I85PREP
⌘ K
NSSCO Economics (6145) study materials
NSSCO Economics (6145) study resources

NSSCO Economics (6145) practice questions

One question at a time. Build your NSSCO Economics (6145) understanding.

First 50 of 199 questions. Each one lists the choices, the correct answer, and an explanation. The checker at the top of this page saves progress in this browser when it is available.

Continue in the practice tool above to load more questions, 50 at a time.

Question 1Basic economic problem and economic systems

A country can produce either 200 tonnes of maize or 100 tonnes of wheat with its given resources. What is the opportunity cost of producing one tonne of wheat?

  1. 100 tonnes of maize
  2. 0.5 tonnes of maize
  3. 200 tonnes of maize
  4. 2 tonnes of maize Correct answer.

Explanation

Opportunity cost is the next best alternative given up. Moving all resources from maize to wheat sacrifices 200 tonnes of maize to gain 100 tonnes of wheat, so each tonne of wheat costs 200/100 = 2 tonnes of maize.

Question 2Basic economic problem and economic systems

Which statement best describes the basic economic problem facing every society?

  1. Wants are unlimited while productive resources are scarce relative to those wants Correct answer.
  2. Governments always lack sufficient tax revenue to fund public services
  3. Some countries have fewer factories than other countries do
  4. Consumers do not always know which goods give them the greatest satisfaction

Explanation

The basic economic problem arises because human wants are infinite but the resources available to satisfy them are limited. This forces every society to choose how to allocate scarce resources among competing uses.

Question 3Basic economic problem and economic systems

In a pure market economy, the three central allocation questions are answered mainly by:

  1. a central planning authority issuing production quotas
  2. the interaction of supply and demand through the price mechanism Correct answer.
  3. the voting decisions of citizens in national elections
  4. customs and traditions passed down through generations

Explanation

A market economy relies on prices generated by supply and demand to signal what to produce, how to produce it and for whom. Profit-seeking producers respond to price signals without central direction.

Question 4Basic economic problem and economic systems

Which of the following is classified as a factor of production called capital?

  1. A deposit of copper ore in the ground
  2. Money saved in a commercial bank account
  3. A worker trained in bookkeeping
  4. A delivery van owned by a retail business Correct answer.

Explanation

In economics, capital refers to man-made goods used to produce other goods and services, such as machinery, tools and vehicles. A delivery van is a produced asset used in the business's operations.

Question 5Basic economic problem and economic systems

A production possibility curve that is concave to the origin illustrates:

  1. constant opportunity cost at every output combination
  2. that an economy can produce beyond the curve with better technology
  3. that resources are equally suited to producing both goods
  4. increasing opportunity cost as more of one good is produced Correct answer.

Explanation

A bowed-out (concave) production possibility curve shows that resources are not perfectly transferable between uses. As more of one good is produced, successively less suitable resources must be shifted, raising the opportunity cost.

Question 6Basic economic problem and economic systems

A point lying inside a country's production possibility curve indicates that:

  1. resources are not fully or efficiently employed Correct answer.
  2. the combination is unattainable with current resources
  3. the country has experienced technological progress
  4. the country has achieved allocative efficiency

Explanation

Any point inside the curve means the economy could produce more of at least one good without sacrificing the other, so resources are idle or used inefficiently. Points on the curve represent full and efficient use.

Question 7Basic economic problem and economic systems

Which feature is most characteristic of a traditional economy?

  1. Production and distribution are guided largely by custom and inheritance Correct answer.
  2. The state owns all major industries and sets output targets
  3. Resources are allocated through forward markets and futures trading
  4. Prices are set by independent regulatory commissions

Explanation

In a traditional economy, economic decisions follow long-established customs, habits and inherited roles, often in subsistence farming or fishing communities. What, how and for whom to produce is determined by tradition rather than markets or planners.

