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Chapter 4

Applications of Supply and Demand

Multiple Choice Questions


Difficulty: 1 Topic: Definition
1. A change in the supply of a given good could be caused by
A) a change in demand for the good.
B) a change in consumer preferences.
C) a change in technology that affects of production costs.
D) introduction of new consumers into the market.
E) none of the above.
Answer: C
Difficulty: 3 Topic: Simple Application
2. Which of the following might explain why farm revenues are higher in years of lower production
due to bad weather?
A) Demand is more elastic than supply.
B) Supply is perfectly elastic.
C) Demand is relatively inelastic; a leftward shift in supply will increase total revenue.
D) Supply is relatively inelastic; a leftward shift in supply will increase total revenue.
E) None of the above.
Answer: C
Difficulty: 2 Topic: Simple Application
3. Rank the demand curves in the figure below in order of greatest to least price elasticity of demand
at their in common intersection point.
P

C
A
B

A) A, B, C.
Answer: C

B) B, C, A.

C) B, A, C.

D) C, A, B.

E) none of the above.

Chapter 4: Applications of Supply and Demand

Difficulty: 2 Topic: Simple Application


4. Rank the points A, B and C on the demand curve in the figure below in order of greatest to least
elasticity of demand.
P

A
B
C

A) C, A, B.
B) B, A, C.
C) A, B, C.
Answer: C

D) They are of equal elasticity.


E) More information is needed.

Difficulty: 3 Topic: Simple Application


5. Rank the demand curves A, B and C in the figure below in order of greatest to least elasticity at
the quantity Q*.
P

C
B
A
Q *

A) A, B, C.
B) C, A, B.
C) C, B, A.
Answer: C

D) They have equal elasticity at Q*.


E) More information is needed.

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Chapter 4: Applications of Supply and Demand

Difficulty: 1 Topic: Definition


6. The quantity of a good which a person will purchase will not depend on which one of the
following items?
A) The price of the good.
D) His or her income.
B) His or her tastes.
E) The elasticity of supply.
C) The prices of substitute goods.
Answer: E
Difficulty: 2 Topic: Simple Application
7. If consumers have budgeted a fixed amount of money to buy a certain commodity, and within a
certain range of prices will spend neither more nor less than this amount on it, then their demand
curve in this price range would be properly designated as:
A) in equilibrium.
D) highly price inelastic but not perfectly so.
B) perfectly price elastic.
E) unitary price elastic.
C) perfectly price inelastic.
Answer: E
Difficulty: 2 Topic: Definition
8. An increase in supply will lower price unless:
A) supply is perfectly price inelastic.
B) demand is perfectly price elastic.
C) it is followed by a reduction in quantity demanded.
D) demand is highly price inelastic.
E) both demand and supply are highly price inelastic.
Answer: B
Difficulty: 1 Topic: Definition
9. A vertical supply curve may be described as:
A) relatively price elastic.
B) perfectly price inelastic.
C) relatively price inelastic.
D) perfectly price elastic.
E) none of the above are accurate descriptions.
Answer: B
Difficulty: 2 Topic: Simple Application
10. A "normal" straight-line demand curve that intersects the X and Y-axis has which of the following
properties?
A) Constant slope and varying price elasticity.
B) Constant income elasticity with varying slope.
C) Varying slope and varying supply elasticity.
D) Constant slope and constant price elasticity.
E) None of the above may be asserted in general.
Answer: A

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Chapter 4: Applications of Supply and Demand

Difficulty: 1 Topic: Definition


11. The price elasticity of demand is the:
A) change in total revenue divided by the change in price.
B) change in price divided by the change in quantity demanded.
C) percentage change in price divided by the percentage change in quantity demanded.
D) quantity demanded divided by the change in price.
E) percentage change in quantity demanded divided by the percentage change in price.
Answer: E
Difficulty: 2 Topic: Simple Application
12. The government declares that it is prepared to purchase any and all gold supplied to it by
domestic gold mines at a price of $500 an ounce. Which-if any-of the four panels in the figure
below could be used as shown to illustrate the government's demand curve for domestic gold?
P

P
d
d

d
Q

(a )
P

( b)

P
d

d
d
(c )

A) a. B) b.
Answer: A

C) c. D) d.

( d)

E) None of these diagrams.

