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Fundamentals of Business Economics

CHAPTER 2 – MICROECONOMICS II – THE MARKET SYSTEM

2.1 D

By definition a mixed economy means one where the market mechanism
operates to allocate resources but the state intervenes to modify the operation
of these market forces where it would be in the public interest so to do. Thus A
and C are not the exceptions. Due to the nature of free market forces, firms are
free to advertise in order to expand their markets thus B is not the exception.
The economy may contain large and small companies but this is not implied by
the term ‘mixed economy’.

2.2 C

If theatre attendances fell then there was a fall in demand for theatre seats. In
A there is no change in demand and in B there is an increase in demand. The
costs changing in D would not affect demand (unless prices were increased as
a result, which the question states did not happen). C could cause a decrease
in demand as customers decide to switch from expensive theatre trips to cheap
cinema ones as a way of spending their free time.

2.3 A

Change in demand = +100 = +10%

Change in price = –1 = -1%
PED = +10/-1 = -10.

2.4 B

The only possible answer here that has both price and demand increasing
would be for the demand curve to move to the right – i.e. consumer incomes
increased substantially.

2.5 A

A shift to the right in a supply curve indicates an increase in supply which could
only be caused by an increase in the subsidy paid to produce the good.

2.6 C

Setting the minimum price below the original free market equilibrium price has
no effect on the original equilibrium, so price is determined by supply and
demand.

A decrease in supply will shift supply to the left. This will increase equilibrium
price and reduce equilibrium quantity, therefore there will be a balance between
supply and demand.

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