Question 8Basic economic problem and economic systems

In a command economy, the problem of what to produce is resolved primarily by:

  1. decisions of a central planning authority setting national output targets Correct answer.
  2. changes in the exchange rate affecting the prices of imports
  3. bargaining between trade unions and employers over output levels
  4. the profit motive of privately owned firms responding to consumer demand

Explanation

A command economy places ownership of key resources in the state, and a central planning body decides output targets for industries. Prices and quantities are administratively determined rather than set by market forces.

Question 9Basic economic problem and economic systems

A government decides to build a new hospital instead of a new sports stadium on the same land. The sports stadium forgone represents:

  1. an external cost of the hospital
  2. a sunk cost of the hospital
  3. the social benefit of the hospital
  4. the opportunity cost of the hospital Correct answer.

Explanation

Opportunity cost is the value of the next best alternative forgone when a choice is made. Since the land could have been used for a stadium, the lost stadium is the opportunity cost of choosing the hospital.

Question 10Basic economic problem and economic systems

Which of the following best explains why a mixed economy contains both public and private sectors?

  1. Some goods and services are provided by the state while markets allocate most other resources Correct answer.
  2. The government sets every price and output level in the economy
  3. Production is organised entirely by custom and family inheritance
  4. All resources are owned by private individuals and no government intervention occurs

Explanation

A mixed economy combines market allocation with government provision and regulation. Public goods, merit goods and natural monopolies are often state-provided, while private firms operate in most markets.

Question 11Basic economic problem and economic systems

A firm switches from producing 100 units of cloth to 120 units, but must give up 30 units of clothing. What is the opportunity cost of each additional unit of cloth?

  1. 1.5 units of clothing
  2. 0.5 units of clothing Correct answer.
  3. 30 units of clothing
  4. 3 units of clothing

Explanation

The extra cloth produced is 20 units and the clothing sacrificed is 30 units, so the opportunity cost per additional unit of cloth is 30/20 = 1.5 units of clothing. Opportunity cost is measured per unit of the good gained.

Question 12Basic economic problem and economic systems

An economy operating on its production possibility curve reallocates resources to produce more capital goods and fewer consumer goods. The most likely long-run effect is:

  1. the production possibility curve shifts outward because the capital stock grows Correct answer.
  2. the economy moves to a point inside the curve due to lost consumer output
  3. the opportunity cost of capital goods becomes zero
  4. the production possibility curve shifts inward because consumer goods are scarcer

Explanation

Capital goods are used to produce other goods, so sacrificing current consumption to build capital raises future productive capacity. This growth is represented by an outward shift of the production possibility curve over time.

Question 13Basic economic problem and economic systems

A country moves along a bowed-out production possibility curve, producing successively more of good X. Which statement is correct?

  1. The opportunity cost of each extra unit of X rises as production of X increases Correct answer.
  2. The country can avoid opportunity cost by using unemployed resources
  3. The opportunity cost of X stays constant because resources are homogeneous
  4. The opportunity cost of X falls because specialisation improves efficiency

Explanation

Along a concave production possibility curve, resources are imperfectly transferable between goods. As more of X is produced, resources less suited to X must be diverted, so each additional unit costs more of the other good.

Question 14Basic economic problem and economic systems

Which argument is most often used to justify government provision of public goods such as street lighting?

  1. They are always cheaper to produce when the state owns the factory
  2. Consumers are legally barred from buying them from private firms
  3. They are non-excludable and non-rival, so private firms cannot profitably supply them Correct answer.
  4. They generate large external costs that private firms refuse to bear

Explanation

Public goods are non-excludable, so firms cannot charge users, and non-rival, so charging each user would be inefficient. These characteristics create a free-rider problem, which is why the state often finances such goods from taxation.

Question 15Basic economic problem and economic systems

The table-free scenario: an economy can produce either 50 units of rice or 25 units of timber. If it currently produces 30 units of rice and 10 units of timber, the economy is:

  1. operating on its production possibility curve
  2. operating beyond its production possibility curve
  3. experiencing constant opportunity cost at full employment
  4. operating inside its production possibility curve Correct answer.

