# Microeconomic theory

1. In the Microeconomic theory, the “supply” curve of a good/service represents:

A) The price that a consumer is willingness to pay for purchasing a good/service

B) A function of the price of a good/service

C) A function of the quantity of a good/service

D) The quantity that a firm is willing to sell as the price per unit changes

2. The “demand” curve of a good/service represents:

A) A function with two independent variables

B) A relationship between quantity and price

C) The price that a consumer decides to pay independently on the purchased quantity

D) Nothing of above

3. The market clearing can be obtained when:

A) Demand is higher than supply

B) Demand is lower than supply

C) Demand is equal to the supply

D) Nothing of above

4. The supply function of a good can change (and the curve shifts) when:

A) The cost of raw materials decreases

B) The fashion changes

C) The quantity changes

D) None of above

5. The “elasticity” of demand function represents:

A) The delta percentage of the quantity with respect to the delta percentage of the price of a good

B) The delta of the quantity with respect to the delta of the price of a good

C) The sensitivity of the supplier to react when prices change

D) Both b) and c)

6. In which case we can say the supply is “rigid”?:

A) When the supply function is a horizontal line

B) When the supply function has a positive slope

C) When the supply function has a negative slope

D) Nothing of above

Let consider the market is in equilibrium. Explain, briefly:

1. when there could be a change in the ‘slope’ of the demand function
2. when the demand can ‘shift’ above or below.

Please, make a real example (by considering a demand of a good or a service) to explain this (100-200 words).

1. Please, try to solve the following exercise:

Let suppose the market demand curve for a product is given by:

qd = 30 −0.5p

and the market supply curve is given by

qs =−10 + 2p

1. What are the equilibrium price and quantity?
2. At the market equilibrium, what is the price elasticity of demand?
3. Suppose the price in this market is \$40, are you in a situation of shortage or surplus? Please, explain.

Solution

1. In the Microeconomic theory, the “supply” curve of a good/service represents:

A) The price that a consumer is willingness to pay for purchasing a good/service

B) A function of the price of a good/service

C) A function of the quantity of a good/service

D) The quantity that a firm is willing to sell as the price per unit changes

2. The “demand” curve of a good/service represents:

A) A function with two independent variables

B) A relationship between quantity and price

C) The price that a consumer decides to pay independently on the purchased quantity

D) Nothing of above

3. The market clearing can be obtained when:

A) Demand is higher than supply

B) Demand is lower than supply

C) Demand is equal to the supply

D) Nothing of above

4. The supply function of a good can change (and the curve shifts) when:

A) The cost of raw materials decreases

B) The fashion changes

C) The quantity changes

D) None of above

5. The “elasticity” of demand function represents:

A) The delta percentage of the quantity with respect to the delta percentage of the price of a good

B) The delta of the quantity with respect to the delta of the price of a good

C) The sensitivity of the supplier to react when prices change

D) Both b) and c)

6. In which case we can say the supply is “rigid”?:

A) When the supply function is a horizontal line

B) When the supply function has a positive slope

C) When the supply function has a negative slope

D) Nothing of above

Let consider the market is in equilibrium. Explain, briefly:

1. when there could be a change in the ‘slope’ of the demand function
2. when the demand can ‘shift’ above or below.

Please, make a real example (by considering a demand of a good or a service) to explain this (100-200 words).

1. Slope of the demand curve changes when the change in price delta percentage changes more rapidly than the quantity delta changes. This happens when the preferences of people change. Usually this is the case when income of people or of a group change (rises or decreases). This is also the case when the good is non – replenishable or valuable. In the case when a good move from one category to another. The prices change more rapidly or less rapidly than the previous ration compared to quantity.
2. The shift of a demand curve takes place when there is a change in any non-price determinant of demand, resulting in a new demand curve. Non-price determinants of demand are those things that will cause demand to change even if prices remain the same—in other words, the things whose changes might cause a consumer to buy more or less of a good even if the good’s own price remained unchanged Some of the more important factors are the prices of related goods (both substitutes and complements), income, population, and expectations. The shift means an increase in demand with consequences for the other variables

Example: Changes in the prices of related goods (substitutes and complements). Changes n price of sugar or tea will make demand curve to shift above or below

1. Please, try to solve the following exercise:

Let suppose the market demand curve for a product is given by:

qd = 30 −0.5p

and the market supply curve is given by

qs = −10 + 2p

1. What are the equilibrium price and quantity?
2. At the market equilibrium, what is the price elasticity of demand?
3. Suppose the price in this market is \$40, are you in a situation of shortage or surplus? Please, explain.

A)

30 – 0.5p = -10 + 2p

40 = 2.5p

P = 16

Q = 22

B)

Dq = -0.5 dp

P Dq/QDp = (-0.5/Q) * P

Elasticity = -0.5* (16/22)

Elasticity = -0.36

C)

Qd= 10

Qs = 70

The goods supplies is available in surplus since the quantity supplied is higher than quantity demanded.