Difficulty: 3 Topic: Simple Application


13. If both the supply and the demand increase, the market price will:
A) rise only in the case of a perfectly price inelastic supply.
B) rise or fall, depending on the magnitude of the shifts.
C) fall only if the supply is price inelastic.
D) rise only if the demand is price inelastic.
E) fall whether or not the supply curve is price inelastic.
Answer: B
Difficulty: 2 Topic: Numerical Analysis
14. If at a price of $10, quantity bought will be 5400 per day, and at $15, quantity bought will be
4600 per day, then the price elasticity of demand is approximately:
A) 0.2. B) 0.4. C) 0.6. D) 2.5. E) 6.0.
Answer: B

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Chapter 4: Applications of Supply and Demand

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Chapter 4: Applications of Supply and Demand

Difficulty: 3 Topic: Simple Application


15. Given the supply and demand curves shown in the figure below, the effect of a $1 subsidy to
suppliers would be that:
P

d
100

A) price would fall by $1.


B) price would not change.
C) price would fall by less than $1.
Answer: C

D) price would fall by more than $1.


E) none of the above.

Difficulty: 3 Topic: Simple Application


16. If the burden of an excise tax is shifted forward completely onto the consumer, we can say that:
A) supply is perfectly price elastic.
B) demand is perfectly price elastic.
C) demand is more price elastic than supply.
D) supply is price inelastic and demand is price elastic.
E) none of the above.
Answer: A
Difficulty: 2 Topic: Simple Application
17. If a sales tax is imposed on a good produced by an industry which exhibits a positively-sloped
supply curve, and demand is not perfectly price inelastic, then the price:
A) received by the producer will increase.
B) paid by the consumer will rise by more than the tax.
C) paid by the consumer will rise by the tax.
D) paid by the consumer will rise by less than the tax.
E) paid by the consumer will not change.
Answer: D

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Chapter 4: Applications of Supply and Demand

Difficulty: 2 Topic: Numerical Analysis


18. The government levies an excise tax of 5 cents per unit sold on the sellers in a competitive
industry. Both supply and demand curves have some elasticity with respect to price. This tax
means that the:
A) supply curve shifts up by 5 cents, but (unless demand is perfectly elastic) price will not rise.
B) supply curve shifts up by less than 5 cents, but (unless demand is highly elastic) price will
rise by the full 5 cents.
C) supply curve shifts up by less than 5 cents, but (unless demand is highly inelastic) price will
rise by more than 5 cents.
D) supply curve shifts up by 5 cents, but (unless supply is perfectly elastic) any price rise will be
less than 5 cents.
E) demand curve shift up by 5 cents and price will rise by 5 cents.
Answer: D
Difficulty: 3 Topic: Simple Application
19. In "tight" housing markets, rent controls are often applied to hold the price of housing to a
"reasonable" level. What is the immediate effect of this price policy with respect to the allocative
functions of prices, and the relative incomes of tenants and landlords?
A) The allocative function of prices is impaired, but the tenants are prevented from gaining at
the expense of the landlords.
B) The allocative function of prices is not impaired, and the tenants are prevented from gaining
at the expense of landlords.
C) The allocative function of prices is impaired, and the tenants who find housing gain at the
expense of landlords.
D) The allocative function of prices is not impaired, but the landlords gain at the expense of
tenants who do not find housing.
E) None of the above.
Answer: C
Difficulty: 3 Topic: Simple Application
20. During the first year that the Salk vaccine for infantile paralysis became available, the quantity
produced was too small to inoculate all those in susceptible age groups. Although the cost of
production and the price were not particularly high, production could not be expanded rapidly
enough to meet the demand. The government therefore intervened to regulate its distribution.
What do these facts suggest about the price of Salk vaccine during the first year it was available?
It was:
A) at equilibrium and government should not have intervened.
B) above equilibrium and a price ceiling was required.
C) below equilibrium and a price ceiling was required.
D) indeterminate.
E) below equilibrium so there was a shortage
Answer: E

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Chapter 4: Applications of Supply and Demand

Difficulty: 3 Topic: Simple Application


21. For a given increase in supply, price will fall most when demand is relatively
A) inelastic and supply is relatively inelastic. D) elastic and supply is relatively elastic.
B) inelastic and supply is relatively elastic.
E) any of the above.
C) elastic and supply is relatively inelastic.
Answer: A
Difficulty: 1 Topic: Definition
22. If a demand curve displays unitary elasticity, an upward shift in the supply curve will:
A) raise total revenue.
B) lower total revenue.
C) have no effect on total revenue.
D) have an indeterminant effect on total revenue.
Answer: C
Difficulty: 1 Topic: Simple Application
23. A cost cutting technical advance in the production of cars will cause:
A) the demand curve for cars to rise.
B) the demand curve for cars to fall.
C) no change in the supply of, or demand for cars.
D) a rightward shift in the supply curve of cars.
E) a leftward shift in the supply curve for cars.
Answer: D
Difficulty: 3 Topic: Simple Application
24. The four points in the figure below are equilibrium points for a particular good at four separate
points in time. Which of the following is true?

