CHAPTER 4-The Market Forces of Supply and Demand: True/False

CHAPTER 4—The market forces of supply and demand
TRUE/FALSE
1. Supply and demand are the concepts that economists use most often.
ANS: T PTS: 1 DIF: Easy TOP: What is a market?
2. Supply and demand determine prices and prices allocate the economy’s scarce resources.
ANS: T PTS: 1 DIF: Easy TOP: What is a market?
3. In economics, a market is a place where people buy fruit and vegetables.
ANS: F PTS: 1 DIF: Easy TOP: What is a market?
4. A competitive market is a market in which there are enough buyers and sellers that each has a
negligible impact on the market price.
ANS: T PTS: 1 DIF: Easy TOP: What is competition?
5. A competitive market is one in which sellers and buyers can choose the price at which they wish to
buy or sell goods.
ANS: F PTS: 1 DIF: Easy TOP: What is competition?
6. Market demand is obtained by adding individual demand curves vertically.
ANS: F PTS: 1 DIF: Easy TOP: Market demand versus

individual demand
7. The clothing market is a good example of perfect competition.
8. If a good or service has only more than one seller, it is called a monopoly.
9. A market with many sellers offering slightly different products is called a monopoly.
10. A market with just one seller is said to be a monopoly.
11. The computer software industry is an example of a perfectly competitive industry.
12. In Australia, a public transport operator might be a monopolist.

13. The stock market is a monopoly.
14. The law of demand states that, other things being equal, when the price of a good rises, the quantity
demanded of the good falls.
15. Demand curves are often upward sloping when prices are very high.
16. The quantity demanded of a product is the amount that buyers are willing and able to purchase at a
particular price.
17. Tastes and expectations are not determinants of individual demand.
ANS: F PTS: 1 DIF: Easy TOP: The demand curve: The

relationship between price and quantity demanded
18. The quantity demanded of a product is positively related to the price.
19. If the demand for movies falls when income falls, then movies must be an inferior good.
ANS: F PTS: 1 DIF: Easy TOP: Income
20. If a rise in the price of a visit to the gym causes an increase in the demand for movie tickets, visits to
the gym and trips to the movies are complements.
ANS: F PTS: 1 DIF: Easy TOP: Prices of related goods
21. When an increase in the price of one good lowers the price of another good, the two goods are called
substitutes.
22. A game console and games designed for that console are substitute goods.
23. Movies and popcorn are complementary goods.
ANS: T PTS: 1 DIF: Easy TOP: Prices of related goods
24. The market demand is the average of all of the individual demands for a particular good or service.
ANS: F PTS: 1 DIF: Easy TOP: Market demand versus
individual demand
25. Individual demand curves are summed horizontally to obtain the market demand curve.
ANS: T PTS: 1 DIF: Moderate TOP: Market demand versus

individual demand
26. If the price of a good changes, its demand curve shifts.
ANS: F PTS: 1 DIF: Easy TOP: Shifts in the demand curve
27. An increase in the number of buyers in the market will cause a rightward shift in the demand curve if
the good is a normal good.
ANS: T PTS: 1 DIF: Moderate TOP: Shifts in the demand curve
28. If mad cow disease causes a beef-scare in Europe, demand for wild meat like deer or kangaroo is likely
to shift to the right in that market.
29. If the price of tea increases, there is likely to be a rightward shift in the demand for coffee.
30. Jack usually eats a lot of noodles. He reads an article saying that rice has twice the health benefits of
noodles. His demand curve for noodles is likely to shift right.
ANS: F PTS: 1 DIF: Moderate TOP: Shifts in the demand curve
31. A reduction in the price of a product and an increase in the number of buyers in the market affect the
demand curve in the same general way.
ANS: F PTS: 1 DIF: Moderate TOP: Number of buyers
32. A demand schedule shows how much will be demanded of a good in the future.
ANS: F PTS: 1 DIF: Easy TOP: Demand
33. If crocodile leather handbags are a normal good, then consumers will buy less of them as their incomes
rise.
34. The Latin phrase ceteris paribus means ‘other things changing’.
ANS: F PTS: 1 DIF: Easy TOP: Summary
35. The quantity supplied of a good or service is the amount that sellers are willing and able to sell at a
particular price.
ANS: T PTS: 1 DIF: Easy TOP: Supply

36. In addition to price, the determinants of individual supply include input prices, technology and
expectations.
ANS: T PTS: 1 DIF: Easy TOP: The supply curve: The

relationship between price and quantity supplied
37. The supply curve has a negative slope.
ANS: F PTS: 1 DIF: Easy TOP: The supply curve: The

38. The law of supply states that, other things being equal, when the price of a good rises, the quantity
supplied of the good falls.

39. If a tupperware company discovers that the price of plastic has risen by 10%, the company will decide
to supply more tupperware to the market.
ANS: F PTS: 1 DIF: Moderate TOP: Shifts in the supply curve
40. Increasing the number of sellers in a market is demonstrated by a movement along the supply curve.
ANS: F PTS: 1 DIF: Moderate TOP: The supply curve: The

41. Improvements in technology is demonstrated by a shift in the supply curve.
ANS: T PTS: 1 DIF: Moderate TOP: The supply curve: The

42. Equilibrium in a market is found where the supply curve and the demand curve intersect.
ANS: T PTS: 1 DIF: Easy TOP: Supply and demand together
43. At the equilibrium price, quantity demanded is equal to quantity supplied.
ANS: T PTS: 1 DIF: Easy TOP: Supply and demand together
44. The market-clearing price will always be lower than the equilibrium price.
ANS: F PTS: 1 DIF: Easy TOP: Equilibrium
45. When analysing how some event affects a market, we check whether the price is the same as the
quantity demanded.
46. If the market price is below the equilibrium price, there will be a surplus and the price will rise.
ANS: T PTS: 1 DIF: Easy TOP: Equilibrium
47. Surpluses drive price up, whereas shortages drive price down.
48. A shortage will occur at any price below equilibrium price and a surplus will occur at any price above
equilibrium price.
ANS: T PTS: 1 DIF: Moderate TOP: Equilibrium
49. It is not possible for demand and supply to shift at the same time.
ANS: F PTS: 1 DIF: Moderate TOP: Example: A change in both

supply and demand
50. The price of any good adjusts until quantity demanded equals quantity supplied.
51. If demand and supply both increase, quantity demanded will always increase, no matter how big the
changes in supply and demand.
ANS: F PTS: 1 DIF: Moderate TOP: Equilibrium
52. Analysing how an event affects a market can be accomplished in two steps.
ANS: F PTS: 1 DIF: Easy TOP: Three steps for analysing

changes in equilibrium
53. In a monopoly market, equilibrium is always achieved.
ANS: F PTS: 1 DIF: Easy TOP: Three steps for analysing

changes in equilibrium
54. If the number of buyers of DVD movies increases, other things being equal, there will be an increase
in the equilibrium price of DVD movies and a decrease in the equilibrium quantity sold.
ANS: F PTS: 1 DIF: Easy TOP: Shifts in curves versus

movements along curves
55. When large areas of the US Pacific North-West were protected from logging in 1990 (to conserve
spotted owl habitat), this is likely to have caused the equilibrium price of logs to increase and the
equilibrium quantity of logs sold to decrease.
ANS: T PTS: 1 DIF: Moderate TOP: Conclusion: How prices

allocate resources
56. If demand increases and supply simultaneously decreases, equilibrium price will rise.
ANS: T PTS: 1 DIF: Moderate TOP: Example: A change in both

supply and demand
57. A table showing how the quantity supplied of a product varies with its price, other things being equal,
is a supply schedule and the graph of the supply schedule is called a supply curve.

58. A supply curve slopes upward because, ceteris paribus, a higher price means a greater quantity
supplied.

59. A market supply curve is found by summing vertically all of the individual supply curves.
ANS: F PTS: 1 DIF: Moderate TOP: Market supply versus

individual supply
60. A change in the cost of producing a good will cause a change in the quantity supplied of a good.
ANS: F PTS: 1 DIF: Easy TOP: Shifts in the supply curve
61. A movement along a supply curve is called a change in supply, while a shift of the curve is called a
change in quantity supplied.

62. If there is an improvement in the technology of producing a product, the supply curve for that product
will shift to the left.
63. A reduction in an input price will cause a change in quantity supplied, but not a change in supply.
64. In a market economy, prices determine who produces each good and how much is produced.
65. Based on economic theory, anyone willing to pay the market price for a resource may have it.
ANS: T PTS: 1 DIF: Moderate TOP: Equilibrium
66. Normal and inferior goods are substitutes.
67. The internet has enabled markets to move towards the competitive model.
68. Because consumers can now buy books online and get them shipped, this leads to less competition.
MULTIPLE CHOICE
1. The behaviour of firms to different market conditions is known as:
A. supply
B. demand
C. incomes
D. taxation
ANS: A PTS: 1 DIF: Easy TOP: Markets and competition
2. Generally, the market for water in your town would be considered:

A. a monopolistic market
B. more organised than an auction
C. a competitive market
D. a market where individual sellers have significant pricing power
3. A perfectly competitive market DOES NOT have which of the following characteristics?
A. many buyers
B. several buyers which have a large impact on the price of goods
C. many goods which are very similar
D. many sellers
ANS: B PTS: 1 DIF: Easy TOP: What is competition?
4. Which of the following are the words most commonly used by economists?
A. supply and demand
B. entrepreneurial ability
C. scarcity and human wants
D. prices and exchange
5. In a free market, the relationship between price and quantity demanded of a good can be called:
A. supply and demand
B. the law of demand
C. the Phillips curve
D. market demand
ANS: B PTS: 1 DIF: Easy TOP: Markets and competition
6. A market is a:
A. place where only buyers come together
B. place where only sellers meet
C. group of demanders and suppliers of a particular good or service
D. group of people with common desires
ANS: C PTS: 1 DIF: Easy TOP: Markets and competition
7. The ultimate source of demand for a product is?

A. advertisers
B. those people who purchase the product
C. those firms that produce the product
D. the value of the labour used to produce the product
8. A market where there is only one seller is called a:

A. monopoly market
B. competitive market
C. regulated market
D. wheat market
ANS: A PTS: 1 DIF: Easy TOP: What is competition?
9. Firms that sell their products in a competitive market have limited pricing power because:
A. sellers have reason to charge more than their competitors
B. each buyer has a significant influence on the price of the product
C. other sellers are offering very similar products
D. none of the above are correct
ANS: C PTS: 1 DIF: Easy TOP: What is competition?
10. If a seller in a competitive market chooses to charge more than the market price, then:
A. buyers will tend to make their purchases elsewhere
B. the owners of the raw materials used in production would raise the prices
for the raw materials
C. other sellers would also raise their price
D. buyers would tend to buy more from this seller
11. If sellers are price makers, then individually:

A. their production decisions can affect the market price
B. their production decisions do not determine the market price
C. their production decisions have no effect on the market price
D. people will not buy their product whatever price they set
12. There are thousands of wheat farmers who produce and sell wheat, and there are millions of consumers
who use wheat and wheat products. The market for wheat would be considered:
A. perfectly competitive
B. monopolistic
C. oligopolistic
D. monopolistically competitive
13. As a seller, you would be considered part of a perfectly competitive market if:
A. your actions are quickly followed by competitors
B. your pricing has no impact on the amount you can sell
C. your actions essentially have no effect on the market price
D. increases in the price of your product have an impact on the market price
14. Which of the following would be an example of a monopoly?

