5 questions. Work each one out before revealing the answer.
If the price of a good is set above its equilibrium price, what is likely to happen?
Answer: A surplus
At a price above equilibrium, quantity supplied exceeds quantity demanded.
Common misconception: Mixing up shortage and surplus.
A bakery with one oven can bake bread worth 400 or cakes worth 500 in a day, not both. It bakes cakes. What is the opportunity cost?
Answer: 400 (the value of the bread given up)
Opportunity cost is the value of the next best alternative forgone, which is the bread.
Common misconception: Saying the opportunity cost is 500 or 900.
A price index rises from 250 to 260 in a year. What is the inflation rate?
Answer: 4%
The change is 10, and 10 ÷ 250 × 100 = 4%.
Common misconception: Dividing by the new value.
If demand for a good increases and supply stays the same, what happens to the equilibrium price?
Answer: It rises
The demand curve shifts right, so the equilibrium price and quantity increase.
Common misconception: Moving the wrong curve.
A frost damages a fruit crop. What happens to the equilibrium price and quantity of the fruit?
Answer: Price rises, quantity falls
Supply shifts left, which raises the price and reduces the quantity traded.
Common misconception: Confusing a shift with a movement along a curve.