Q u a n tity

A) A supply curve can be derived from the recorded equilibrium points.


B) A demand curve can be derived from the recorded equilibrium points
C) These equilibrium points could only have been produced by three separate shifts in the
supply curve.
D) The demand curve for this good cannot be totally inelastic.
E) None of the above are true.
Answer: E

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Chapter 4: Applications of Supply and Demand

Difficulty: 1 Topic: Experience


25. In 1979, in a isolated small town, 100,000 bricks were sold at $1.20 per brick. In 1980, 120,000
bricks were sold at $1.50 each in the same town. This data could provide evidence of:
A) a totally elastic demand curve for bricks.
B) an unitary elasticity of demand for bricks.
C) a contraction in the supply of bricks over time.
D) a shift in the demand curve for bricks over time.
E) none of the above.
Answer: D
Difficulty: 2 Topic: Simple Application
26. Suppose that demand is everywhere price inelastic. In this case, a contraction in the quantity
supplied at every price must cause:
A) total revenue to climb.
B) total revenue to fall.
C) total revenue to remain flexed as profits fall.
D) any of the above depending upon circumstance.
E) either answer a or c, depending upon circumstance.
Answer: A
Difficulty: 1 Topic: Definition
27. Change in quantity demanded (as distinguished from a change in demand) is the result of a:
A) shift in the supply curve.
D) change in the price of a rival product.
B) change in the tastes of consumers.
E) none of the above.
C) increase in consumer incomes.
Answer: A
Difficulty: 2 Topic: Simple Application
28. During the summer of 1978, the airlines had a large increase in revenues after introducing a large
number of bargain fares. Which of the following is a possible explanation?
A) Demand was price inelastic.
D) All the above.
B) Demand was price elastic.
E) None of the above.
C) The demand curve had shifted leftward.
Answer: B

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Chapter 4: Applications of Supply and Demand

Difficulty: 2 Topic: Simple Application


29. Rank the supply curves in the figure below in order of greatest to least price elasticity at the
common intersection point.
C

A) C, A, B.
Answer: D

B) B, A, C.

C) B, C, A.

D) A, B, C.

E) None of the above.

Use the following to answer questions 30-31:


Figure 4-1
P
$200

$150

$100

10

15

20

Difficulty: 1 Topic: Numerical Analysis


30. The price elasticity of supply shown in Figure 4-1 between points A and B is:
A) .1. B) .5. C) 1. D) 5. E) none of the above.
Answer: C
Difficulty: 1 Topic: Numerical Analysis
31. The price elasticity of supply shown in Figure 4-1 between points B and C is:
A) .1. B) .5. C) 1. D) 5 E) none of the above.
Answer: C

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Chapter 4: Applications of Supply and Demand

Difficulty: 3 Topic: Simple Application


32. Rank the demand curves A, B. and C shown in the figure below in order of greatest price
elasticity to least at price P*.
P

C
Q

A) C, A, B.
B) A, B, C.
C) C, B, A.
Answer: B

D) They have equal elasticity at P*.


E) More information is needed.

Difficulty: 2 Topic: Simple Application


33. Suppose that successive price reductions reduce total revenue. The supplier faces a demand
curve that is, in this region:
A) price elastic.
D) of indeterminate elasticity.
B) unitary elastic.
E) price inelastic.
C) infinitely price elastic.
Answer: E
Difficulty: 2 Topic: Simple Application
34. If demand is price elastic within the relevant price range, then total revenue:
A) will rise with a fall in price.
B) will fall with a fall in price.
C) will remain constant with a fall in price.
D) may either rise or fall with a fall in price.
E) will rise if price is greater than $1, but fall if price is less than $1.
Answer: A
Difficulty: 3 Topic: Numerical Analysis
35. "If its advocates are correct, the minimum-wage bill passed by the House of Representatives
would raise wages for nearly 7 million underpaid workers, but would have no noticeable effect on
employment." The quotation implies that the demand for the labor services of the 7 million
workers mentioned, with respect to the price of labor services, has elasticity equal to:
A) 2. B) 5. C) 1. D) 0. E) .5
Answer: D

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Chapter 4: Applications of Supply and Demand