Explanation

The maximum output combinations lie on the line joining 50 units of rice and 25 units of timber. At 30 rice and 10 timber the economy uses only part of its capacity, so it lies inside the curve and could produce more of either good.

Question 16Basic economic problem and economic systems

Which of the following is an example of a positive statement in economics?

  1. The government ought to subsidise maize farmers to protect the poor
  2. Maize farming is the most important occupation in the country
  3. Farmers deserve a higher share of national income
  4. A rise in the price of maize reduces the quantity demanded by consumers Correct answer.

Explanation

Positive statements are factual claims that can be tested against evidence, such as the relationship between price and quantity demanded. They do not express value judgements about what should happen.

Question 17Basic economic problem and economic systems

A society must decide whether to allocate scarce resources to schools or to hospitals. This decision illustrates the economic concept of:

  1. choice arising from scarcity Correct answer.
  2. equilibrium in the labour market
  3. perfect competition in both sectors
  4. the law of diminishing returns

Explanation

Because resources are scarce, society cannot satisfy all wants at once and must choose between competing uses. Every such choice carries an opportunity cost, which is the essence of the economic problem.

Question 18Basic economic problem and economic systems

A government wishes to increase the output of both goods shown on a production possibility curve. Which change would make this possible?

  1. A fall in consumer demand for one of the two goods
  2. An improvement in technology that raises productivity in both industries Correct answer.
  3. Reallocating existing workers from one industry to the other
  4. Reducing unemployment of existing resources to zero

Explanation

Producing more of both goods requires the whole production possibility curve to shift outward. Technological improvement raises productivity and expands productive capacity, making previously unattainable combinations possible.

Question 19Basic economic problem and economic systems

Which statement about the role of profit in a market economy is correct?

  1. Profit is fixed by government planners to guide resource allocation
  2. Profit exists only in industries where the state owns the means of production
  3. Profit guarantees that income is distributed equally among all citizens
  4. Profit signals where resources are most wanted and attracts firms into those industries Correct answer.

Explanation

In a market economy, profit acts as a signal and incentive: high profits in an industry attract new firms and resources, while losses drive resources out. This helps allocate resources towards goods consumers value most.

Question 20Basic economic problem and economic systems

Two economies face the same production possibility curve. Economy A devotes most resources to consumer goods, while Economy B devotes most to capital goods. Which prediction is most consistent with economic reasoning?

  1. Economy A is likely to grow faster because consumers spend more and boost demand
  2. Economy B will have higher current living standards because capital goods are consumed directly
  3. Both economies will grow at identical rates because their curves are the same
  4. Economy B is likely to grow faster in the long run because it builds more productive capacity Correct answer.

Explanation

Capital goods are used to produce other goods, so an economy that sacrifices current consumption to build capital expands its productive capacity. Over time this shifts its production possibility curve outward faster than Economy A's.

Question 21Demand, supply and market equilibrium

Which statement best describes the relationship between individual demand and market demand for a good?

  1. Market demand equals the quantity demanded by the largest single buyer in the market.
  2. Market demand is the horizontal sum of all individual quantities demanded at each price. Correct answer.
  3. Market demand is the vertical sum of the prices each individual is willing to pay.
  4. Market demand is the average of all individual quantities demanded at each price.

Explanation

Market demand is derived by adding the quantities each consumer demands at every price level, which is a horizontal summation. Averaging quantities or taking the largest buyer ignores the contribution of other consumers. Vertical summation applies to public goods, not ordinary private goods.

Question 22Demand, supply and market equilibrium

A movement along a demand curve for bread is caused by which of the following?

  1. A fall in the price of butter
  2. A rise in the price of bread Correct answer.
  3. An increase in consumers' incomes
  4. A successful advertising campaign for bread

Explanation

A change in the good's own price changes the quantity demanded and is shown as a movement along the existing demand curve. The other factors shift the whole curve because they alter demand at every price. This distinction between movement along and shift of the curve is central to demand analysis.

