1 unit change in quantity demanded
c. The percentage change in quantity demanded resulting from a 1 percent change in price
d. The change in the price of a good divided by the resulting change in its quantity demanded

5. Suppose that the price elasticity of demand for a bottle of syrup has been estimated at -2. If quantity
demanded increased by 10 percent, price must have changed by
a. 5 percent lower
b. 5 percent higher
c. 10 percent lower
d. 10 percent higher

6. In 1976, a frost in Brazil killed over 500 million coffee trees and damaged many more. A civil war in
Angola, a major supplier of coffee, cut back its crop. And, an earthquake in Guatemala disrupted the
flow of coffee. In spite of these disasters, these three producers reported an increase in export
earnings. On the basis of this information, which of the following must be true
a. The demand for coffee is price elastic
b. The supply of coffee is price elastic
c. The demand for coffee is price inelastic
d. The supply of coffee is price inelastic

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7.A price ceiling is binding when it is set
a. above the equilibrium price, causing a shortage.
b. above the equilibrium price, causing a surplus.
c. below the equilibrium price, causing a shortage.
d. below the equilibrium price, causing a surplus.

For the question no. 8 and 9

Price ($) QD QS
(ton per annum) (ton per annum)
1 1,000 400
2 900 500
3 800 600
4 700 700
5 600 800
6 500 900
7 400 1,000
8 300 1,100

8. In the table above what will be the equilibrium market price?

a. $ 1
b. $ 2
c. $ 3
d. $ 4

9. If the government set a price floor of $ 6 and agreed to buy any resulting surplus to stockpile it, how
much would the government has to spend in the first year?
a. $ 1,200
b. $ 1,600
c. $ 2,400
d. $ 2,800

10.The tax burden will fall most heavily on buyers of the good when the demand curve
a. is relatively steep, and the supply curve is relatively flat.
b. is relatively flat, and the supply curve is relatively steep.
c. and the supply curve are both relatively flat.
d. and the supply curve are both relatively steep.

PART B. FILL IN THE BLANKS

Figure 1. Change in market equilibrium

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Referring to Figure 1, assume that the initial demand and supply curves are D1 and S1. If the income
decreases, the demand (1) ………. (increase/decrease/constant) thus D1 shifts to (2) ………… (D2/D3).
A shift in the supply curve from S1 to S2 might be caused by the cost of production (3) ………….
(increase/decrease/constant). If the initial demand and supply curves are D1 and S1, then the demand D1
shifts to D2, at the price P1, the quantity demanded will be (4) ……….. (more/less/same) than/with the
quantity supplied and market is in situation (5) ……….. (surplus/shortage). An automatic adjustment will
bring the price (6) ………. (up/down/constant) toward a new equilibrium. An increase in the demand for
goods will tend to cause the equilibrium price (7) ……………. (increase/decrease/constant) and the
equilibrium quantity (8) ..……….. (increase/decrease/constant). If both the supply and the demand
decrease at the same time will cause the equilibrium price (9) ……… (increase/decrease/ constant) and the
equilibrium quantity (10) ……….. (increase/decrease/constant).

PART C. ESSAYS

Suppose “Kita” convenience store sold only 2 brands of bottled water namely “CAI” and “BANYU”. In
order to fulfill a group assignment of Introductory Microeconomics, students are conducting a survey
results in a demand schedule of “CAI” at any income level. The students also generate a demand schedule
of “BANYU” at any price level of “CAI” as follows:

Price CAI QD CAI QD CAI QD BANYU

(Rp) (Income Rp 2 million) (Income Rp 3 million)
1.000 30 40 16
Questions:
3.000 25 35 18
1. Please
5.000 20 20 20
calculate
7.000 15 15 22 price
9.000 10 8 24
elasticity
of demand “CAI” when its price increases from Rp. 1.000 to Rp 3.000 at income level of (a) Rp 2

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 million and (b) Rp 3 million. What is the effect of a 100% price increase of ‘CAI” on its quantity
demanded? Describe what will happen to “Kita” total revenue when the price of “CAI” increases?
2. Please calculate income elasticity of demand “CAI” when income level increases from Rp 2 million
to Rp 3 million at price level of (a) Rp 1000 and (b) Rp 3000. What kind of good of “CAI” based on
its income elasticity of demand?
3. Please calculate cross price elasticity of demand “BANYU” in relation to “CAI” in the situation price
of “CAI” increases from Rp 5.000 to Rp 7.000. If the price of “CAI” increases by 10%, how much
change of demand for “BANYU”? What kind of good of “BANYU” in relation to “CAI” based on its
cross price elasticity of demand?

Notes: Please use the midpoint method (or arc elasticity).