Difficulty: 1 Topic: Definition


36. The following is a complete and correct definition of the demand curve for commodity X. The
demand curve shows, for a given market:
A) how much of X would be bought at the equilibrium price.
B) how, as people's incomes rise and they have more money to spend, their purchases of X
would increase.
C) how the amount of money people spend to purchase X changes as the price they must pay for
it changes.
D) the amounts of X that would be bought each period, at each and any price, assuming other
factors influencing demand (incomes, tastes, etc.) remain constant.
E) the amounts of X that would be bought each period if taxes were to go down.
Answer: D
Difficulty: 2 Topic: Definition
37. A horizontal demand curve may be described as:
A) relatively price elastic.
D) perfectly price elastic.
B) perfectly price inelastic.
E) unit elastic.
C) relatively price inelastic.
Answer: D
Difficulty: 2 Topic: Numerical Analysis
38. Suppose the absolute value of the slope of a straight-line demand curve is 1. The price elasticity
at any point along this demand curve is:
A) equal to 1.
D) infinite.
B) greater than 1, but less than infinite.
E) none of the above are necessarily true.
C) less than 1.
Answer: E
Difficulty: 1 Topic: Definition
39. Whenever total expenditure (i.e., total revenue) remains the same after a change in price, the
elasticity of demand is:
A) greater than 1. B) less than 1. C) equal to 0. D) equal to 1. E) equal to infinity.
Answer: D

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Chapter 4: Applications of Supply and Demand

Difficulty: 2 Topic: Simple Application


40. The government declares that it is prepared to sell any and all cotton yard goods from its
surpluses to domestic purchasers at a price of $2 per yard. Which-if any-of the four panels in the
figure below could be used as shown to illustrate this government supply situation?
P

P
s

$2

$2
s
Q

(a)
P

P
s

$2

(b )

$2

(c )

A) a. B) b.
Answer: D

C) c. D) d.

(d )

E) None of these diagrams.

Difficulty: 1 Topic: Definition


41. If demand is relatively price inelastic:
A) a 1 percent increase in price evokes a less than 1 percent decrease in quantity demanded.
B) a 1 percent increase in price evokes a larger than 1 percent decrease in quantity demanded.
C) a 1 percent decrease in price evokes a larger than 1 percent increase in quantity demanded.
D) a 1 percent decrease or increase in price induces no change in total revenue.
E) none of the above.
Answer: A

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Chapter 4: Applications of Supply and Demand

Difficulty: 2 Topic: Simple Application


42. Given the supply and demand curves shown in the figure below, a $1 tax on sales should be
expected to cause:
P
S
D

S
Q

A) price to increase by $1 with quantity unchanged.


B) quantity to fall with price left unchanged.
C) no change in either price or quantity.
D) price to rise and quantity to fall.
E) quantity to increase with price left unchanged.
Answer: B
Difficulty: 3 Topic: Simple Application
43. If the incidence of a tax per unit of output is shifted completely back onto the producer, then:
A) demand is perfectly price elastic.
D) supply and demand are price inelastic.
B) supply is price inelastic.
E) either A) or C) could be correct.
C) supply is perfectly price inelastic.
Answer: E
Difficulty: 3 Topic: Simple Application
44. The government reduces the excise tax on the sellers in a competitive industry by $10 per unit
sold. Both supply and demand curves have some elasticity with respect to price. This reduction
in tax means that:
A) supply curve shifts down by $10, but (unless demand is perfectly elastic) price remain
constant.
B) supply curve shifts down by less than $10, but (unless demand is highly inelastic) price falls
by more than $10.
C) supply curve shifts down by less than $10, but (unless demand is highly elastic) price falls by
$10.
D) supply curve shifts down by $10, but (unless supply is perfectly elastic) any price decline is
less than $10.
E) demand curve shift down by $10 and price falls by $10.
Answer: D

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Chapter 4: Applications of Supply and Demand