Question 23Demand, supply and market equilibrium

The law of supply states that, all else equal, as the price of a good rises:

  1. the supply curve shifts to the right.
  2. the quantity supplied falls because consumers buy less.
  3. producers reduce output to keep prices high.
  4. the quantity supplied rises because higher prices raise potential profit. Correct answer.

Explanation

Higher prices make additional production profitable, so firms are willing to supply more, giving an upward-sloping supply curve. A change in price causes a movement along the supply curve, not a shift of it. Consumer buying behaviour belongs to demand analysis.

Question 24Demand, supply and market equilibrium

At the equilibrium price in a competitive market:

  1. quantity demanded exceeds quantity supplied, creating a shortage.
  2. the government must set the price to keep the market stable.
  3. quantity supplied exceeds quantity demanded, creating a surplus.
  4. quantity demanded equals quantity supplied and there is no tendency for price to change. Correct answer.

Explanation

Equilibrium occurs where the demand and supply curves intersect, so planned purchases equal planned sales. At that price neither buyers nor sellers have an incentive to push the price up or down. Shortages and surpluses occur only at prices away from equilibrium.

Question 25Demand, supply and market equilibrium

Which of the following is a non-price determinant of demand for a normal good?

  1. The price of the good itself
  2. The cost of raw materials
  3. The quantity supplied by firms
  4. Consumer income Correct answer.

Explanation

Income is a non-price factor that shifts the demand curve because it affects how much consumers can buy at every price. The good's own price causes movement along the curve rather than a shift. Supply-side factors such as costs affect the supply curve, not demand.

Question 26Demand, supply and market equilibrium

A price ceiling set below the equilibrium price will normally result in:

  1. a persistent surplus because quantity supplied exceeds quantity demanded.
  2. no change because the market always clears at the ceiling.
  3. an immediate rise in the equilibrium price.
  4. a persistent shortage because quantity demanded exceeds quantity supplied. Correct answer.

Explanation

A binding price ceiling holds the price below equilibrium, so buyers want more than sellers offer, producing excess demand. Because the price cannot rise to clear the market, the shortage persists. Surpluses arise from price floors set above equilibrium.

Question 27Demand, supply and market equilibrium

The demand for a good is said to be price elastic when:

  1. the percentage change in quantity demanded is greater than the percentage change in price. Correct answer.
  2. the demand curve is perfectly vertical.
  3. the percentage change in quantity demanded is smaller than the percentage change in price.
  4. quantity demanded does not respond to a change in price at all.

Explanation

Elasticity measures responsiveness, and demand is elastic when the quantity response proportionately exceeds the price change, giving a coefficient greater than one. A smaller response indicates inelastic demand. Zero response describes perfectly inelastic demand shown by a vertical curve.

Question 28Demand, supply and market equilibrium

A manufacturer's cost of producing notebooks falls sharply. In the market for notebooks, this change will:

  1. cause a movement along the supply curve without shifting it.
  2. shift the demand curve to the right, raising both price and quantity.
  3. shift the supply curve to the left, raising price and lowering quantity.
  4. shift the supply curve to the right, lowering the equilibrium price and raising equilibrium quantity. Correct answer.

Explanation

Lower production costs increase supply at every price, shifting the supply curve rightward. The new intersection with a downward-sloping demand curve lies at a lower price and a higher quantity. A cost change shifts supply rather than moving along it.

Question 29Demand, supply and market equilibrium

The government imposes a minimum price above equilibrium on a farm product. The likely market outcome is:

  1. a new equilibrium at the minimum price with no excess.
  2. a surplus that the government may need to buy or store. Correct answer.
  3. a fall in the price received by farmers.
  4. a shortage that requires rationing.

Explanation

A price floor above equilibrium prevents the price from falling, so quantity supplied exceeds quantity demanded and a surplus develops. Governments often buy or store the surplus to support farmers' incomes. Shortages follow binding price ceilings, not floors.

