Chapter 2 The Basics of Supply and Demand

1) A simple linear demand function may be stated as Q = a - bP + cI where Q is quantity demanded, P is the product price, and I is consumer income. To compute an appropriate value for c, we can use observed values for Q and I and then set the estimated income elasticity of demand equal to:

A) c(I/Q)

B) c(Q/I)

C) -b(I/Q)

D) Q/(cI)

2) A simple linear demand function may be stated as Q = a - bP + cI where Q is quantity demanded, P is the product price, and I is consumer income. To compute an appropriate value for b, we can use observed values for Q and P and then set -b(P/Q) equal to the:

A) income elasticity of demand.

B) cross-price elasticity of demand.

C) price elasticity of demand.

D) price elasticity of supply.

Answer: C

3) Suppose the observed annual quantity of steel exchanged in the European market is 30 million metric tons, and the observed market price is 90 euros per ton. If the price elasticity of demand for steel is -0.3 in Europe, what is an appropriate value for the price coefficient (b) in a linear demand function Q = a - bP?

A) b = 0.9

B) b = -0.9

C) b = 0.1

D) b = -0.1

4) Suppose the observed annual quantity of steel exchanged in the European market is 30 million metric tons, and the observed market price is 90 euros per ton. If the linear demand function for steel takes the form Q = a - 0.9P, what is an appropriate value for the intercept coefficient a?

A) a = -51

B) a = 51

C) a = 111

D) a = -111