Difficulty: 3 Topic: Simple Application


45. Suppose that a large city is investigating the elimination of rent controls on housing at a time
when the vacancy rate is extremely low-only 1 percent of all apartments in the city are vacant.
Which of the following is most likely to occur if rent controls are eliminated?
A) An increase in the demand for housing, followed by a decrease in the supply of housing.
B) An increase in rents, perhaps followed later by an increase in the supply of housing.
C) A decrease in rents and a decrease in the supply of housing.
D) No change in rents, since price controls are usually set where supply and demand intersect.
E) A decrease in the demand for housing, followed by a decrease in the supply of housing.
Answer: B
Difficulty: 3 Topic: Simple Application
46. Consider the following quotation: "Price adjustments serve to keep the quantities supplied and
demanded equal. If, at some initial price, there is excess demand, then the price will rise. The
price increase has two effects: it tends to shift the demand curve down because people are willing
to buy a smaller quantity at a higher price, and it tends to shift the supply curve up because
producers find it profitable to produce a greater output at a higher price. The price will adjust
until there is no excess demand."
A) The analysis in the quotation is correct.
B) The quotation confuses shifts in curves with movements along the curve.
C) The quotation is free of logical error but does not describe the way prices behave in actual,
competitive markets.
D) The quotation would be correct if "excess supply" were substituted for "excess demand."
E) None of the above.
Answer: B
Difficulty: 3 Topic: Simple Application
47. A shift to the left of the demand curve for X together with a shift to the right of the supply curve
for X tends to:
A) increase the price of X; the effect upon the quantity exchanged is indeterminate.
B) increase the price of X and to increase the quantity exchanged.
C) decrease the price of X and to decrease the quantity exchanged.
D) decrease the price of X; the effect upon quantity exchanged is indeterminate.
E) make changes in both the price of X and the quantity of X exchanged that are indeterminate.
Answer: D

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Chapter 4: Applications of Supply and Demand

Difficulty: 3 Topic: Simple Application


48. Recently a railroad asked the state commerce commission for permission to increase its
commuter rates by 20 percent. The railroad argued that declining revenues made this rate
increase essential. Opponents of the rate increase contended that the railroad's revenues would
fall because of the rate hike. It can be concluded that:
A) the railroad felt that the demand for passenger service was elastic and the opponents of the
rate increase felt it was inelastic.
B) the railroad felt that the demand for passenger service was inelastic and the opponents of the
rate increase felt it was elastic.
C) both groups felt that the demand was inelastic but for different reasons.
D) both groups felt that the demand was elastic but for different reasons.
E) both groups felt that the demand was inelastic for the same reason.
Answer: B
Difficulty: 1 Topic: Simple Application
49. Given a relatively, but not perfectly, price elastic supply curve, an increase in demand will
certainly:
A) raise price but leave quantity sold unchanged.
B) raise price and increase quantity sold.
C) lower price, since supply cannot increase except through the inducement of higher price.
D) reduce quantity sold but leave price unchanged.
E) do none of the above, since "increase in demand" refers to a movement along a given demand
curve.
Answer: B
Difficulty: 2 Topic: Definition
50. If a good is in fixed supply, then the incidence of a tax
A) falls entirely on the consumers.
B) falls mostly on the producers and partly on consumers.
C) falls entirely on the producers.
D) depends on the elasticity of demand.
E) none of the above.
Answer: C
Difficulty: 2 Topic: Simple Application
51. An increased government excise tax on liquor will NOT affect liquor consumption if:
A) the demand for liquor is perfectly elastic.
B) consumer tastes change.
C) the demand for liquor is perfectly inelastic.
D) liquor production becomes more expensive.
E) the supply of liquor is perfectly elastic.
Answer: C

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Chapter 4: Applications of Supply and Demand

Difficulty: 2 Topic: Numerical Analysis


52. If the elasticity coefficient of demand for coconuts is .40, then a 20% fall in price will result in:
A) a 20% rise in quantity demanded.
C) a 200% rise in quantity demanded.
B) an 8% rise in quantity demanded.
D) a 50% rise in quantity demanded.
Answer: B
Difficulty: 1 Topic: Simple Application
53. A price subsidy of 20 cents per gallon on milk (which does not have a perfectly inelastic demand
curve) will result in a:
A) change in consumer tastes.
B) decrease in the equilibrium price of 20 cents per gallon.
C) decrease in the equilibrium price of less than 20 cents per gallon.
D) decrease in the equilibrium price of more than 20 cents per gallon.
Answer: C
Difficulty: 3 Topic: Simple Application
54. Assume that quantity demanded is negatively correlated with price. Observing equilibrium
moving from point A to point D in the figure below can be explained by:

Q u a n tity
A) an increase in demand against a fixed, perfectly inelastic supply curve.
B) an increase in demand against a fixed, but somewhat price elastic supply curve.
C) an increase in supply against a somewhat price elastic demand curve.
D) a reduction in supply against a somewhat price elastic demand curve.
E) none of the above.
Answer: C

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Chapter 4: Applications of Supply and Demand

Use the following to answer questions 55-60:


Figure 4-2
P ric e
D
6
5

A
1

B
G
C

H
D

I
E

J
F

K
D
20

40

60

80

100

120

D
Q u a n tity

Difficulty: 1 Topic: Numerical Analysis


55. Refer to the Figure 4-2. What is the elasticity of the demand curve DD between points A and B?
A) 3.67 B) 1.8 C) 1.0 D) 0.56 E) None of the above
Answer: A
Difficulty: 1 Topic: Numerical Analysis
56. Refer to Figure 4-2 What is the elasticity of the demand curve DD between points B and C?
A) 3.33 B) 1.8 C) 1.0 D) 0.56 E) None of the above
Answer: B
Difficulty: 1 Topic: Numerical Analysis
57. Refer to Figure 4-2. What is the elasticity of the demand curve DD between points C and D?
A) 3.33 B) 1.8 C) 1.0 D) 0.56 E) None of the above
Answer: C
Difficulty: 1 Topic: Numerical Analysis
58. Refer to Figure 4-2. Assume that the sellers in this market wish to maximize their total revenue.
What price should they set along DD in order to maximize total revenue?
A) $5 B) $4 C) $3 D) S2 E) None of the above
Answer: E
Difficulty: 1 Topic: Numerical Analysis
59. Refer again to Figure 4-2. At what point along the demand curve DD is price elasticity exactly 1?
A) P = 5, Q = 40
D) P = 2, Q = 100
B) P = 4, Q = 60
E) P = 3.50, Q = 70
C) P = 3,Q = 80
Answer: E

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Chapter 4: Applications of Supply and Demand

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Chapter 4: Applications of Supply and Demand

Difficulty: 1 Topic: Numerical Analysis


60. Refer to Figure 4-2 once again. Suppose that now the demand curve has shifted to D'D'. At what
point along D'D' is price elasticity equal to 1?
A) G B) between G and H. C) H. D) between H and I. E) I.
Answer: E
Difficulty: 1 Topic: Numerical Analysis
61. If at a price of $8, the quantity of movie tickets bought will be 3300 per day, and at $12, the ticket
quantity bought will be 2700 per day, then the price elasticity of demand for movie tickets is
approximately:
A) 0.4 B) 0.5 C) 0.7 D) 2.0 E) 2.5
Answer: B
True/False Questions
Difficulty: 1 Topic: Definition
62. The price elasticity of demand measures the ratio of percentage change in quantity demanded to
percentage change in price.
Answer: True
Difficulty: 1 Topic: Numerical Analysis
63. If a 1 percent change in price causes a 5 percent change in quantity demanded, then demand is
price inelastic.
Answer: False
Difficulty: 2 Topic: Simple Application
64. If price and quantity sold both increase from one period to another, we may infer that the law of
downward-sloping demand does not operate in that market.
Answer: False
Difficulty: 1 Topic: Definition
65. Economists make a distinction between an increase in supply and an increase in quantity
supplied.
Answer: True

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Chapter 4: Applications of Supply and Demand

Difficulty: 2 Topic: Numerical Analysis


66. Given:
P ric e o f C a n ta lo u p e s (c e n ts )
N u m b e r o f C a n ta lo u p e s s o ld

1998
5
100

1999
10
125

2000
15
150

From the above we can conclude that the demand curve for cantaloupes slopes upward and to the
right.
Answer: False
Difficulty: 3 Topic: Simple Application
67. Imposing a minimum wage may cause the quantity of labor services demanded to fall short of the
quantity that laborers are willing to supply at the minimum wage.
Answer: True
Difficulty: 2 Topic: Definition
68. Sales of the common necessities of life tend to increase sharply when there is a drop in their
price.
Answer: False
Difficulty: 1 Topic: Simple Application
69. An increase in population will tend to increase the rent of land.
Answer: True
Difficulty: 2 Topic: Simple Application
70. An excise tax on a commodity normally places an economic burden on both its producers and its
consumers.
Answer: True
Difficulty: 2 Topic: Simple Application
71. Dollar receipts for every commodity will always be higher at lower prices.
Answer: False
Difficulty: 1 Topic: Definition
72. An increase in the rental price of skis will increase the demand for ski rentals.
Answer: False
Difficulty: 1 Topic: Definition
73. Consider some price range in which a slight change in either direction will have practically no
effect on total revenue. This part of the demand curve is said to have unitary elasticity.
Answer: True