Question 30Demand, supply and market equilibrium

Two goods, tea and coffee, are substitutes. If the price of tea rises, what happens in the market for coffee?

  1. Demand for coffee increases, raising its equilibrium price and quantity. Correct answer.
  2. Supply of coffee increases, lowering its equilibrium price.
  3. There is a movement down the demand curve for coffee.
  4. Demand for coffee decreases, lowering its equilibrium price and quantity.

Explanation

When the price of a substitute rises, consumers switch toward the other good, so demand for coffee shifts rightward. The new equilibrium shows a higher price and a larger quantity traded. Supply is unaffected because coffee production costs have not changed.

Question 31Demand, supply and market equilibrium

A firm's total revenue rises when it raises its price. This suggests that demand for its product is:

  1. price elastic over that price range.
  2. perfectly elastic.
  3. price inelastic over that price range. Correct answer.
  4. unit elastic.

Explanation

With inelastic demand, quantity falls proportionately less than the price rises, so total revenue increases. If demand were elastic, a price rise would reduce revenue because the quantity fall would dominate. Unit elasticity leaves total revenue unchanged.

Question 32Demand, supply and market equilibrium

Which factor is most likely to make the supply of a product more price elastic?

  1. A shortage of skilled labour needed for production
  2. A very short time period for adjustment
  3. The use of highly specialised machinery that takes years to install
  4. The existence of spare production capacity that can be quickly used Correct answer.

Explanation

Spare capacity allows firms to expand output quickly when prices rise, making quantity supplied more responsive to price. Short time periods and scarce inputs make supply less elastic because output cannot easily be increased. Specialised, slow-to-install machinery also reduces responsiveness.

Question 33Demand, supply and market equilibrium

A simultaneous increase in demand and decrease in supply for a good will definitely cause:

  1. no change in price or quantity.
  2. a fall in the equilibrium price, with a certain rise in quantity.
  3. a rise in equilibrium quantity, with an uncertain effect on price.
  4. a rise in the equilibrium price, with an uncertain effect on quantity. Correct answer.

Explanation

Both a rightward demand shift and a leftward supply shift push the equilibrium price upward. Their effects on quantity work in opposite directions, so the quantity outcome depends on the relative size of the shifts. Hence price is certain while quantity is indeterminate.

Question 34Demand, supply and market equilibrium

The demand curve for a good is a straight downward-sloping line. As price falls toward zero along this curve, price elasticity of demand generally:

  1. falls, becoming more inelastic at lower prices. Correct answer.
  2. remains constant at every point.
  3. rises continuously without limit.
  4. becomes negative in value.

Explanation

Along a straight-line demand curve, elasticity is high at high prices and low at low prices because the same absolute quantity change becomes a larger percentage of a shrinking quantity. Near the price axis demand is elastic; near the quantity axis it is inelastic. Only a constant-elasticity curve keeps elasticity unchanged.

Question 35Demand, supply and market equilibrium

A consumer's income rises and, as a result, she buys less of a particular good. This good is:

  1. a luxury good.
  2. an inferior good. Correct answer.
  3. a complementary good.
  4. a normal good.

Explanation

For an inferior good, demand falls when income rises because consumers switch to preferred substitutes. Normal and luxury goods show demand rising with income. Complementarity describes how goods are consumed together, not the income response.

Question 36Demand, supply and market equilibrium

An effective maximum price on rented housing is likely to cause which combination of effects?

  1. A rightward shift of the supply curve for rental housing
  2. Excess supply of housing and rising rents for tenants
  3. Excess demand for housing and reduced incentive for landlords to supply rental units Correct answer.
  4. An increase in the equilibrium quantity of rental housing

Explanation

A binding price ceiling below equilibrium makes renting less profitable, so landlords supply fewer units while tenants demand more, creating excess demand. The shortage often leads to queues or informal allocation. It does not increase equilibrium quantity or shift supply rightward.