A. a power company that is the sole supplier of electricity to a city
B. a rice farmer
C. a salmon fisher
D. a bank in a domestic market like Australia
15. Which of the following would be an example of a monopoly?

A. local cement companies
B. a local petrol station in the country town
C. a bakery in a large city
D. a potato farmer
16. In a competitive market, buyers cannot influence the price because:

A. each buyer purchases a small amount of the product
B. each buyer purchases a large amount of the product
C. each buyer is a monopoly
D. prices are determined by advertisers
17. In a competitive market, suppliers have little reason to charge different prices because:
A. they have little reason to charge a lower price
B. if they a charge a higher price, buyers will purchase from someone else
C. only B is true
D. both A and B are true
ANS: D PTS: 1 DIF: Easy TOP: What is competition?
18. Which of the following is an example of a market?

A. an auction for agricultural products
B. the purchase and sale of software over the internet
C. the purchase and sale of illegal drugs in secret locations in a city
D. all of the above
ANS: D PTS: 1 DIF: Easy TOP: Markets
19. Most markets in an economy are:

A. very inefficient
B. uncompetitive to a small degree
C. very competitive
D. competitive to a small degree
20. An increase in the price of a product will reduce the amount of it purchased because:
A. supply curves are up sloping
B. the higher price means that real incomes have risen
C. consumers will substitute other products for the one where price has risen
D. consumers substitute relatively high-priced products for relatively low-priced products
ANS: C PTS: 1 DIF: Moderate TOP: What is competition?
21. A demand curve is:

A. the upward-sloping line relating the price of the good with the quantity demanded
B. the upward-sloping line relating price with quantity supplied
C. the downward-sloping line relating the price of the good with the quantity demanded
D. the downward-sloping line relating price with quantity supplied
ANS: C PTS: 1 DIF: Easy TOP: Demand
22. The law of demand states that:

A. price and quantity demanded are inversely related
B. the larger the number of buyers in a market, the lower product price
C. price and quantity demanded are directly related
D. consumers will buy more of a given product at high prices than they will at low prices
23. Graphically, the market demand curve is:

A. the vertical sum of individual demand curves
B. steeper than any individual demand curve that comprises it
C. greater than the sum of the individual supply curves
D. the horizontal sum of individual demand curves
ANS: D PTS: 1 DIF: Moderate TOP: The demand curve: The

24. What could cause the demand curve for fish to shift?
A. an increase in the price of a substitute good for fish
B. a decrease in the price of a close substitute for fish
C. an increase in consumer incomes
D. all of the above
ANS: D PTS: 1 DIF: Moderate TOP: Shifts in the demand curve
25. Which of the following would not shift the demand curve for beef?
A. a reduction in the price of cattle farm fencing
B. a change in the incomes of beef consumers
C. an effective advertising campaign by pork producers
D. a widely publicised study that indicates beef increases one’s cholesterol
ANS: A PTS: 1 DIF: Moderate TOP: Shifts in the demand curve

26. Which one of the following is not a determinant of demand?
A. the price of a close-substitute good
B. income levels of consumers
C. tastes
D. the prices of the energy inputs used to make the good
ANS: D PTS: 1 DIF: Easy TOP: Shifts in the demand curve
27. If a good is ‘normal’, then an increase in income will result in:

A. no change in the demand for the good
B. a decrease in the demand for the good
C. an increase in the demand for the good
D. a lower market price
ANS: C PTS: 1 DIF: Easy TOP: Shifts in the demand curve
28. If good Z is ‘inferior’, then an increase in income will cause:

A. demand for good Z will increase
B. market price of good Z will increase
C. demand for good Z will decrease
D. demand for good Z will not change
ANS: A PTS: 1 DIF: Easy TOP: Shifts in the demand curve
29. Suppose that a decrease in the price of X results in more of good Y sold. This would mean that X and
Y are:
A. complementary goods
B. substitute goods
C. unrelated goods
D. normal goods
30. Suppose Lee likes chicken curry a little bit more than fish and chips. Lee eats chicken curry twice as
often as fish and chips. Now suppose the price of chicken rises. How would Lee’s demand for fish and
chips change, assuming everything else was constant?
A. it would decrease
B. it would increase
C. it would be unaffected
D. there is insufficient information given to answer the question
ANS: B PTS: 1 DIF: Moderate TOP: Shifts in the demand curve:

Related products
31. A higher price for batteries would tend to:

A. increase the demand for flashlights
B. decrease the demand for electricity
C. increase the demand for electricity
D. increase the demand for batteries

32. Suppose that the demand for crocodile leather falls after a decrease in price of snake skin. This would
mean that crocodile leather is:
A. a substitute good
B. a normal good
C. a complementary good
D. an inferior good
ANS: A PTS: 1 DIF: Easy TOP: Prices of related goods
33. Which of the following is a determinant of demand?

A. the price of a substitute good
B. the price of a complement good
C. the price of the good next month
D. all of the above
34. In 1989 an international trade ban was announced for ivory. If people expected the price of ivory to
rise after the ban, then their demand before the ban would:
A. increase
B. decrease
C. be unchanged
D. be impossible to tell
35. Holding all else constant, a decrease in the price of mobile phones will:
A. increase the demand for tablets
B. decrease sales of lap top computers
C. decrease the demand for other types of telecommunications devices
D. decrease the supply of mobile phones
ANS: C PTS: 1 DIF: Easy TOP: The demand curve: The

36. Which of the following would NOT shift the demand curve for a good or service?
A. a change in income
B. a change in the price of a related good
C. a change in expectations about the price of the good or service
D. a change in the price of the good or service
ANS: D PTS: 1 DIF: Easy TOP: The demand curve: The

37. Demand for fish is higher in India than Australia because:

A. the cost of supplying fish in India is lower than Australia
B. fish is an inferior good and people in India have less income
C. there are more buyers in the Indian market
D. people expect fish to be cheaper in India
38. Sally tells you that she thinks the price of her favourite stationery will increase in the near future. She
will probably respond by:
A. decreasing her current demand for the stationery
B. increasing her current demand for the stationery
C. not changing her demand for stationery currently
D. currently refusing to buy any more stationery
ANS: B PTS: 1 DIF: Moderate TOP: Shifts in the demand curve
39. A market demand is:

A. a vertical summation of individual demand curves
B. a horizontal summation of individual demand curves
C. not responsive to change in tastes and preferences
D. determined solely by the number of buyers and sellers in the market
ANS: B PTS: 1 DIF: Easy TOP: Market demand versus

individual demand
40. The market demand curve illustrates:

A. how much all buyers in the market are willing and able to buy at each possible price
B. the fact that tastes for a good are inversely related to the price of a good
C. how the quantity demanded increases as incomes increase
D. the fact that demand for a good is inversely related to the number of buyers
ANS: A PTS: 1 DIF: Moderate TOP: Market demand versus

individual demand
NARRBEGIN: 4-1
Graph 4-1
NARREND
41. Refer to Graph 4-1. The movement from point A to point B on the graph would be caused by:
A. an increase in price
B. a decrease in the price of a substitute good
C. an increase in income
D. a decrease in price

relationship between price and quantity demanded NAR: 4-1
42. Refer to Graph 4-1. The movement from point B to point A on the graph shows:
A. a decrease in demand
B. a decrease in quantity demanded
C. an increase in demand
D. an increase in quantity demanded
ANS: B PTS: 1 DIF: Easy TOP: The demand curve: The

relationship between price and quantity demanded NAR: 4-1
43. Suppose that the price of shaving cream rises. We could expect the:
A. demand for hair dye for men to increase
B. demand for shaving gel to increase
C. demand for razors to decrease
D. demand for razors to increase
ANS: B PTS: 1 DIF: Easy TOP: Prices of related goods
44. Suppose that scientists find evidence that proves that chocolate pudding increases hair growth in men
who are balding. We would expect to see:
A. no change in the demand for chocolate pudding
B. a decrease in the demand for chocolate pudding
C. an increase in the demand for chocolate pudding
D. a decrease in the supply of chocolate pudding
ANS: C PTS: 1 DIF: Moderate TOP: Number of buyers
45. To represent the effect of a price increase for coffee:

A. there would be a movement along the demand curve for coffee
B. the demand curve for coffee would shift to the right
C. the demand curve for coffee would shift to the left
D. there would be a movement along the demand curve for sugar
ANS: A PTS: 1 DIF: Easy TOP: The relationship between

price and quantity demanded
46. Suppose that John receives a pay increase. We would expect John’s demand for:
A. normal goods to remain unchanged
B. luxury goods to increase
C. inferior goods to increase
D. normal goods to decrease
ANS: B PTS: 1 DIF: Easy TOP: Income

47. Doug likes tomatoes today more than he did yesterday. Ceteris paribus, which of the following
statements is correct?
A. Doug must have received an increase in income
B. Doug is now willing to pay more than before for tomatoes
C. Doug must now consider tomatoes a luxury
D. the supply of tomatoes must have increased
ANS: B PTS: 1 DIF: Moderate TOP: Tastes
48. A decrease in subsidies for art galleries would:

A. increase the supply of art
B. decrease the supply of art
C. increase the demand for art dealers
D. decrease the demand for art dealers
ANS: D PTS: 1 DIF: Easy TOP: Number of buyers
NARRBEGIN: 4-2
Graph 4-2
NARREND
49. Refer to Graph 4-2. On the graph, the movement from D to D1 is called:
A. a decrease in demand
B. an increase in demand
C. a decrease in quantity demanded
D. an increase in quantity demanded

NAR: 4-2
50. Refer to Graph 4-2. On the graph, the movement from D to D1 could be caused by:
A. an increase in price
B. a decrease in the price of a complement
C. an increase in technology
D. a decrease in the price of a substitute

NAR: 4-2
51. Refer to Graph 4-2. If the demand curve shifts from D1 to D on the graph, this means that:
A. firms are willing to supply less than before
B. people are less willing to buy the product at any price than before
C. people are now more willing to buy the product at any price than before
D. the price of the product has decreased, causing consumers to buy more of the product

NAR: 4-2
52. When we move up or down a given demand curve:

A. only price is held constant
B. all non-price determinants of demand are assumed to be constant
C. income and the price of the good are held constant
D. all determinants of quantity demanded are held constant

