AMERICAN UNIVERSITY OF RAS AL KHAIMAH

SCHOOL OF BUSINESS
Course: Principles of Microeconomics
Course Code: ECON 103

Test 1

Student Name:Student ID:..

(This Test 1 accounts for 15% of your total marks to pass this course)

SECTION A: Each multiple choice question has 1 mark (total 14 marks)

1) In the circular-flow diagram, firms produce

a.
b.
c.
d.

goods and services using factors of production.

output using inputs.
factors of production using goods and services.
Both (a) and (b) are correct.

2) In the markets for factors of production in the circular-flow diagram,

a. households provide firms with labor, land, and capital.
b. households provide firms with savings for investment.
c. firms provide households with goods and services.
d. firms provide households with profit.
Figure 1
soccer balls
225
200

175
B

150
125
D

100

75
50
25

F
30

60

sweaters

90 120 150 180 210 240 270 300 330 360

3) Refer to Figure 1. If this economy devotes all of its resources to the production of sweaters,
then it will produce
a) 0 sweaters and 200 soccer balls.
b) 180 sweaters and 125 soccer balls.
c) 300 sweaters and 0 soccer balls.
d) 300 sweaters and 200 soccer balls.
4) Refer to Figure 1. A movement from point C to point D could be caused by
a) unemployment.
b) a decrease in society's preference for sweaters.
c) fewer resources available for production of sweaters.
d) All of the above are correct.

5) Refer to Figure 1. The opportunity cost of this economy moving from point A to point C is:
a) 75 soccer balls.
b) 125 soccer balls.
c) 125 soccer balls and 240 sweaters.
d) 240 sweaters.
6. For a particular good, a 5 percent increase in price causes a 15 percent decrease in quantity
demanded. Which of the following statements is most likely applicable to this good?
a. There are many substitutes for this good.
b. The good is a necessity.
c. The market for the good is broadly defined.
d. The relevant time horizon is short.
7. For a particular good, a 10 percent increase in price causes a 5 percent decrease in quantity
demanded. Which of the following statements is most likely applicable to this good?
a. There are many close substitutes for this good.
b. The good is a necessity.
c. The market for the good is narrowly defined.
d. The relevant time horizon is long.
8. For a particular good, a 10 percent increase in price causes a 15 percent decrease in quantity
demanded. Which of the following statements is most likely applicable to this good?
a. There are no close substitutes for this good.
b. The good is a necessity.
c. The market for the good is broadly defined.
d. The relevant time horizon is long.
9. For a particular good, a 5 percent increase in price causes a 2 percent decrease in quantity
demanded. Which of the following statements is most likely applicable to this good?
a. There are many close substitutes for this good.
b. The good is a luxury.
c. The market for the good is broadly defined.
d. The relevant time horizon is long.
10. If the price elasticity of demand for a good is 0.4, then a 10 percent increase in price results
in a:
a. 0.4 percent decrease in the quantity demanded.
b. 2.5 percent decrease in the quantity demanded.
c. 4 percent decrease in the quantity demanded.
d. 40 percent decrease in the quantity demanded.

11. As we move downward and to the right along a linear, downward-sloping demand
curve,
a. both slope and elasticity remain constant.
b. slope changes but elasticity remains constant.
c. both slope and elasticity change.
d. slope remains constant but elasticity changes.
12. Refer to Table 1 below. Using the midpoint method, if the price falls from $80
to $60, the absolute value of the price elasticity of demand is
a. 20.
b. 10.
c. 2.33.
d. 0.43.
13. Refer to Table 1 below. Using the midpoint method, if the price falls from $40
to $0, the price elasticity of demand is
a. zero.
b. inelastic.
c. unit elastic.
d. elastic.
14. Refer to Table 1 below. Using the midpoint method, if the price falls from $60
to $40, the price elasticity of demand is
a. zero.
b. inelastic.
c. unit elastic.
d. elastic.
Table 1:
Price
$100
$80
$60
$40
$20
$0

Quantity
0
10
20
30
40
50

SECTION B: SHORT ANSWER QUESTIONS (10 marks)

1. Using the outline below, draw a circular-flow diagram representing the interactions
between households and firms in a simple economy. Explain briefly the various parts of
the diagram (6 marks).

2. Consider the following pairs of goods. For which of the two goods would you expect the
demand to be more price elastic? Why? (4 marks).
a. water or diamonds

b. insulin or nasal decongestant spray

c. food in general or breakfast cereal

d. gasoline over the course of a week or gasoline over the course of a year
________________________________NO MORE QUESTIONS___________________________

Total: ../24 marks