Question 37Demand, supply and market equilibrium

The supply curve for a good shifts to the left while its demand curve remains unchanged. Which outcome is certain?

  1. The equilibrium price rises and the equilibrium quantity falls. Correct answer.
  2. Both equilibrium price and quantity rise.
  3. Both equilibrium price and quantity fall.
  4. The equilibrium price falls and the equilibrium quantity rises.

Explanation

A leftward supply shift moves the intersection with the unchanged demand curve up and to the left. This means a higher equilibrium price and a lower equilibrium quantity. The demand curve has not moved, so there is no offsetting effect.

Question 38Demand, supply and market equilibrium

Which pair of goods is most likely to have a negative cross-price elasticity of demand?

  1. Printers and printer ink Correct answer.
  2. Bus travel and train travel
  3. Butter and margarine
  4. Tea and coffee

Explanation

Negative cross-price elasticity indicates complements, whose consumption moves together: a rise in the price of printers reduces demand for ink. Substitutes such as butter and margarine, tea and coffee, or bus and train travel have positive cross-price elasticities. The sign of the coefficient therefore identifies the relationship.

Question 39Demand, supply and market equilibrium

A market has a perfectly inelastic supply curve and demand increases. What happens?

  1. Quantity rises while price stays the same.
  2. Price and quantity both remain unchanged.
  3. Price rises while equilibrium quantity stays the same. Correct answer.
  4. Both price and quantity rise proportionately.

Explanation

With perfectly inelastic supply, the quantity supplied is fixed regardless of price, shown by a vertical supply curve. An increase in demand therefore bids the price up without changing the quantity traded. Only if supply could respond would quantity rise.

Question 40Demand, supply and market equilibrium

The government grants a subsidy to producers of a staple food. Assuming demand is downward-sloping, the likely result is:

  1. supply shifts right, price falls and quantity traded rises. Correct answer.
  2. demand shifts right, price and quantity both rise.
  3. demand shifts left, price and quantity both fall.
  4. supply shifts left, price rises and quantity traded falls.

Explanation

A subsidy lowers producers' effective costs, increasing supply at every price so the supply curve shifts rightward. The new equilibrium has a lower price for consumers and a larger quantity traded. Subsidies operate on the supply side, not by shifting demand.

Question 41Demand, supply and market equilibrium

A firm faces unit elastic demand at its current price. If it raises price slightly, total revenue will:

  1. rise because the price increase outweighs the quantity fall.
  2. fall sharply because quantity collapses.
  3. stay approximately unchanged because the percentage fall in quantity equals the percentage rise in price. Correct answer.
  4. fall to zero because demand is perfectly elastic.

Explanation

Unit elastic demand means the percentage change in quantity demanded exactly offsets the percentage change in price, leaving total revenue constant. Revenue rises only when demand is inelastic and falls when demand is elastic. Perfect elasticity is a separate extreme case.

Question 42Demand, supply and market equilibrium

In a market where both demand and supply are price elastic, a small shift in supply will cause:

  1. no change in price or quantity.
  2. a large change in price with quantity unchanged.
  3. a relatively large change in price and a small change in quantity.
  4. a relatively small change in price and a relatively large change in quantity. Correct answer.

Explanation

When both curves are elastic, quantities respond strongly to price, so a supply shift is absorbed mainly through quantity adjustment. The price change needed to restore equilibrium is therefore small. Inelastic curves produce the opposite pattern, with large price changes and small quantity changes.

Question 43Demand, supply and market equilibrium

A government fixes a price above equilibrium for a good and agrees to buy any unsold output. Which statement best evaluates this policy?

  1. It guarantees that consumers pay the lowest possible price for the good.
  2. It removes the surplus by allowing the market price to fall freely.
  3. It protects producers' incomes but imposes a cost on taxpayers and may encourage overproduction. Correct answer.
  4. It has no effect on government spending because the market clears itself.

