Question TWO: (30 points)

1. During the previous 5 years, tuition fees at AOU have increased by 15%. At the same time, there is an increase in the number of students enrolled. Does this situation show that the law of Demand is false? Explain your answer. (6 points)

2. An increase in the price of a product will reduce the amount of it purchased because: (select and explain your answer) (6 points)

1. Supply curves are up sloping.

2. The higher price means that real incomes have risen.

3. Consumers will substitute other products for the one whose price has risen.

4. Consumers substitute relatively high-priced for relatively low-priced products.

3. The meaning of a ceiling price is: (select from the following and explain your answer).

(6 points)

1. Encourage new firms to enter the industry.

2. Result in an excess surplus for the product.

3. Clearing the market.

4. None of the above.

4. If a decrease in the price of one product results in an increase in demand for another product, then the product is: (Select the answer and explain why). (6 points)

• A- substitute good

• B. Normal good

• C. Inferior good

• D. Complement good

5. Which of the following is NOT a characteristic of a market in equilibrium? (6 points)

1. Excess supply is zero.

2. All consumers are able to purchase as much as they wish.

3. Excess demand is zero.

4. The equilibrium price is stable, i.e., there is no pressure for it to change.