Mock Exam Paper One Answers
1. How the scarcity of resources has affected SPEEDOM’s current situation? Explain with reference
your knowledge on basic economic problem.
SPEEDOM had faced its challenges mainly since 80s with the introduction of harsher safety regulations
that required major re-engineering. Amidst all that Lynx was not an instant success unlike its previous
two cars. When the company performance dropped by this, it had to tighten its resources while
investments were frozen. And after 1990s, SPEEDOM wanted to continue with Tiger2 and Puma.
However, it didn’t have the managerial resources, physical resources or enough money to pursue both
options. Management is also concerned about the impact the present economic climate might have on
their sales. All these indicate the constant and most basic economic problem, scarcity of resources. This
arise due to the unlimited needs and wants of humans to be fulfilled by the limited resources in the
world. As a result, all the factors of production has a cost and it leads to the opportunity cost.
2. SPEEDOM’s economic specialist requires your assistance to identify the concept of opportunity cost
in making their choice on long term expansion.
Opportunity cost arises due to the scarcity of resources. It is the loss of other alternatives when one
alternative is chosen.
Due to the scarcity of resources, one resource has a number of alternative uses. Therefore, when the
resource is used for one use, the opportunity to use it for other options are forgone.
3. Identify four possible situations where Puma’s demand and supply curves can shift to right and left.
Puma’s demand curve will shift to right due to:
A positive change in the consumer taste
Increase in consumer income
If future expectations for price hikes go up
Puma’s demand curve will shift to left due to:
Reduction in consumer income
Negative change in consumer taste which will be detrimental for demand
If future expectations is for a price reduction
Puma’s supply curve will shift to right due to:
Positive changes in technology
Reduction in factors of production
Reduction in government taxation
Improvement in subsidies
Easing of government regulations
Puma’s supply curve will shift to left due to:
Negative changes in technology
Increase in factors of production
, Increase in taxation and tightening of government regulations
Reduction in subsidies
4. Using the demand and supply figures for the Puma contained in Table 1, construct a suitably
labelled demand and supply diagram, and clearly identify the equilibrium price and quantity.
Equilibrium price- $30,000
Equilibrium quantity – 500
Demand curve
Supply curve
5. It has been forecast that, in future, insurance costs for sports cars will rise sharply. This will have an
adverse effect on the demand for SPEEDOM’s Puma car with an estimated fall in sales of 100 Puma
cars per year at each market price.
(a) Draw and label the new Demand Curve on the diagram that you have constructed in question 4.
Demand curve will shift to left as an increase in insurance cost is affecting negatively to the demand
curve.
(b) Describe how the market will move back to equilibrium.
(c) Identify the new equilibrium price and quantity.
6. Using the demand figures in Table 1 in the case study, calculate the price elasticity of demand for a
Puma sports car if the price changed from $40,000 to $50,000.
Price elasticity of demand- % change in Qd/% change in price = 2.67
1. How the scarcity of resources has affected SPEEDOM’s current situation? Explain with reference
your knowledge on basic economic problem.
SPEEDOM had faced its challenges mainly since 80s with the introduction of harsher safety regulations
that required major re-engineering. Amidst all that Lynx was not an instant success unlike its previous
two cars. When the company performance dropped by this, it had to tighten its resources while
investments were frozen. And after 1990s, SPEEDOM wanted to continue with Tiger2 and Puma.
However, it didn’t have the managerial resources, physical resources or enough money to pursue both
options. Management is also concerned about the impact the present economic climate might have on
their sales. All these indicate the constant and most basic economic problem, scarcity of resources. This
arise due to the unlimited needs and wants of humans to be fulfilled by the limited resources in the
world. As a result, all the factors of production has a cost and it leads to the opportunity cost.
2. SPEEDOM’s economic specialist requires your assistance to identify the concept of opportunity cost
in making their choice on long term expansion.
Opportunity cost arises due to the scarcity of resources. It is the loss of other alternatives when one
alternative is chosen.
Due to the scarcity of resources, one resource has a number of alternative uses. Therefore, when the
resource is used for one use, the opportunity to use it for other options are forgone.
3. Identify four possible situations where Puma’s demand and supply curves can shift to right and left.
Puma’s demand curve will shift to right due to:
A positive change in the consumer taste
Increase in consumer income
If future expectations for price hikes go up
Puma’s demand curve will shift to left due to:
Reduction in consumer income
Negative change in consumer taste which will be detrimental for demand
If future expectations is for a price reduction
Puma’s supply curve will shift to right due to:
Positive changes in technology
Reduction in factors of production
Reduction in government taxation
Improvement in subsidies
Easing of government regulations
Puma’s supply curve will shift to left due to:
Negative changes in technology
Increase in factors of production
, Increase in taxation and tightening of government regulations
Reduction in subsidies
4. Using the demand and supply figures for the Puma contained in Table 1, construct a suitably
labelled demand and supply diagram, and clearly identify the equilibrium price and quantity.
Equilibrium price- $30,000
Equilibrium quantity – 500
Demand curve
Supply curve
5. It has been forecast that, in future, insurance costs for sports cars will rise sharply. This will have an
adverse effect on the demand for SPEEDOM’s Puma car with an estimated fall in sales of 100 Puma
cars per year at each market price.
(a) Draw and label the new Demand Curve on the diagram that you have constructed in question 4.
Demand curve will shift to left as an increase in insurance cost is affecting negatively to the demand
curve.
(b) Describe how the market will move back to equilibrium.
(c) Identify the new equilibrium price and quantity.
6. Using the demand figures in Table 1 in the case study, calculate the price elasticity of demand for a
Puma sports car if the price changed from $40,000 to $50,000.
Price elasticity of demand- % change in Qd/% change in price = 2.67
