Revision Questions

SEC2302:Advanced Principles of Economics

Question 01
1. In general terms elasticity implies the responsiveness of one variable towards the changes
in another variable.
a. Define price elasticity of demand in your words. (02 Marks)
b. A finding reveals that price elasticity of demand for fuel in Sri Lanka is -0.5.
Interpret this statistic of -0.5. (02 Marks)
2. Sri Lanka has experienced a rise in the prices of Pharmaceutical Products or Medicine in
the recent period. However, a study found that the demand for these products are inelastic.
Using your knowledge of determinants of price elasticity of demand, explain any three
possible reasons for the demand for the Pharmaceutical Products to be inelastic.
(06 Marks)
3. “Although bus rides and taxi rides fulfill the same need of transportation, bus rides are
recognized as inferior goods whereas taxi rides are recognized as normal goods”. Do you
agree with this statement. Explain reason/s for your answer.
(05 Marks)
4. State whether the following statements are true for false. Provide reasons for answer.
a. An increase in price for the goods that have elastic demand will cause to reduce its
total revenue.
b. An increase in the price of soap decreases the demand for body wash.
c. A decrease in the price of torches increases the demand for torch batteries.
d. The price elasticity of supply tends to high in the long run due to the greater
flexibility the firms enjoy in the same period.
(02 Marks for Each)
Question 02
1. Perfect competition is one extreme of the market structures. Discuss the characteristics of
a perfectly competitive market using examples. (04 Marks)
2. Using the MR=MC approach, explain the two instances of a perfectly competitive firm
where it earns profits and makes losses in the short run. Use illustrations where necessary.
(10 Marks)
3. Price discrimination is a special characteristic that is inherited by monopolies. Explain the
meaning of price discrimination by using an example. Identify the conditions to be fulfilled
in order to practice price discrimination effectively. (05 Marks)

1
 4. The following Figure 1 is a profit maximization instance of a monopoly firm.
Figure 1

Based on Figure 1 compute the following.

a. Equilibrium price and equilibrium quantity (02 Marks)
b. Total revenue (01 Mark)
c. Total cost (01 Mark)
d. Profit (02 Marks)

Question 03
1. A bank has deposits of 10,000. Suppose the reserve requirement is 5 percent.
a. If the bank can loan out as much as they can, write down the T-account of the bank.
b. What is the value of the money multiplier?
c. What is the maximum amount of money that the bank system can create?
d. If the required reserve ratio is raised to 10 percent of deposits, what will be the
changes in reserves and money supply.
2. State whether the following statements are true or false. In each case justify your answer
by giving reason/s.

2
 a. Credit cards cannot be considered as money.
b. Liquidity of shares and bonds is relatively higher than that of lands and houses.
c. In a 100 percent reserve banking system, banks can influence the money supply of
its economy.
d. Money supply will be increased in a situation where the Central Bank sells the
government bonds to public through its open market operations.
e. Money supply will be decreased in a situation where the Central Bank decreases
the discount rate applicable for the banks.
(03 Marks Each)
3. Explain the impact of a bank run on the money supply of an economy. (04 Marks)

Question 04
1. Differentiate between the following terms.
a. Short run and long run
b. Average product of labor and marginal product of labor
c. Iso quant and iso cost
(02 Marks Each)
2. A firm’s decision on its production varies upon the time horizon at which the firm operates.
Using your knowledge of the theory of production explain a firm’s equilibrium, in the long
run. Use illustrations where necessary. (06 Marks)
3. Suppose you are planning to start a restaurant after your graduation.
a. Explain possible explicit and implicit costs of your business. (03 Marks)
b. List your fixed costs and variable costs. For each of them, describe why you
consider them as fixed or variable costs.
(05 Marks)
c. Suppose that you are planning to expand your business. What would be the
economies and diseconomies of scale that you will experience?
(05 Marks)