INSTRUCTION: Answer ONLY FOUR (4) Questions in A-4 size paper. 1. a) Use a downward-sloping demand curve to explain a change in quantity demanded.
b) Use a diagram to show how each of the following events affects the equilibrium quantity and price of cakes:
the cost of ingredients of cakes falls. (4 marks)
households tend to prefer buns to cakes. (4 marks) iii. cakes is assumed a normal good and a fall in consumer income. (4 marks) iv. consumers expect the price of cakes to rise next week. (4 marks) v. the number of confectioneries rises sharply. (4 marks)
2. a) Suppose Shanghai Metropolitan of Arts and Cultures is the sole operator of Shanghai World Expo 2010. The Expo is expected to be running short of funds, so the operator decides to raise revenue.
i. Use a diagram to show and explain how a rise in price of admission would raise total revenue received.
ii. Use a diagram to illustrate and explain how a fall in price of admission would raise total revenue received.
b) Consider a government policy aimed at consuming sugary drinks. Studies estimated that the price elasticity of demand for sugary drinks is 0.8. Assuming the price of a pint of sugary drinks is RMB6 and the government intends to reduce the amount of sugary drinks consumed by 40%. How much should the government increase the price of sugary drinks? (Use the midpoint method for your calculations). (5 marks)
c) Assuming the production of tea in Suzhou increased dramatically in 2000 after the bumper harvest. The following table shows what happened to prices and quantity of tea demanded:
Quantity Demanded (in kg) 10.56 million 18.63 million Price
Use the midpoint method to determine the price elasticity of demand for
tea. (4 marks)
ii. According to your estimate in (i), how might the bumper harvest affect the total revenue of tea producers?
3. a) Bingo’s marginal utility of one visit to a Yoga Centre is 480 utils per visit. His marginal utility of a bottle of Armani perfume is 800 utils per bottle. The price of a bottle of Armani perfume is RMB350 per bottle. He currently spends all his income and this consumer buys his optimal consumption bundle. Determine the price of a visit to Yoga Centre. (4 marks)
Suppose an individual consumes two goods – spaghetti and pizza. He has income of RMB3000. Price of spaghetti is RMB20 while pizza costs RMB10. Label spaghetti on the horizontal axis and pizza on the vertical axis.
i. Determine and explain the slope of this individual’s budget constraint. (4 marks)
ii. Show the effects on his consumption bundle if his income is now raised to RMB4000 and spaghetti is an inferior good.
iii. Assuming both goods are normal goods. The price of spaghetti falls to RMB15 while the consumer has a constant income of RMB3000. Show a derived demand curve for spaghetti (6 marks)
iv. Suppose spaghetti is an inferior good. The price of spaghetti rises to RMB25 while the consumer has a constant income of RMB3000. Show a derived demand curve for spaghetti.
4. a) Explain why the marginal cost (MC) curve is the competitive firm’s supply
curve? (3 marks)
b) Is the business practice of price discrimination possible for a typical competitive firm or a monopoly? Why? (4 marks)
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