53. Ceteris paribus is a Latin phrase that literally means:

A. ‘other things equal’
B. ‘after this therefore because of this’
C. ‘to respond slowly to a change in price’
D. ‘there’s no such thing as a free lunch’
ANS: A PTS: 1 DIF: Easy TOP: Summary
54. The term ceteris paribus refers to a:

A. central market price
B. real-world situation in which every variable is held constant
C. hypothetical situation in which some variables are assumed to be constant
D. situation in which only the price is held constant
ANS: C PTS: 1 DIF: Easy TOP: Summary
55. A demand schedule is a table showing the relationship between:

A. the price of a good and the quantity supplied
B. income and the quantity of the good demanded
C. the price of a good and the quantity buyers are willing and able to purchase
D. the determinants of demand and the quantity demanded

NARRBEGIN: Table 4-1

Table 4-1
A market is represented by the table below:
Quantities demanded:
Price of the good John Lee Amy Jean

$0.50 36 25 12 5
1.00 30 22 8 4
2.00 25 20 3 3
3.00 20 19 1 2
4.00 10 18 0 1
5.00 5 17 0 0
NARREND
56. Refer to Table 4-1. If the price of the good is $4, the quantity demanded in this market would be:
A. 125 units
B. 51 units
C. 22 units
D. 29 units

relationship between price and quantity demanded NAR: Table 4-1
57. Refer to Table 4-1. If the price increases from $1 to $4:

A. the market demand increases by 20 units
B. the quantity demanded in the market decreases by 35 units
C. the quantity demanded in the market decreases by 42 units
D. the quantity demanded in the market decreases by 13 units

relationship between price and quantity demanded NAR: Table 4-1
58. A demand curve:

A. can slope upwards or downwards depending on the good
B. illustrates a positive relationship between price and quantity demanded
C. is always downward sloping
D. shows that demand changes when the number of sellers in a market increases
ANS: A PTS: 1 DIF: Moderate TOP: The demand curve: The

59. Economists can use which of the following to illustrate the law of demand?
A. A demand schedule, a supply schedule and prices
B. A demand curve or a demand schedule
C. A demand curve or a supply curve
D. A demand curve, a supply schedule and a demand schedule

60. The side of the market that deals with the willingness and ability to produce and sell is:
A. demand
B. competition
C. supply
D. a monopoly
ANS: C PTS: 1 DIF: Easy TOP: The supply curve: The

61. One reason why government taxes on cigarettes imposed on sellers reduces smoking is that:
A. cigarette companies are successful in passing much of the tax on to consumers
B. cigarette companies do not pass much of the tax on to consumers
C. there are many good substitutes for cigarettes
D. none of the above answers is correct
ANS: A PTS: 1 DIF: Easy TOP: The supply curve: The

62. The relationship between price and quantity supplied is:

A. positive or direct
B. negative or inverse
C. non-existent
D. the same as the relationship between price and quantity demanded
ANS: A PTS: 1 DIF: Easy TOP: The supply curve: The

63. If nothing else changes, a rise in the price of a good leads to an increase in the quantity supplied of a
good. This is known as:
A. diminishing returns
B. conservation
C. the law of supply
D. the law of demand

64. A decrease in the number of sellers supplying a good will shift the:
A. demand curve to the right
B. demand curve to the left
C. supply curve to the right
D. supply curve to the left
ANS: D PTS: 1 DIF: Easy TOP: Shifts in the supply curve
65. The global financial crisis was in part caused by many traders selling mortgage-based financial
products all at the same time. Why might they have decided to do so?
A. they wanted to supply more mortgage-based financial products to the market
B. they had found better products than mortgage-based financial products
C. the supply of mortgage-based financial products had fallen
D. they expected the price of mortgage-based financial products to fall in the near future
ANS: D PTS: 1 DIF: Moderate TOP: Shifts in the supply curve
66. Holding the non-price determinants of supply constant, a change in price would:
A. result in a change in supply
B. result in a movement along a stable supply curve
C. result in a shift of demand
D. have no effect on the quantity supplied
ANS: B PTS: 1 DIF: Moderate TOP: Shifts in the supply curve
67. New Zealand sphagnum moss is an input used in the production of orchids. If the price of sphagnum
moss increases, but nothing else changes, this will cause:
A. the demand for orchids to increase
B. the supply of orchids to decrease
C. the supply of orchids to increase
D. the demand for orchids to decrease
68. All else being constant, an increase in the number of cattle delivered to an auction to be marketed
would:
A. represent an increase in demand for cattle at the auction
B. represent an increase in the supply of cattle at the auction
C. represent a decrease in the number of sellers at the auction
D. have no effect on the demand or supply at the auction
ANS: B PTS: 1 DIF: Easy TOP: Shifts in the supply curve
69. A leftward shift of a product supply curve might be caused by:

A. an improvement in the relevant technique of production
B. a decline in the prices of needed inputs
C. an increase in consumer incomes
D. some firms leaving an industry
ANS: D PTS: 1 DIF: Moderate TOP: Shifts in the supply curve
70. If the government imposes a price control on the price of wine so that no bottle can be sold for more
than $15, you would expect:
A. supply in that market will decrease
B. quantity supplied in that market will decrease
C. supply in that market will increase
D. demand in that market will not change
ANS: B PTS: 1 DIF: Easy TOP: The supply curve: The

71. ‘Because of unseasonably cold weather, the supply of oranges has substantially decreased’. This
statement indicates that:
A. the amount of oranges that will be available at various prices has declined
B. the equilibrium quantity of oranges will rise
C. consumers will be willing and able to buy fewer oranges at each possible price
D. the price of oranges will fall
ANS: A PTS: 1 DIF: Moderate TOP: Shifts in the supply curve
72. Suppose you make jewellery. If the price of gold rises, we would expect you to:
A. be willing and able to produce more jewellery than before at each possible price
B. be willing and able to produce less jewellery than before at each possible price
C. face a greater demand for your jewellery
D. face a weaker demand for your jewellery
73. A supply curve slopes upward because:

A. an increase in input prices increases supply
B. a decrease in input prices decreases supply
C. as more is produced, per unit costs of production fall
D. an increase in price gives producers incentive to supply a larger quantity
ANS: D PTS: 1 DIF: Easy TOP: The supply curve: The

NARRBEGIN: 4-3
Graph 4-3
NARREND
74. Refer to Graph 4-3. Suppose we observe the movement from point B to point A on the graph. This
would be caused by:
A. a decrease in the price of the good
B. an increase in technology
C. an increase in the price of the good
B. a decrease in technology
relationship between price and quantity supplied NAR: 4-3
75. Refer to Graph 4-3. The movement from point A to point B on the graph is called:
A. a decrease in supply
B. an increase in supply
C. a decrease in the quantity supplied
D. an increase in the quantity supplied

NARRBEGIN: 4-4
Graph 4-4
NARREND
76. Refer to Graph 4-4. On the graph, the movement from S to S1 is called:
A. a decrease in supply
B. a decrease in quantity supplied
C. an increase in quantity supplied
D. an increase in supply
ANS: D PTS: 1 DIF: Easy TOP: Shifts in the supply curve

NAR: 4-4
77. Refer to Graph 4-4. On the graph, the movement from S to S1 could be caused by:
A. a decrease in the number of sellers of the good
B. an improvement in the wage conditions for workers
C. an increase in good publicity for the good
D. a decrease in input prices
ANS: D PTS: 1 DIF: Moderate TOP: The supply curve: The

78. The intersection of the demand and supply curves is a unique point termed:
A. perfect competition
B. an equilibrium
C. the conservation of resources
D. equality

79. If the supply curve shifts left but the demand for a good stays the same, it is called:
A. the equilibrium
B. a shortage
C. a surplus
D. excess supply

80. Suppose at the current price of sugar, sugar suppliers have a surplus. This must mean that:
A. the price of sugar is currently higher than the equilibrium price
B. the price of sugar is currently lower than the equilibrium price
C. less sugar is being produced by sellers than buyers want to buy
D. the demand for sugar has fallen
ANS: A PTS: 1 DIF: Easy TOP: Equilibrium
81. At the equilibrium price:

A. everyone in the market has been satisfied
B. it is possible for there to be a shortage
C. firms have an incentive to increase production
D. buyers have an incentive to buy more
NARRBEGIN: 4-5
Graph 4-5
NARREND
82. Refer to Graph 4-5. According to the graph, equilibrium price and quantity are:
A. $7, 20
B. $7, 60
C. $5, 40
D. $3, 60
ANS: C PTS: 1 DIF: Easy TOP: Equilibrium NAR: 4-5
83. Refer to Graph 4-5. According to the graph, at a price of $7:

A. there would be a shortage of 40 units
B. there would be a surplus of 40 units
C. there would be a surplus of 20 units
D. the market would be in equilibrium
ANS: B PTS: 1 DIF: Easy TOP: Equilibrium NAR: 4-5

A. there would be a shortage of 40 units
B. there would be a surplus of 40 units
C. there would be a surplus of 20 units
ANS: A PTS: 1 DIF: Easy TOP: Equilibrium NAR: 4-5
85. Refer to Graph 4-5. According to the graph, at the equilibrium price:
A. 20 units would be supplied and demanded
B. 40 units would be supplied and demanded
C. 60 units would be supplied and demanded
D. 60 units would be supplied, but only 20 would be demanded

A. a surplus would exist and the price would tend to fall
B. a surplus would exist and the price would tend to rise
C. a shortage would exist and the price would tend to fall
ANS: A PTS: 1 DIF: Moderate TOP: Equilibrium NAR: 4-5
Table 4-2
Price ($) Quantity demanded Quantity supplied

25 1 25
20 2 20
15 3 15
10 4 10
5 5 5
NARREND
87. Refer to Table 4-2. In the table shown, the equilibrium price and quantity would be:
A. $5, 5
B. $15, 20
C. $20, 20
D. $20, 22
88. Refer to Table 4-2. In the table shown, suppose the current price was $25. This would mean:
A. a surplus of 1 unit would exist and price would tend to fall
B. a shortage of 24 units would exist and price would tend to fall
C. a surplus of 24 units would exist and price would tend to fall
D. a shortage of 1 unit would exist and price would tend to rise
ANS: C PTS: 1 DIF: Moderate TOP: Equilibrium NAR: 4-2
89. Refer to Table 4-2. In the table shown, if the price were $10:
A. a surplus of 6 units would exist and price would tend to fall
B. a surplus of 3 units would exist and price would tend to rise
C. a shortage of 3 units would exist and price would tend to fall
D. a shortage of 6 units would exist and price would tend to rise
ANS: A PTS: 1 DIF: Moderate TOP: Equilibrium NAR: 4-2
NARRBEGIN: 4-6
Graph 4-6
NARREND
90. Refer to the Graph 4-6. In this market, equilibrium price and quantity would be:
A. $15, 400
B. $20, 600
C. $25, 500
D. $25, 800
ANS: B PTS: 1 DIF: Moderate TOP: Equilibrium NAR: 4-6
91. Refer to the Graph 4-6. If price were $25, quantity demanded would be:
A. 400
B. 500
C. 600
D. 800
92. Refer to the Graph 4-6. If price were $15, quantity supplied would be:
A. 200
B. 400
C. 500
D. 700
93. Refer to the Graph 4-6. If the price were $25:

A. there would be a surplus of 300
B. there would be a surplus of 200
C. there would be a shortage of 200
94. Refer to the Graph 4-6. If the price were $10 there would be a:
A. shortage of 200
B. surplus of 200
C. surplus of 600
D. shortage of 600
ANS: D PTS: 1 DIF: Easy TOP: Equilibrium NAR: 4-6
95. Refer to the Graph 4-6. At a price of $15:

A. quantity demanded < quantity supplied
B. quantity demanded = quantity supplied
C. quantity demanded > quantity supplied
D. none of the above is true
ANS: C PTS: 1 DIF: Easy TOP: Equilibrium NAR: 4-6
96. Refer to the Graph 4-6. At a price of $20:

A. the market would be in equilibrium
B. 600 units would be bought and sold
C. there would be no pressure for price to change
D. all of the above are true
ANS: D PTS: 1 DIF: Easy TOP: Equilibrium NAR: 4-6
97. When the price is higher than the equilibrium price:

A. suppliers will reduce prices to try to clear the market
B. suppliers will increase their prices to clear the market
C. buyers will change their tastes and desire more of the good
D. more sellers will enter the market as they expect prices to go higher
98. A surplus is:

A. a situation in which quantity supplied is lower than quantity demanded
B. a situation in which there is downward pressure on price
C. a situation in which there is too much produced of a good
D. a situation in which quantity supplied is greater than quantity demanded
ANS: D PTS: 1 DIF: Easy TOP: Equilibrium
99. A shortage is:

A. a situation in which quantity supplied is lower than quantity demanded
B. a situation in which there is downward pressure on price
C. a situation in which there is too much produced of a good
D. a situation in which quantity supplied is greater than quantity demanded

100. At the equilibrium price:
A. there can still be upward or downward pressure on price
B. there will be no pressure on price to rise or fall
C. sellers will eventually require a higher price
D. buyers will not be willing to purchase the output sellers desire to sell
ANS: B PTS: 1 DIF: Easy TOP: Equilibrium
101. Comparative statics involves:

A. comparing the old equilibrium and the new equilibrium
B. the estimating of buyer reluctance to pay the market price
C. comparisons of varying prices
D. the estimating of the friction that develops between buyer and seller
ANS: A PTS: 1 DIF: Easy TOP: Example: A change in both

supply and demand
102. Equilibrium is:

A. the price that balances supply and demand
B. the quantity supplied and the quantity demanded when the price has adjusted to balance
supply and demand
C. a situation in which quantity supplied is greater than quantity demanded
D. a situation in which supply and demand have been brought into balance
ANS: D PTS: 1 DIF: Moderate TOP: Equilibrium
103. A shift in the supply curve is called:

A. a ‘change in supply’
B. a ‘movement along the supply curve’
C. a ‘change in the quantity supplied’
D. all of the above
ANS: A PTS: 1 DIF: Easy TOP: Shifts in the supply curve
104. If there is a shift of the demand curve, this is known as:

A. a ‘change in demand’
B. a ‘movement along the demand curve’
C. a ‘change in tastes’
D. a ‘change in taxation’
105. Whenever the price of a good changes in a competitive market it is NOT a result of:
A. a change in supply and demand
B. a change in input prices
C. a decision by a local farmer to stop selling the good
D. a shift in expectations
ANS: C PTS: 1 DIF: Easy TOP: Equilibrium
106. Suppose an outbreak of Varroa kills off many beehives. Which of the following would not occur as a
direct result of this event?
A. honey sellers would not be willing to produce and sell as much honey at previous
market prices
B. the supply of honey would decrease
C. honey buyers would not be willing to buy as much at previous market prices
D. the equilibrium price of honey would increase
ANS: C PTS: 1 DIF: Moderate TOP: Shifts in the supply curve
107. Suppose that the number of buyers in a market increases and expectations of the price of the good
indicate that its price will rise in the future. What would we expect to happen in the market?
A. the equilibrium price would increase but the impact on the amount sold in the market
would be ambiguous
B. the equilibrium price would decrease but the impact on the amount sold in the market
would be ambiguous
C. both equilibrium price and equilibrium quantity would increase
D. equilibrium quantity would increase but the impact on equilibrium price
would be ambiguous
ANS: C PTS: 1 DIF: Difficult TOP: Conclusion: How prices

allocate resources
108. Suppose that the incomes of buyers in a particular market for a normal good decline and there is also a
reduction in input prices. What would we expect to occur in this market?
A. the equilibrium price would increase but the impact on the amount sold in the market
would be ambiguous
B. the equilibrium price would decrease but the impact on the amount sold in the market
would be ambiguous
D. equilibrium quantity would increase but the impact on equilibrium price
would be ambiguous
ANS: B PTS: 1 DIF: Difficult TOP: Example: A change in both

supply and demand
109. Suppose that demand decreases AND supply decreases. What would you expect to occur in the market
for the good?
A. equilibrium price would increase but the impact on equilibrium quantity
would be ambiguous
B. equilibrium price would decrease but the impact on equilibrium quantity
would be ambiguous
D. equilibrium quantity would decrease but the impact on equilibrium price
would be ambiguous
ANS: D PTS: 1 DIF: Moderate TOP: Example: A change in both

supply and demand
110. Suppose that demand for black-market koala skins decreases AND supply decreases because of falling
koala populations. What would happen in the black market for koala skins?
A. the effect on equilibrium price would be ambiguous
B. both equilibrium price and quantity would increase
C. both equilibrium price and quantity would decrease
D. equilibrium price would increase but the impact on equilibrium quantity
would be ambiguous
ANS: A PTS: 1 DIF: Moderate TOP: Example: A change in both

supply and demand
111. Which of the following would result in an increase in equilibrium price and an ambiguous change in
equilibrium quantity?
A. an increase in supply and demand
B. an increase in supply and a decrease in demand
C. a decrease in supply and demand
D. a decrease in supply and an increase in demand
ANS: D PTS: 1 DIF: Difficult TOP: Example: A change in both

supply and demand
112. Suppose a drought reduces the production of brussels sprouts in Australia, but simultaneously a new
study finds that they have cancer-curing properties. One would expect:
A. the price of brussels sprouts to increase
B. the price of brussels sprouts to decrease
C. the price of brussels sprouts to remain the same
D. the price of brussels sprouts to drop slightly, then increase

supply and demand
113. A weaker demand together with a stronger supply would necessarily result in:
A. a lower price
B. a higher price
C. an increase in equilibrium quantity
D. a decrease in equilibrium quantity

supply and demand
114. Which of the following statements is correct?

A. prices change as soon as the demand for a good changes
B. prices may take some time to change when demand for a good changes
C. prices will shift by ten per cent in the short run and by more in the long run
D. prices sometimes shift but most often they are fixed
ANS: B PTS: 1 DIF: Easy TOP: Conclusion: How prices

allocate resources
115. Which of the following statements is incorrect?

A. if demand increases and supply decreases, equilibrium price will rise
B. if supply increases and demand decreases, equilibrium price will fall
C. if supply declines and demand remains constant, equilibrium price will rise
D. if demand decreases and supply increases, equilibrium price will rise
ANS: D PTS: 1 DIF: Moderate TOP: Example: A change in both
supply and demand
116. Boris discovers a new technology that can produce economics textbooks at triple the speed that
textbooks are usually produced. What effect can Boris expect this discovery to have on the supply of
economics textbooks?
A. the quantity supplied will increase
B. the production possibilities frontier will shift outwards
C. the supply curve will shift to the right
D. the supply curve will shift to the left

117. An increase in the price of a good would:

A. increase the supply
B. increase the amount purchased by buyers
C. decrease the supply
D. give producers an incentive to produce more

118. Which of the following is NOT a step for analysing changes in equilibrium?
A. deciding whether the event shifts the supply or the demand curve
B. using a circular flow diagram to determine changes in the flow of money
C. using the supply and demand diagram to see how the shift changes the equilibrium
D. deciding in which direction the curve is shifted

119. In a market, to find the total amount supplied at a particular price:

A. we must add up all of the amounts firms are willing and able to supply at that price
B. we need the demand for the good
C. the tastes and preferences of buyers must be established
D. the income level of buyers would need to be determined
ANS: A PTS: 1 DIF: Easy TOP: Market supply versus

individual supply
120. In a free market system, what coordinates the actions of millions of people with their varying abilities
and desires?
A. producers
B. consumers
C. prices
D. the government
ANS: C PTS: 1 DIF: Easy TOP: Conclusion: How prices

allocate resources
121. If the price of timber falls:

A. the supply of wooden tables will rise
B. the supply of wooden tables will fall
C. the supply of wooden tables will stay the same
D. there is not enough information to answer this question
ANS: A PTS: 1 DIF: Easy TOP: Shifts in the supply curve
122. Demand for which of the following goods will fall as income rises?
A. handbags
B. second-hand clothing
C. donuts
D. bus tickets
ANS: B PTS: 1 DIF: Easy TOP: Conclusion: How prices

allocate resources
123. Which of the following would cause both the equilibrium price and equilibrium quantity of number-
two-grade potatoes (an inferior good) to increase?
A. a decrease in consumer income
B. an increase in consumer income
C. greater government restrictions on agricultural chemicals
D. fewer government restrictions on agricultural chemicals
SHORT ANSWER
1. What are two types of markets? What are their characteristics?
ANS:
Any of the following are acceptable:
a. Perfectly competitive: The goods being offered for sale must all be the same. The buyers and sellers
must be so numerous that no single buyer or seller influences the market price.
b. A monopoly: A monopoly is a market in which there is only one seller.
c. An oligopoly: An oligopoly is a market in which there are only a few sellers and the sellers do not
always compete aggressively.
d. Monopolistic competition: Monopolistic competition is a market containing many sellers offering
slightly different products.
PTS: 1 DIF: Easy TOP: Markets and competition
2. For each of the following products and industries, determine whether the market structure is perfect
competition, monopolistic competition, oligopoly or monopoly.
a. mobile phone services
b. soft drinks
c. local water
d. the automobile industry
e. fast food in a city
f. the textbook industry
g. television networks
h. market for second hand cars
ANS:
a. The local telephone service is usually an oligopoly, with only one seller.
b. The soft drink industry is best described as an oligopoly, with just a few producers.
c. Local water is usually a monopoly, with only one seller.
d. The automobile industry is best described as an oligopoly, with just a few large producers.
e. The fast food industry in a city is monopolistically competitive, with many sellers and differentiated
products.
f. The textbook industry is best described as monopolistically competitive, with many producers
selling differentiated products. Recently, however, mergers and acquisitions have moved the industry
toward oligopoly.
g. Since there are only a few large television networks, the industry is an oligopoly.
h. This is best described as monopolistic competition as consumers are able to access a large amount of
information, and there is a slight differentiation of product. It is, however, moving closer to the perfect
competition model – but there is asymmetry of information.
PTS: 1 DIF: Difficult TOP: What is competition?
3. Given the following demand schedule, graph Lee’s weekly demand curve for coffee.
Price of Coffee ($) Cups of Coffee