Explanation

A supported minimum price raises producers' revenue but creates a surplus that the government must purchase, using public funds. The guaranteed outlet can also encourage firms to overproduce relative to demand. Consumers generally pay more, and the policy does affect the budget.

Question 44Demand, supply and market equilibrium

A technological improvement lowers the cost of producing solar panels while, at the same time, environmental awareness raises demand for them. Which outcome is certain?

  1. Equilibrium quantity rises, while the effect on price is uncertain. Correct answer.
  2. Neither equilibrium price nor quantity changes.
  3. Equilibrium price rises, while the effect on quantity is uncertain.
  4. Both equilibrium price and quantity fall.

Explanation

A cost reduction shifts supply rightward and higher demand shifts demand rightward, and both shifts raise equilibrium quantity. The price effects work in opposite directions, so the final price depends on which shift is larger. Thus quantity is certain but price is indeterminate.

Question 45Elasticity and its applications

A bakery raises the price of bread from N$10 to N$12 and finds that quantity demanded falls from 200 loaves to 180 loaves per day. Using the simple percentage method, what is the price elasticity of demand?

  1. 0.5 Correct answer.
  2. 0.1
  3. 2.0
  4. 1.0

Explanation

Percentage change in quantity demanded is 20/200 = 10%, and percentage change in price is 2/10 = 20%. Dividing the quantity change by the price change gives 10 ÷ 20 = 0.5, so demand is inelastic over this range.

Question 46Elasticity and its applications

Which statement best describes a good whose price elasticity of demand is zero?

  1. Quantity demanded falls sharply when price rises
  2. Quantity demanded changes in the same proportion as price
  3. Quantity demanded does not change when price changes Correct answer.
  4. Quantity demanded rises when price rises

Explanation

Perfectly inelastic demand means the quantity bought stays the same whatever happens to price, giving an elasticity value of zero. The demand curve is drawn as a vertical line.

Question 47Elasticity and its applications

A farmer's total revenue rises when the price of maize increases. What does this indicate about the price elasticity of demand for the farmer's maize?

  1. Demand is unit elastic
  2. Demand is perfectly elastic
  3. Demand is price elastic
  4. Demand is price inelastic Correct answer.

Explanation

When price and total revenue move in the same direction, the percentage fall in quantity sold is smaller than the percentage rise in price. This happens only when demand is inelastic, so the higher price more than offsets the lost sales.

Question 48Elasticity and its applications

Which pair of goods is most likely to have a positive cross elasticity of demand?

  1. Salt and sugar
  2. Tea and coffee Correct answer.
  3. Petrol and motor cars
  4. Bread and butter

Explanation

Cross elasticity is positive for substitutes, because a rise in the price of one good increases demand for the other. Tea and coffee are substitutes, so this pair fits.

Question 49Elasticity and its applications

The supply of fresh fish from a small coastal market is usually price inelastic in the short run. Which factor best explains this?

  1. Fishermen can store fish for long periods without cost
  2. Fish has many close substitutes in the local diet
  3. Consumers regard fish as a luxury good
  4. Fishermen cannot quickly increase their catch because boats and crews are fixed Correct answer.

Explanation

Price elasticity of supply depends mainly on how easily producers can change output, which is limited when capital such as boats and labour is fixed. In the short run extra fish cannot be landed quickly, so supply responds weakly to price.

Question 50Elasticity and its applications

A taxi company raises its fare from N$20 to N$24 per trip and the number of trips falls from 500 to 450 per day. Using the simple percentage method, what is the price elasticity of demand, and is demand elastic or inelastic?

  1. 0.5, elastic
  2. 1.25, elastic
  3. 0.5, inelastic Correct answer.
  4. 2.0, elastic

Explanation

Quantity falls by 50/500 = 10% while price rises by 4/20 = 20%. Dividing 10 by 20 gives 0.5, which is less than one, so demand is inelastic and the fare rise raises total revenue.