Samuelson/Nordhaus: Economics, 18/e Page 21

Chapter 4: Applications of Supply and Demand

Difficulty: 2 Topic: Simple Application


74. A straight-line demand curve, unless vertical or horizontal, does not have constant elasticity at
every point.
Answer: True
Difficulty: 2 Topic: Numerical Analysis
75. When a reduction in the price of a college yearbook from $10 to $5 fails to increase sales,
demand for the product must be perfectly inelastic.
Answer: True
Difficulty: 1 Topic: Definition
76. For a given shift in demand, one would expect the price change to be greater in the long run than
in the short run.
Answer: False
Difficulty: 2 Topic: Simple Application
77. The price elasticity of supply is important primarily as an indicator of how total revenue changes
when a rise in price induces a decline in quantity.
Answer: False
Difficulty: 2 Topic: Simple Application
78. In general, supply curves become less elastic the longer the time period under consideration.
Answer: False
Difficulty: 2 Topic: Simple Application
79. When all farmers have a small harvest, their total (combined) revenue may actually go up. This
shows that the market demand for these agricultural products is relatively price inelastic in this
price range.
Answer: True
Difficulty: 1 Topic: Definition
80. A perfectly price inelastic demand curve must be a vertical line.
Answer: True
Difficulty: 3 Topic: Numerical Analysis
81. A straight-line supply curve has a price elasticity equal to 1 everywhere along it.
Answer: False
Difficulty: 2 Topic: Simple Application
82. The more price inelastic the demand for a good which is taxed, the greater tend to be the total tax
receipts of the government.
Answer: True

Samuelson/Nordhaus: Economics, 18/e Page 22

Chapter 4: Applications of Supply and Demand

Samuelson/Nordhaus: Economics, 18/e Page 23

Chapter 4: Applications of Supply and Demand

Difficulty: 3 Topic: Numerical Analysis


83. If a commodity costs nothing to produce or to sell, its price will be zero.
Answer: False
Difficulty: 2 Topic: Simple Application
84. The more price inelastic the demand for a good, the greater tends to be the incidence on
consumers of a per-unit tax.
Answer: True
Difficulty: 2 Topic: Simple Application
85. The more price elastic the supply of a good, the greater tends to be the incidence on the producers
of a per-unit commodity tax on that good.
Answer: False
Difficulty: 2 Topic: Definition
86. An increase in the rental price of skis could be the result of an increase in the demand for ski
rentals.
Answer: True
Difficulty: 2 Topic: Simple Application
87. If the government levies a tax of 25 cents per unit on any commodity, this means that consumers
will necessarily be forced to pay an extra 25 cents per unit to buy it.
Answer: False
Difficulty: 3 Topic: Simple Application
88. Although price is an agent for rationing scarce goods, direct controls cannot be thought of as a
different mechanism for achieving this same end.
Answer: False
Difficulty: 2 Topic: Simple Application
89. With inelastic supply, a rise in quantity implies a fall in total revenue.
Answer: False
Difficulty: 2 Topic: Numerical Analysis
90. If a 1 percent change in price causes a 5 percent change in quantity, demand is relatively elastic in
this price range.
Answer: True
Difficulty: 2 Topic: Simple Application
91. When demand displays unitary price elasticity at all parts, total revenue is the same at all prices.
Answer: True

Samuelson/Nordhaus: Economics, 18/e Page 24

Chapter 4: Applications of Supply and Demand

Difficulty: 2 Topic: Simple Application


92. If the supply of oil is relatively price elastic, deregulation of oil prices that had been held below
equilibrium will result in a smaller increase in price than would be expected if supply were price
inelastic.
Answer: True
Difficulty: 1 Topic: Simple Application
93. If price and quantity sold both decrease from one period to another, we may infer that the law of
downward-sloping demand does not operate in that market.
Answer: False
Difficulty: 1 Topic: Definition
94. Economists distinguish between an increase in the quantity demanded and an increase in demand.
Answer: True
Difficulty: 1 Topic: Numerical Analysis
95. Given:
P ric e o f s te a k
P o u n d s o f s te a k s o ld

1998
$ 1 .2 9
400

1999
$ 1 .5 9
500

2000
$ 1 .7 9
600

From the above we cannot conclude that the demand curve for steak slopes upward and to the
right.
Answer: True
Difficulty: 2 Topic: Simple Application
96. A decrease in population will tend to increase the rent of land.
Answer: False
Difficulty: 2 Topic: Simple Application
97. Sales of the common necessities of life tend to decrease sharply when there is an increase in their
price.
Answer: False
Difficulty: 2 Topic: Simple Application
98. An excise tax on a commodity normally places an economic burden on only its supplier.
Answer: False
Difficulty: 2 Topic: Simple Application
99. A government policy which requires that all land rents be zero can distort the allocation of
resources.
Answer: True