5.00 0
4.00 4
3.00 8
2.00 12
1.00 16
.00 20
ANS:
PTS: 1 DIF: Easy TOP: The demand curve: The relationship between price
and quantity demanded
4. New Zealand exports possum skins that are used to make leather products. What determinants of
demand would be influenced by the following events?
a. New Zealand’s possum skin industry is recognised as having conservation benefits as possums are a
feral pest in New Zealand.
b. incomes in China grow rapidly
c. the price of calf leather becomes more expensive
ANS:
a. This may influence people’s tastes. If people are concerned about the environment, knowing that
their purchases help reduce the feral possum plague, may increase their demand for such products.
b. Possum skin is a normal good; hence an increase in incomes in export markets is likely to affect
demand.
c. Possum skin is a related good and as a substitute is likely to increase the demand for New Zealand
possum.
PTS: 1 DIF: Moderate TOP: Shifts in the demand curve
5. For each of the following situations in the wheat market, determine whether the quantity demanded
changes, or the demand curve shifts and determine the direction of the change.
a. consumer income increases
b. the price of wheat increases
c. scientists determine that eating wheat causes high blood pressure
d. the price of oats increases
e. in June, insects destroy part of the country’s wheat crop
ANS:
a. An increase in consumer income will cause a rightward shift in the demand curve, assuming that
wheat is a normal good.
b. An increase in the price of wheat will cause a decrease in the quantity demanded.
c. Consumers’ tastes will shift away from wheat, causing the demand curve to shift to the left.
d. Since oats and wheat are substitute goods, an increase in the price of oats will cause a rightward
shift in the demand for wheat.
e. Destruction of part of the growing wheat crop will cause consumers to expect higher prices in the
future. They will demand more wheat now and the demand curve will shift to the right.
PTS: 1 DIF: Moderate TOP: The demand curve: The relationship between price
and quantity demanded
6. What are the determinants of individual demand and individual supply?
ANS:
The determinants of individual demand are price, income, prices of related goods, tastes and
expectations. The determinants of individual supply are price, input prices, technology and
expectations.
PTS: 1 DIF: Easy TOP: Demand
7. What is a normal good? Give an example. How is a normal good different from an inferior good?
ANS:
A normal good is a good for which, other things being equal, an increase in income leads to an
increase in quantity demanded. Examples include wine, clothing, dinners at restaurants etc. An inferior
good is a good for which, other things being equal, an increase in income leads to a decrease in
quantity demanded.
PTS: 1 DIF: Easy TOP: Shifts in the demand curve
8. Given the following information about three consumers’ monthly demand, construct a market demand
curve for potato chips. What would happen to demand if Ryan decided to buy popcorn and not to buy
chips? Show this change on your graph.
Price per bag ($) Ryan’s demand Rusty’s demand Regan’s demand
.25 7 10 6
.50 6 8 5
.75 5 6 4
1.00 4 4 3
1.25 3 2 2
1.50 2 0 1
ANS:
PTS: 1 DIF: Moderate TOP: Market demand versus individual demand
9. What is the difference between a change in demand and a change in quantity demanded? Graph your
answer.
ANS:
A change in demand refers to a shift in the demand curve. A change in quantity demanded refers to a
movement along a fixed demand curve.
10. For each of the following changes, determine whether there will be a movement along the demand
curve (a change in quantity demanded) or a shift in the demand curve (a change in demand).
a. a change in the price of a related good
b. a change in tastes
c. a change in the number of buyers
d. a change in price
e. a change in expectations
f. a change in income
ANS:
A change in price causes a change in quantity demanded. All of the other changes listed shift the
demand curve.
11. Why is the ceteris paribus assumption so important when constructing a demand or supply curve?
ANS:
Ceteris paribus means ‘other things equal’. When we draw a demand (or supply) curve, we show the
relationship between quantity demanded (or quantity supplied) and price and hold all other factors that
might affect demand (or supply), other than price, constant.
PTS: 1 DIF: Moderate TOP: Markets and competition
12. For each of the following situations in the Australian crocodile market, determine whether the quantity
supplied changes, or whether the supply curve shifts and determine the direction of the change.
a. the number of crocodile farms and ranches closes, ceteris paribus
b. Professor Webb develops an antibiotic that ensures more hatchlings survive on ranches
c. the cost of meat to feed crocodiles rises
d. Thailand announces it is going to increase the number of crocodile farms in the next five years
ANS:
a. A reduction in the number of sellers will cause the supply curve to shift to the left.
b. This technological improvement will cause the supply curve to shift to the right.
c. An increase in the price of an input will cause the supply curve to shift to the left.
d. Australian producers will expect the price of crocodile products to fall in the future, so the current
supply curve will shift to the right.
PTS: 1 DIF: Moderate TOP: The supply curve: The relationship between price
and quantity supplied
13. What will happen to supply or quantity supplied under each of the following situations?
a. the price of the product falls
b. technology improves
c. input prices rise
d. expectations change – you expect the price of your product to rise next month
ANS:
a. A change in price will cause a movement along the supply curve, or a decrease in quantity supplied.
b. The supply curve will shift to the right.
c. The supply curve will shift to the left.
d. The supply curve will shift to the left.
PTS: 1 DIF: Moderate TOP: Shifts in the supply curve
14. Given the following table, graph the demand and supply curves for flashlights. Be sure to label
equilibrium price and equilibrium quantity.
Price/flashlight ($) Quantity demanded/month Quantity supplied/month

5 2,000 12,000
4 4,000 10,000
3 7,000 7,000
2 11,000 4,000
1 15,000 1,000
ANS:
PTS: 1 DIF: Easy TOP: Equilibrium
15. What does the term ‘equilibrium’ mean when applied to a market?
ANS:
The equilibrium in a market is the point at which the supply and demand curves intersect. At the
equilibrium price, quantity supplied is equal to quantity demanded.
PTS: 1 DIF: Easy TOP: Equilibirum
16. Given the graph shown, what will be the result in the market if the price was $6, or $5 or $4?
ANS:
At a price of $6 there will be a surplus of coffee, at $5 there will be an equilibrium and at $4 there will
be a shortage of coffee.
PTS: 1 DIF: Easy TOP: Equilibrium
17. Suppose that the equilibrium price in a market is $100, but the existing market price is $80. What will
happen in the market? What if the existing market price is $150?
ANS:
At $80 there will be a shortage of the good, and the market price will rise to clear the market of excess
demand. At $150 there will be a surplus of the good and the market price will fall to clear the market
of excess supply.
PTS: 1 DIF: Moderate TOP: Equilibrium
18. The following table shows the demand and supply of backpacks made by a Melbourne designer whose
products sell exclusively to a youth market. Graph both the demand and supply curves and label the
equilibrium price and quantity. Now assume that a famous celebrity starts wearing the backpack
everywhere, making it very popular with young people. Young people are now willing to purchase 300
more backpacks per year at every price. Show this change on your graph and explain what has
happened to equilibrium price and quantity as a result.
Price of Backpack ($) Quantity demanded per year Quantity supplied per year
210 800 5100
180 2000 4300
130 3000 3000
100 5000 1200
70 6000 800
50 8000 500
ANS:
The equilibrium price would originally be $130 and the equilibrium quantity would be 3000. When
demand increases by 500 due to an increase in income, the new equilibrium price would be $180 and
the new equilibrium quantity would be 4300.
19. Why do we aspire to achieve the equilibrium for a market? What happens when supply and demand
are not equal? Give two examples of events that could cause the equilibrium of a market to shift.
ANS:
We aspire to achieve equilibrium in a market because it is the most efficient point of a market – where
supply and demand are equal and there is no waste (shortage or surplus) in the economy. When supply
and demand are not equal, a shortage or a surplus will result. A shift in the equilibrium can be caused
by a change in quantity demanded or supplied or a shift in demand or supply.
20. Other things being equal, explain the effect each of the following situations will have on either the
demand or supply of corn. Explain also what the effect will be on equilibrium price and quantity.
a. corn is now considered by doctors to be the most healthy vegetable
b. there is a decline in the amount of land used to grow corn
c. producers expect the price of corn to fall in the future
d. the price of peas, a substitute for corn, goes up
e. corn is a normal good and incomes fall
f. the price of fertiliser rises
ANS:
1. demand increases; equilibrium price increases; equilibrium quantity increases
2. supply decreases; equilibrium price increases; equilibrium quantity decreases
3. supply increases; equilibrium price decreases; equilibrium quantity increases
4. demand increases; equilibrium price increases; equilibrium quantity increases
5. demand decreases; equilibrium price decreases; equilibrium quantity decreases
6. supply decreases; equilibrium price increases; equilibrium quantity decreases
21. Fill in the accompanying table, showing whether equilibrium price and equilibrium quantity go up,
down or stay the same.
No change in supply An increase in supply A decrease in supply

No change in demand
An increase in demand
A decrease in demand
ANS:
No change in supply An increase in supply A decrease in supply

