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Question Bank- Microeconomics

The document outlines questions related to economic concepts such as price elasticity of demand, income elasticity of demand, price floors, and indirect taxes, providing guidance on how to address each question. It emphasizes the need for definitions, explanations, diagrams, and real-world examples to support answers, while also noting the importance of evaluating the effectiveness and limitations of economic policies. The document specifies maximum scores for incomplete answers and encourages a comprehensive understanding of the topics.

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Sanghya Mahendran
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22 views2 pages

Question Bank- Microeconomics

The document outlines questions related to economic concepts such as price elasticity of demand, income elasticity of demand, price floors, and indirect taxes, providing guidance on how to address each question. It emphasizes the need for definitions, explanations, diagrams, and real-world examples to support answers, while also noting the importance of evaluating the effectiveness and limitations of economic policies. The document specifies maximum scores for incomplete answers and encourages a comprehensive understanding of the topics.

Uploaded by

Sanghya Mahendran
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1. Explain two determinants of price elasticity of demand.

[10]

Answers may include:


• Terminology: price elasticity of demand, demand.
• Explanation: that price elasticity of demand depends upon a number of determinants and
two of them should be explained, such as the number and closeness of substitutes,
degree of necessity, proportion of income spent on the good, time and others.
• Diagram: to show price elasticity of demand, for example changing along a straight-line
demand curve or diagrams of relatively more or less elastic demand curves.
A maximum of [6] should be awarded if only one of the two determinants is addressed.

2. Explain why products may have different income elasticities of demand. [10]

Answers may include:


• Terminology: income elasticity of demand (YED)
• Explanation: that a positive YED is where an increase in income leads to an
increase in demand/a decrease in income leads to a decrease in demand and
that this is associated with normal goods; that a negative YED is where an
increase in income leads to a decrease in demand/a decrease in income leads
to an increase in demand and that is associated with inferior goods; that some
goods may have a high income elasticity of demand (ie income elastic) and
some may have a low income elasticity of demand (ie income inelastic).
• Diagram: demand and supply diagram showing relevant shifts of demand,
Engel curve.
A maximum of [6] should be awarded if only one aspect of the question is
addressed.

3. Using real world example(s) evaluate the effectiveness of price floors in achieving
a reduction in the consumption of demerit goods. [15]

Answers may include:


 definitions of price floor, demerit goods
 diagram showing the imposition of a price floor, resulting in increased price
and decreased quantity demanded (consumed)
 explanation that the imposition of a price floor on the market for a demerit
good would increase the price and reduce the quantity demanded (and
consumed) of the good, moving consumption of the good closer to the
socially optimal quantity
 examples of cases where price floors have been imposed to discourage the
consumption of demerit goods
 synthesis or evaluation.

Evaluation may include:


 Consideration of the limitations of the policy: unlike indirect taxes, price floors
do not increase government revenues; may lead to surpluses and attempts by
the producers to sell the surpluses at a price below the legally set minimum (in
parallel markets); may increase the producers’ revenues and profits (if the
demand for the demerit good is inelastic).
 Consideration of the strengths of the policy: the threat of a price floor may
cause the suppliers to modify the product to reduce the negative externalities;
price floors may be used in cases where the local government is not legally
allowed to impose indirect taxes or ban the use of the demerit good. A price
floor allows government to set the price, a tax might be absorbed by abnormal
profit-making producers.
 Consideration of the strengths and limitations of alternative policies such as
indirect taxes and government regulations (restrictions).

4. Using real world example(s), discuss the significance of price elasticity of demand
(PED) for a government imposing an indirect tax on a good. [15]

Answers may include:


• definitions of indirect tax, price elasticity of demand (PED)
• diagram(s) to show the effect of taxation on the market for a good and how the price
elasticity of demand (PED) will impact the outcome
• explanation that the government uses indirect taxes to raise revenue as well as to limit the
production/consumption of demerit goods
• examples of specific products upon which a government has imposed indirect taxes in
practice
• synthesis or evaluation (discuss).
Discussion may include: consideration of the extent to which government revenue and the
production/consumption of the product will be impacted by the PED, consideration of the
effect of PED on how the tax burden will be divided between consumers and producers,
consideration of the effect of PED on workers (employment), consideration of the difficulties
in measuring PED and in determining the socially optimal level of production/consumption
(when taxes are imposed to limit the production/consumption of demerit goods).

Examiners should be aware that candidates may take a different approach which, if
appropriate, should be rewarded.
NB: It should be noted that definitions, theory, and examples that have already been given in
part (a), and then referred to in part (b) should be rewarded.

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