Samuelson/Nordhaus: Economics, 18/e Page 25

Chapter 4: Applications of Supply and Demand

Samuelson/Nordhaus: Economics, 18/e Page 26

Chapter 4: Applications of Supply and Demand

Difficulty: 1 Topic: Simple Application


100. Dollar receipts for sellers of some commodities will be lower at higher prices.
Answer: True
Difficulty: 1 Topic: Simple Application
101. There is some price where a slight change in either direction will have practically no effect on
total revenue. This part of the demand curves is said to have infinite price elasticity.
Answer: False
Difficulty: 1 Topic: Simple Application
102. A straight-line demand curve, unless vertical or horizontal, has constant elasticity at every point.
Answer: False
Difficulty: 1 Topic: Numerical Analysis
103. If the number of football patrons increases when the price of tickets to games rises from $7 to
$10, we say that the demand is clearly elastic.
Answer: False
Difficulty: 2 Topic: Simple Application
104. For a given shift in demand, one would expect the price change to be greater in the short run than
in the long run.
Answer: True
Difficulty: 2 Topic: Simple Application
105. Elasticity of demand is important primarily as an indicator of how total revenue changes when a
rise in price induces a rise in quantity demanded.
Answer: False
Difficulty: 1 Topic: Simple Application
106. In general, supply curves become increasingly elastic the longer the time period under
consideration.
Answer: True
Difficulty: 1 Topic: Definition
107. The price elasticity of demand is the change in price divided by the change in total revenue.
Answer: False
Difficulty: 2 Topic: Simple Application
108. When all farmers are lucky enough to have a large wheat crop, their total (combined) revenue
may actually go down. This shows that the market demand for wheat is relatively price elastic.
Answer: False

Samuelson/Nordhaus: Economics, 18/e Page 27

Chapter 4: Applications of Supply and Demand

Difficulty: 1 Topic: Simple Application


109. A perfectly price inelastic supply curve must be a horizontal line.
Answer: False
Difficulty: 2 Topic: Numerical Analysis
110. A straight-line supply curve which goes through the origin has price elasticity equal to 1
everywhere along it.
Answer: True
Difficulty: 3 Topic: Simple Application
111. The more price elastic the demand for a good, the greater the portion of a per-unit tax paid by the
consumer and the greater the total tax receipts for the government.
Answer: False
Difficulty: 2 Topic: Simple Application
112. The more price inelastic the demand for a good, the less the incidence of a per-unit tax on that
good will fall on the consumer.
Answer: False
Difficulty: 2 Topic: Simple Application
113. The more price inelastic the supply of a good, the greater the incidence of a per-unit commodity
tax on that good will fall on the suppliers.
Answer: True
Difficulty: 2 Topic: Simple Application
114. Price is itself an agent for rationing scarce goods, and direct controls can be thought of as a
different mechanism for achieving this same end.
Answer: True

Samuelson/Nordhaus: Economics, 18/e Page 28

Chapter 4: Applications of Supply and Demand

Use the following to answer questions 115-117:


Figure 4-3

Difficulty: 1 Topic: Numerical Analysis


115. In Figure 4-3 elasticity of supply is greater than the elasticity of demand (in absolute value) at
equilibrium.
Answer: False
Difficulty: 1 Topic: Numerical Analysis
116. If, for the market depicted in Figure 4-3, the government sets a price ceiling of $25, then the
market can't adjust and there is excess supply.
Answer: False
Difficulty: 1 Topic: Numerical Analysis
117. If the government then decides to set a price floor of $20 for the market in Figure 4-3, there is
excess supply and 60 units of goods will be purchased.
Answer: False

Samuelson/Nordhaus: Economics, 18/e Page 29

Chapter 4: Applications of Supply and Demand

Use the following to answer questions 118-120:


Figure 4-4
P ric e

$50

$40
$30
$20

$10

D
10

20

30

40

50

Q u a n tity

Difficulty: 1 Topic: Numerical Analysis


118. Suppose the government decides to impose a $20.00 per unit, sales tax shifting the supply curve
in Figure 4-4 up to S'S'. Since the suppliers have the more inelastic supply curve, the suppliers
bear a greater burden of the sales tax.
Answer: False
Difficulty: 1 Topic: Numerical Analysis
119. The elasticity of S'S' in Figure 4-4 at equilibrium is negative.
Answer: False
Difficulty: 1 Topic: Numerical Analysis
120. The sales tax benefits the suppliers in the market depicted by Figure 4-4 since they now receive
$40 per unit in equilibrium, while they had previously only received $30.00 per unit.
Answer: False

Samuelson/Nordhaus: Economics, 18/e Page 30