No change in demand P same P down P up
Q same Q up Q down
An increase in demand P up P ambiguous P up
Q up Q up Q ambiguous
A decrease in demand P down P down P ambiguous
Q down Q ambiguous Q down
22. Graph each of the following changes and explain what would happen to equilibrium price and quantity.
1. demand increases and supply increases
2. demand increases and supply decreases
3. demand decreases and supply decreases
4. demand decreases and supply increases
ANS:
1. equilibrium price is ambiguous and equilibrium quantity increases
2. equilibrium price increases and equilibrium quantity is ambiguous
3. equilibrium price is ambiguous and equilibrium quantity decreases
4. equilibrium price decreases and equilibrium quantity is ambiguous
PTS: 1 DIF: Moderate TOP: Equilibrium: Example: A change in both supply
and demand
23. In some countries the exchange rate is set by the government. This is often below the market
equilibrium exchange rate. How would this affect buyers and sellers of foreign currency?
ANS:
If the price is below the market equilibrium, then there will be more people wanting to buy foreign
currency than willing to sell it. With this excess demand, a black market in foreign currency is likely to
emerge. Other rationing devices for demand would have to be implemented.
PTS: 1 DIF: Difficult TOP: Equilibrium: Example: A change in both supply

and demand
24. Suppose we are analysing the market for hot chocolate. What will be the impact on the equilibrium
price and quantity of each of the following events affecting the hot chocolate market?
a. winter starts and the weather turns sharply colder
b. the price of coffee falls
c. the price of whipped cream falls
d. the price of cocoa beans increases
e. consumer income falls because of a recession
f. the Health Department of Australia announces that hot chocolate cures acne
g. the population increases
h. a better method of harvesting cocoa beans is introduced
ANS:
a. people demand more hot chocolate in colder weather. The demand curve will shift to the right and
equilibrium market price and quantity will both increase.
b. coffee and hot chocolate are substitutes. A decrease in the price of coffee will cause the demand
curve for hot chocolate to shift to the left. Equilibrium price and quantity of hot chocolate will fall.
c. For many people, whipped cream and hot chocolate are complements. If the price of whipped cream
falls, the demand curve for hot chocolate will shift to the right and the equilibrium price and quantity
of hot chocolate will increase.
d. Since cocoa beans are an important input in making hot chocolate, an increase in the price of cocoa
beans will cause the supply curve of hot chocolate to shift to the left. Equilibrium price will increase
and equilibrium quantity will decrease.
e. Assuming that hot chocolate is a normal good, when consumer income falls, the demand curve for
hot chocolate will shift to the left. Equilibrium price and quantity will fall.
f. The announcement from the Health Department will cause consumers to prefer more hot chocolate
and the demand curve will shift to the right. Equilibrium price and quantity will increase.
g. When population increases, the number of buyers of hot chocolate increases, causing the demand
curve to shift to the right. Equilibrium price and quantity will increase.
h. This technological improvement will cause the supply curve for cocoa beans to shift to the right,
lowering the equilibrium price of cocoa beans, an input in hot chocolate. The supply curve of hot
chocolate will shift to the right, lowering equilibrium price and raising equilibrium quantity.
PTS: 1 DIF: Moderate TOP: Equilibrium: Example: A change in both supply

and demand
25. The news that oat bran helped reduce serum cholesterol, caused people to prefer to eat more oatmeal.
This change in preference would be expected to cause the demand curve for oats to shift to the right,
and equilibrium price and quantity of oats to increase. What effects might be felt in other markets?
ANS:
If the price of oats rises, demand for the substitutes for oats, particularly other small grains, will also
rise, causing the demand curves in those markets to shift to the right and equilibrium prices and
quantities to increase. Increases in the prices of small grains will cause an increase in the demand for
land and other inputs to produce those grains, causing increases in equilibrium prices and quantities of
those inputs. Over time, the movement of more resources into the production of small grains will shift
supply curves to the right and help moderate the initial price increases. If eating more oats causes a
reduction in heart disease, ceteris paribus, there will be a decrease in the long run in the demand for
goods and services used to treat heart disease, reducing the equilibrium prices and quantities of those
goods and services, etc.
PTS: 1 DIF: Difficult TOP: Equilibrium: Example: A change in both supply

and demand
26. How important are prices in allocating resources in a market economy?
ANS:
Prices play the key role in the allocation of resources in a market economy, providing the signals to
which buyers and sellers respond. In turn, the combined actions of buyers and sellers determine the
forces of supply and demand that move prices toward equilibrium in the market. In the end, the buyers
who are willing to pay the most obtain the scarce goods and services and the sellers who are able to
produce the goods and services at the lowest cost obtain the sales. Prices play a similar role in the
allocation of resources to the production of alternative goods and services, with those producers who
are willing to pay the most obtaining the scarce resources. Without the allocative role of prices in
rationing scarce goods and services, there would be no automatic mechanism to guide the allocation of
resources.
PTS: 1 DIF: Difficult TOP: Conclusion: How prices allocate resources
27. Given the following supply schedule, graph Lee’s supply of croissants.
Price of croissants ($) Quantity of croissants supplied

6.00 2400
5.00 2000
4.00 1600
3.00 1200
2.00 800
1.00 400
ANS:
PTS: 1 DIF: Easy TOP: The supply curve

28. What is the practical purpose of ensuring ceteris paribus when explaining the results from a demand
and supply model?
ANS:
Ceteris paribus means ‘other things equal’. We need to be certain that the shift in equilibrium is as a
consequence of a causal link, When we explain the effects from shifts in demand (or supply) curve, we
need show the relationship between quantity demanded (or quantity supplied) and price and hold all
other factors that might affect demand (or supply), other than price, constant. Otherwise there may be a
shift that has occurred and it is unable to track the reason.
PTS: 1 DIF: Moderate TOP: Markets and competition
29. What must happen to cause a movement along the demand curve? How does this differ from what
causes a shift in the demand curve?
ANS:
A shift in the curve is called a ‘change in demand’, while a movement along the curve is called a
‘change in quantity demanded’. A movement along the demand curve refers to the amount buyers wish
to buy but not the amount they wish to buy at any given price. Factors such as changes in income,
tastes and expectations will shift the demand curve, while a movement along the curve will occur
when all these other factors are held constant.
PTS: 1 DIF: Moderate TOP: Market demand versus individual demand
30. Andrew has shares in Qantas. Why would he be interested in the safety ratings of other airlines?
ANS:
Other airlines are considered substitutes to Qantas so Andrew would want to know about their prices
and the other factors contributing to people’s choice of whether to take Qantas or another airline. If
other airlines are better perceived or cheaper then it is likely the price of Qantas shares will fall.
PTS: 1 DIF: Moderate TOP: Prices of related goods
31. Andrew is also interested in the latest discussions about which company, Airbus or Boeing, will be
making more fuel-efficient planes in the future. Why does this interest him?
ANS:
Andrew wants to know about how fuel efficient – and thus costly – any new airlines Qantas buys will
be. He believes that Qantas will have an edge over its competitors if its planes consume less fuel. He
may also want to know which aeroplane builder is expected to be most profitable in the future, as this
will also impact on whether he wants to keep his Qantas shares for longer or sell them now.
PTS: 1 DIF: Difficult TOP: Shifts in the demand curve

CHAPTER 5—Elasticity and its application
TRUE/FALSE
1. The concept of the slope is the best way to measure the responsiveness of
demand to changes in its determinants.
ANS: F PTS: 1 DIF: Easy TOP: The price elasticity of

demand and its determinants
2. The demand for a good is inelastic if the quantity demanded decreases only a
small amount after a small increase in the price.
ANS: T PTS: 1 DIF: Easy TOP: The price elasticity of

3. The demand for a good is said to be elastic if a small price decrease leads to a
substantial increase in the quantity demanded.

4. Necessities tend to have price inelastic demands, whereas luxuries have price
elastic demands.

5. Major Australian supermarket chains have been fighting to sell milk at the lowest
price. The fact that they place such importance on the price must mean that they
consider demand for milk to be somewhat price inelastic.
ANS: F PTS: 1 DIF: Moderate TOP: The price elasticity of

6. Goods with close substitutes tend to have more elastic demands than do goods
without close substitutes.
ANS: T PTS: 1 DIF: Easy TOP: Availability of close

substitutes
7. The demand curve for a market may be different depending on how widely the
market is defined.
ANS: T PTS: 1 DIF: Easy TOP: Definition of the

market
8. The price elasticity of demand for a product will tend to be higher if fewer good
substitutes for it are available.
ANS: F PTS: 1 DIF: Easy TOP: Availability of close

substitutes
9. The demand for apples is generally more elastic than the demand for Australian
apples.
ANS: F PTS: 1 DIF: Moderate TOP: Availability of close

substitutes
10. Goods tend to have more elastic demand over shorter time horizons.
ANS: F PTS: 1 DIF: Easy TOP: Time horizon
11. Over three years the elasticity of demand for oil heaters will be greater than over
ten years.
ANS: F PTS: 1 DIF: Moderate TOP: Time horizon
12. The midpoint method will often give you two different values of elasticity
depending on whether you calculate the elasticity from point A to point B or point
B to point A.
ANS: F PTS: 1 DIF: Moderate TOP: Computing the price

elasticity of demand
13. The price of a hamburger increases by 25 per cent and the quantity of
hamburgers demanded per week falls by 50 per cent. The price elasticity of
demand is two.
ANS: T PTS: 1 DIF: Easy TOP: Computing the price

14. Demand is unit elastic if the elasticity is greater than one.
ANS: F PTS: 1 DIF: Easy TOP: Total revenue and the

price elasticity of demand
15. If the measured elasticity is less than one it means that the demand for this good
is inelastic.
ANS: T PTS: 1 DIF: Easy TOP: Total revenue and the

16. If the price elasticity of demand is equal to zero, demand is elastic.
ANS: F PTS: 1 DIF: Easy TOP: Total revenue and the

17. A good experiences a shift of the demand curve so that it is now flatter than
before. Suppose that the market price and quantity demanded does not change.
This means that the good has now become inelastic.
ANS: F PTS: 1 DIF: Easy TOP: The variety of demand

curves
18. A perfectly vertical demand curve means that demand is perfectly inelastic. The
price elasticity of demand will be zero.
ANS: T PTS: 1 DIF: Easy TOP: The variety of demand

curves
19. A demand curve that is horizontal is perfectly inelastic. This means the elasticity
is equal to one.
ANS: F PTS: 1 DIF: Moderate TOP: The variety of demand

curves
20. A linear demand curve always has the same elasticity over its entire length.

curves
21. As price elasticity of demand increases, the demand curve gets steeper and
steeper.

curves
22. Price elasticity over any range of a demand curve is measured by the slope of the
demand curve over that range.
ANS: F PTS: 1 DIF: Moderate TOP: Total revenue and the

23. If the price elasticity of demand is elastic, reduced demand for a good will create
a greater fall in revenue than the increase in revenue created by the increase in
price.
ANS: T PTS: 1 DIF: Moderate TOP: Total revenue and the
24. If the price elasticity of demand is 1.5, a price decrease will cause total revenue
to increase.

25. The income elasticity of demand measures how hours worked changes when the
hourly wage changes.
ANS: F PTS: 1 DIF: Moderate TOP: The income elasticity

of demand
26. The income elasticity of demand is defined as the percentage change in quantity
demanded divided by the percentage change in income.
ANS: T PTS: 1 DIF: Easy TOP: The income elasticity

of demand
27. Normal goods have positive income elasticities of demand, while inferior goods
have negative income elasticities of demand.
ANS: T PTS: 1 DIF: Easy TOP: The income elasticity

of demand
28. If you enjoy buying luxury goods more than buying groceries, your income
elasticity of demand for luxury goods will be less elastic than for groceries.
ANS: F PTS: 1 DIF: Moderate TOP: Necessities versus

luxuries
29. The demand for basic foodstuffs such as wheat is usually elastic.
ANS: F PTS: 1 DIF: Moderate TOP: Necessities versus

luxuries
30. Cross-price elasticity of demand measures how the quantity demanded of one
good changes as the price of another good changes.
ANS: T PTS: 1 DIF: Easy TOP: The cross-price

31. If the price of one good goes up, and this causes the quantity demanded of
another good to go down, the cross-price elasticity of demand will be negative.
ANS: F PTS: 1 DIF: Easy TOP: The cross-price

32. The cross-price elasticity of demand will be positive for complement goods and
negative for substitute goods.
ANS: F PTS: 1 DIF: Easy TOP: The cross-price

33. If price changes and total revenue changes in the opposite direction, we can
conclude that demand is relatively elastic.

34. The midpoint method is used to calculate elasticity because it gives the same
answer regardless of the direction of the change between two points.
ANS: T PTS: 1 DIF: Moderate TOP: The variety of demand

curves
35. Slope is the ratio of the changes in two variables, while elasticity is the ratio of
the percentage changes in two variables.
ANS: T PTS: 1 DIF: Easy TOP: The variety of demand

curves
36. Given a linear demand curve has a constant slope, it follows that the elasticity of
the linear demand curve is also always constant.

curves
37. Price elasticity of supply measures how much the quantity supplied responds to
changes in demand.

supply and its determinants
38. Supply is said to be inelastic if the quantity supplied responds substantially to

changes in the price and elastic if the quantity supplied responds only slightly to
price.

39. The supply of farmland is more elastic than is the supply of wheat.
ANS: T PTS: 1 DIF: Moderate TOP: The price elasticity of

40. If the price of forest-products rises, the price elasticity of supply will be more
responsive in the long run than in the short run.
ANS: T PTS: 1 DIF: Easy TOP: Can good news for

farming be bad news for farmers?
41. Price elasticity of supply is defined as the percentage change in quantity supplied
divided by the percentage change in price.

42. Suppose a coffee plantation in Colombia increases the quantity of coffee beans it
supplies by 5% when it learns that the price of a coffee at cafes in Melbourne has
risen by 25%. The Colombian producer’s price elasticity of supply of coffee beans
is 0.2.
ANS: T PTS: 1 DIF: Easy TOP: Computing the price

elasticity of supply
43. If a supply curve is horizontal, it is said to be perfectly elastic, and the price
elasticity of supply approaches infinity.
ANS: T PTS: 1 DIF: Easy TOP: The variety of supply

curves
44. A government program that reduces land under cultivation hurts farmers but
helps consumers.
ANS: F PTS: 1 DIF: Moderate TOP: Can good news for

45. While an increase in total agricultural production may benefit farmers as a group,
it will not benefit an individual farmer to increase his production.
ANS: F PTS: 1 DIF: Moderate TOP: Can good news for

46. In the 1970s OPEC generated high prices for oil but could not sustain this in the
mid-80s and 90s. The reason was that both the supply and demand elasticity for
oil is less elastic in the short run than in the long run.
ANS: T PTS: 1 DIF: Moderate TOP: Why did OPEC fail to

keep the price of oil high?
47. A policy reducing the supply of drugs will be less effective for reducing drug-use
and drug-related crime than a policy which reduces the quantity demanded of
drugs.
ANS: T PTS: 1 DIF: Easy TOP: Do drug bans increase

or decrease drug-related crime?
48. Drug interdiction, which reduces the supply of drugs, may increase drug-related
crime because the demand for drugs is inelastic.
ANS: T PTS: 1 DIF: Difficult TOP: Do drug bans increase

MULTIPLE CHOICE
1. In general, elasticity is:

A. the friction that develops between buyer and seller in a market
B. a measure of how much government intervention is prevalent in a
market
C. a measure of how much buyers and sellers respond to changes in
market conditions
D. a measure of the competitive nature of a market
ANS: C PTS: 1 DIF: Easy TOP: The price elasticity of

2. The price elasticity of demand measures how responsive:

A. buyers are to a change in price
B. buyers are to a change in advertising by sellers
C. sellers are to a change in price
D. buyers are to a change in their tastes
ANS: A PTS: 1 DIF: Easy TOP: The price elasticity of

3. Economists use the concept of price elasticity of demand to measure how much:
A. sellers respond to changes in the price of the good
B. worse off consumers are when the price of the good rises
C. demand responds to changes in buyers’ incomes
D. buyers respond to changes in the price of the good
ANS: D PTS: 1 DIF: Easy TOP: The price elasticity of
4. The concept of elasticity is used to:

A. analyse how much the economy is capable of expanding
B. analyse supply and demand with greater precision
C. determine the level of government invention in the economy
D. calculate consumer credit purchases
ANS: B PTS: 1 DIF: Easy TOP: The price elasticity of

5. Demand is said to be elastic if:

A. the price of the good responds substantially to changes in demand
B. the supply of the good responds weakly to changes in demand
C. the quantity demanded responds substantially to changes in the
quantity supplied of the good
D. the quantity demanded responds substantially to changes in the price
of the good

6. Demand is said to be inelastic if:

A. the price of the good responds only slightly to changes in demand
B. demand shifts only slightly when the price of the good changes
C. buyers respond substantially to changes in the price of the good
D. the quantity demanded changes only slightly when the price of the
good changes

7. If a good is a necessity, demand for the good would tend to be:

A. elastic
B. unit elastic
C. inelastic
D. horizontal
ANS: C PTS: 1 DIF: Easy TOP: Availability of close

substitutes
8. If you think good wine is a necessity but cheese is a luxury, then your demand for
wine will be more ______ than your demand for cheese:
A. elastic
B. inelastic
C. unit elastic
D. strong
ANS: B PTS: 1 DIF: Easy TOP: Necessities versus

luxuries
9. If a person has very little concern for her health, her demand for healthcare
would tend to be:
A. elastic
B. inelastic
C. unit elastic
D. horizontal
ANS: A PTS: 1 DIF: Moderate TOP: Necessities versus

luxuries
10. A person who likes to be on the sea in a boat would tend to have what type of
demand for boats?
A. elastic
B. inelastic
C. unit elastic
D. weak
ANS: B PTS: 1 DIF: Moderate TOP: Definition of the

market
11. The elasticity of demand for a good tends to increase if:

A. there is an increase in the availability of complements
B. there is an increase in the availability of substitutes
C. the market is considered over a longer period of time
D. the definition of the market is broadened
ANS: C PTS: 1 DIF: Easy TOP: Availability of close

substitutes
12. The elasticity of demand for toasted muesli would increase if:
A. there was an increase in complements for toasted muesli
B. the definition of the toasted muesli market was made very broad
C. toasted muesli was considered a luxury product
D. the effect of a price rise was measured over a long period of time
ANS: D PTS: 1 DIF: Moderate TOP: Time horizon
13. Suppose that there are many substitutes for crocodile-leather handbags. This
would mean that the:
A. supply of crocodile-leather handbags would tend to be price elastic
B. demand for crocodile-leather handbags would tend to be price elastic
C. demand for crocodile-leather handbags would tend to be price inelastic
D. demand for crocodile-leather handbags would tend to be income elastic
ANS: B PTS: 1 DIF: Easy TOP: Availability of close

substitutes
14. Holding all other forces constant, when the price of gasoline rises, the number of
gallons of gasoline demanded would fall substantially over a 10-year period
because:
A. buyers tend to be much less sensitive to a change in price when given
more time to react
B. buyers will have substantially more income over a 10-year period
C. buyers tend to be much more sensitive to a change in price when given
more time to
react
D. none of these answers are correct
ANS: C PTS: 1 DIF: Moderate TOP: Time horizon
15. The demand for a good tends to be more elastic:

A. the longer the period of time
B. the greater the availability of close substitutes
C. the narrower the definition of the market
D. all of the above are correct

16. Economists compute the price elasticity of demand as the:

A. percentage change in the price divided by the percentage change in
quantity demanded
B. percentage change in the quantity demanded divided by the
percentage change in price
C. change in quantity demanded divided by the change in the price
D. percentage change in the quantity demanded divided by the
percentage change in income

17. Suppose there is a 10 per cent increase in the price of fish and a resulting five per
cent decrease in the quantity of fish demanded. The price elasticity of demand
for fish is:
A. 10
B. 5
C. 2
D. 1/2
ANS: D PTS: 1 DIF: Easy TOP: Computing the price
18. Suppose the price of product X is reduced from $16.00 to $12.00 and, as a result,
the quantity of X demanded increases from 300 to 450. Using the midpoint
method, the price elasticity of demand for X in the given price range is:
A. 1.40
B. 1.00
C. 0.40
D. 0.29
ANS: A PTS: 1 DIF: Moderate TOP: Computing the price

19. Suppose the price of product X is increased from $8.00 to $10.00 and as a result,
the quantity of X demanded decreases from 1500 to 1000. Using the midpoint
method, the price elasticity of demand for X in the given price range is:
A. 2.00
B. 1.80
C. 1.00
D. 0.40
ANS: B PTS: 1 DIF: Moderate TOP: Computing the price

20. Demand would be classed as elastic if the elasticity coefficient was:

A. greater than two
B. less than, or equal to, zero
C. equal to one
D. less than one
ANS: A PTS: 1 DIF: Easy TOP: Computing the price

21. Demand is classed as inelastic if the elasticity coefficient is:

A. less than one
B. equal to one
C. greater than one
D. equal to zero
ANS: A PTS: 1 DIF: Easy TOP: Computing the price

22. Demand is perfectly inelastic if elasticity is:

A. less than one
B. equal to one
C. greater than one
D. equal to zero
ANS: D PTS: 1 DIF: Easy TOP: Computing the price

NARRBEGIN: 5-1
Graph 5-1
NARREND
23. In Graph 5-1, the point on the demand curve labelled B represents the:
A. inelastic section of the demand curve
B. unit elastic section of the demand curve
C. elastic section of the demand curve
D. perfectly elastic section of the demand curve
ANS: B PTS: 1 DIF: Moderate TOP: The variety of demand

curves NAR: 5-1
24. In Graph 5-1, the section of the demand curve labelled C represents the:
A. elastic section of the demand curve
C. perfectly elastic section of the demand curve
D. inelastic section of the demand curve
ANS: D PTS: 1 DIF: Moderate TOP: The variety of demand

curves NAR: 5-1
25. In Graph 5-1, the section of the demand curve labelled A represents the:
A. inelastic section of the demand curve
C. elastic section of the demand curve
D. perfectly elastic section of the demand curve
ANS: C PTS: 1 DIF: Moderate TOP: The variety of demand

curves NAR: 5-1
NARRBEGIN: 5-2
Graph 5-2
NARREND
26. Refer to Graph 5-2. If there is a four per cent decrease in the price of a good and
this leads to a 12 per cent increase in the quantity demanded then the price
elasticity is:
A. 3 and elastic
B. 3 and inelastic
C. 0.3 and elastic
D. 0.3 and inelastic
ANS: A PTS: 1 DIF: Easy TOP: The variety of demand

curves
27. In Graph 5-2, the elasticity of demand from point A to point B, using the midpoint
method, would be:
A. 1
B. 1.5
C. 2
D. 2.5

curves NAR: 5-2
28. In Graph 5-2, the elasticity of demand from point B to point C, using the midpoint
method, would be:
A. 0.5
B. 0.75
C. 1.0
D. 1.3

curves NAR: 5-2
29. Suppose that the slope of the demand curve becomes flatter at a given price.
This means that the price elasticity of demand at this point will:
A. increase
B. decrease
C. not change
D. be zero

curves
30. Demand is said to be unit elastic if:

A. the demand curve shifts by the same percentage amount as the price
B. quantity demanded changes by a larger percentage than the price
C. quantity demanded changes by the same percentage as the price
D. quantity demanded does not respond to a change in price
ANS: C PTS: 1 DIF: Easy TOP: Computing the price

31. A perfectly inelastic demand implies that:

A. buyers will not respond to any change in price
B. any rise in price above that represented by the demand curve will result
in no output demanded
C. price and quantity demanded respond proportionally
D. price will rise by an infinite amount when there is a change in quantity
demanded
ANS: A PTS: 1 DIF: Moderate TOP: The variety of demand

curves
32. A perfectly inelastic demand curve will be:

A. vertical
B. horizontal
C. downward sloping to the right
D. have an infinite elasticity
curves
33. A perfectly inelastic demand implies that buyers:

A. enjoy paying more for the good
B. increase their quantity demanded of the good when the price rises
C. will continue to buy the good no matter how big the change in price
D. purchase none of the good when the price rises

curves
34. Alice says that she likes banana splits but if the price changed, she wouldn’t buy
them anymore. If this is the case:
A. Alice’s demand for banana splits is perfectly inelastic
B. Alice’s price elasticity of demand for banana splits is one
C. Alice’s income elasticity of demand for banana splits is negative
D. none of the answers is correct

curves
NARRBEGIN: 5-3
Graph 5-3
NARREND
35. In Graph 5-3, as price falls from PA to PB, which demand curve is most elastic?
A. D1
B. D2
C. D3
D. all of the above are equally elastic

curves NAR: 5-3
36. In Graph 5-3, as price falls from PA to PB, which demand curve is least elastic?
A. D1
B. D2
C. D3
D. all of the above are equally elastic
ANS: C PTS: 1 DIF: Moderate TOP: The variety of demand

curves NAR: 5-3
37. If the demand curve is linear and downward-sloping, which of the following would
NOT be correct?
A. the upper part of the demand curve is more elastic than the lower part
B. elasticity will change with a movement down the curve
C. the lower part of the demand curve will be less elastic than the upper
part
D. elasticity and slope will both remain constant along the curve
ANS: D PTS: 1 DIF: Difficult TOP: The variety of demand

curves
38. Suppose the price elasticity of demand for wine is 1.60. A 12 per cent decrease in
price will result in:
A. a 19.2 per cent increase in the quantity of wine demanded
B. a 19.2 per cent decrease in the quantity of wine demanded
C. a 7.5 per cent increase in the quantity of wine demanded
D. a 7.5 per cent decrease in the quantity of wine demanded
ANS: A PTS: 1 DIF: Difficult TOP: Computing the price

Table 5-1
Suppose a coffee shop faces the following demand schedule for coffee.
Price per coffee ($) Quantity demanded

4.00 200
3.00 600
2.50 800
2.00 1000
1.50 1200
1.00 1400
NARREND
39. Referring to Table 5-1, comparing the sales at $1.00 and $3.00, which of the
statements below is true?
A. the price elasticity of demand is higher at $3.00 than $1.00
B. the price elasticity of demand is lower at $3.00 than at $1.00
C. the price elasticity of demand is the same at both prices
D. the price elasticity of demand at $3.00 is zero

elasticity of demand NAR: Table 5-1
40. Refer to Table 5-1. Notice that if the price is lowered from $2.00 to $1.50, total
revenue falls from $2000 to $1800. This means that over this price range, the
demand for coffee must be:
A. price elastic
B. price inelastic
C. price unit elastic
D. income elastic
ANS: B PTS: 1 DIF: Moderate TOP: Total revenue and the

price elasticity of demand NAR: Table 5-1
41. In any market, total revenue is the price:

A. divided by the price elasticity of demand
B. multiplied by the quantity
C. plus the quantity
D. multiplied by the quantity minus the costs of production
ANS: B PTS: 1 DIF: Easy TOP: Total revenue and the

42. Referring to Table 5-1, if the shop increases the price from $3.00 to $4.00, the
price elasticity of demand will (according to the mid-point method) be:
A. 0.29 and inelastic
B. 0.29 and elastic
C. 3.5 and inelastic
D. 3.5 and elastic
ANS: D PTS: 1 DIF: Moderate TOP: Computing the price

elasticity of demand NAR: Table 5-1
43. How does total revenue change as one moves down a linear demand curve?
A. it increases
B. it decreases
C. it first increases, then decreases
D. it is unaffected by a movement along the demand curve
ANS: C PTS: 1 DIF: Moderate TOP: Total revenue and the

44. In the case of a downward linear demand curve, total revenue is always
maximised at
A. at the upper end of the demand curve
B. at the lower end of the demand curve
C. at the midpoint of the demand curve
D. it is impossible to tell without knowing the price and quantity
demanded

45. At the midpoint of a downward-sloping linear demand curve, elasticity would be:
A. inelastic
B. elastic
C. unit elastic
D. perfectly elastic

46. When demand is inelastic, a decrease in price will cause:

A. an increase in total revenue
B. a decrease in total revenue
C. no change in total revenue
D. there is insufficient information to answer this question

NARRBEGIN: 5-4
Graph 5-4
NARREND
47. Refer to Graph 5-4. The total revenue at P1 is represented by area(s):

A. B + D
B. A + B
C. C + D
D. D
ANS: A PTS: 1 DIF: Moderate TOP: Total revenue and the

price elasticity of demand NAR: 5-4
48. Refer to Graph 5-4. Total revenue at P2 would be represented by area(s):

A. B + D
B. A + B
C. C + D
D. D

price elasticity of demand NAR: 5-4
49. The local pizza restaurant makes such great bread sticks that consumers do not
respond much to a change in the price. If the owner is only interested in
increasing revenue, he should:
A. lower the price of the bread sticks
B. raise the price of the bread sticks
C. leave the price of the bread sticks alone
D. reduce costs
50. Oliver makes guitars. There are four other guitar shops that also make good
guitars on the same street. If Oliver wishes to increase his total revenue, he
should:
A. decrease the price of the guitars
B. increase the price of the guitars
C. not change the price of the guitars
D. manufacture pianos instead

51. When demand is elastic in the current price range:

A. an increase in price will increase total revenue because the decrease in
quantity demanded is less than the increase in price
B. an increase in price will decrease total revenue because the decrease in
quantity demanded is greater than the increase in price
C. a decrease in price will decrease total revenue because the increase in
quantity demanded is smaller than the decrease in price
D. a decrease in price will not affect the total revenue
ANS: B PTS: 1 DIF: Difficult TOP: Total revenue and the

52. Holding all other forces constant, if raising the price of a good results in less total
revenue, the demand for the good must be:
A. elastic
B. inelastic
C. unit elastic
D. perfectly inelastic

53. If a change in the price of a good results in no change in total revenue:

A. the demand for the good must be elastic
B. the demand for the good must be inelastic
C. the demand for the good must be unit elastic
D. buyers must not respond very much to a change in price

54. Income elasticity of demand measures how:

A. the quantity demanded changes as consumer income changes
B. consumer purchasing power is affected by a change in the price of a
good
C. the price of a good is affected when there is a change in consumer
income
D. many units of a good a consumer can buy given a certain income level
ANS: A PTS: 1 DIF: Easy TOP: The income elasticity

of demand
55. Which of the following would you expect to have the lowest income elasticity of
demand?
A. a dinner at an expensive restaurant
B. a ticket to a music festival
C. a mobile phone
D. a private jet
ANS: C PTS: 1 DIF: Moderate TOP: The income elasticity

of demand
56. Last year, Joan bought 50 kg of hamburger mince when the household income
was $40 000. This year, the household income was only $30 000 and Joan bought
60 kg of hamburger mince. All else being constant, Joan’s income elasticity of
demand for hamburger is:
A. positive, so Joan considers hamburger to be an inferior good
B. positive, so Joan considers hamburger to be a normal good and a
necessity
C. negative, so Joan considers hamburger mince to be an inferior good
D. negative, so Joan considers hamburger mince to be a normal good

of demand
57. If an increase in income results in a decrease in the quantity demanded of a

good, then the good is:
A. a normal good
B. a necessity
C. an inferior good
D. a luxury
ANS: C PTS: 1 DIF: Easy TOP: The income elasticity

of demand
58. An inferior good is one that has:

A. a positive income elasticity of demand
B. a negative income elasticity of demand
C. a positive price elasticity of demand
D. a negative elasticity of demand
ANS: B PTS: 1 DIF: Easy TOP: The income elasticity
of demand
59. Assume that a four per cent decrease in income results in a two per cent increase
in the quantity demanded of a good. The income elasticity of demand for the
good is:
A. negative and therefore the good is an inferior good
B. negative and therefore the good is a normal good
C. positive and therefore the good is an inferior good
D. positive and therefore the good is a normal good
ANS: A PTS: 1 DIF: Moderate TOP: The income elasticity

of demand
Table 5-2
Quantities urchased
Income ($) Good X Good Y
30 000 2 20
50 000 5 10
NARREND
60. Refer to Table 5-2. Using the midpoint method, what is the income elasticity of
good Y?
A. –0.75
B. 0.75
C. –1.33
D. 0
ANS: C PTS: 1 DIF: Moderate TOP: Computing the price

elasticity of demand NAR: 5-2
61. Refer to Table 5-2. Good X is:

A. a normal good
B. an inferior good
C. underpriced
D. very price elastic

elasticity of demand NAR: 5-2
62. Refer to Table 5-2. Good Y is:

A. not related to income
B. an inferior good
C. price inelastic
D. a normal good
ANS: B PTS: 1 DIF: Difficult TOP: The income elasticity

of demand
63. The cross-price elasticity of demand measures how the quantity demanded of a
good changes:
A. as its price changes
B. as the price of a related good changes
C. as income changes
D. as the slope of the demand curve changes
ANS: B PTS: 1 DIF: Easy TOP: The income elasticity

of demand
64. Cross-price elasticity of demand is calculated as:

A. the percentage change in quantity demanded of good one divided by
the percentage change in the price of good two
B. the total percentage change in quantity demanded divided by the total
percentage change in price
C. the percentage change in quantity demanded divided by the
percentage change in income
D. none of the above answers is correct
ANS: A PTS: 1 DIF: Easy TOP: The cross-price

65. Coffee and tea are likely to have:

A. a negative cross-price elasticity of demand because they are
substitutes
B. a negative cross-price elasticity of demand because they are
complements
C. a positive cross-price elasticity of demand because they are substitutes
D. a positive cross-price elasticity of demand because they are
complements
ANS: C PTS: 1 DIF: Easy TOP: The cross-price

66. If the cross-price elasticity of demand is 1.25, then the two goods are:
A. complements
B. luxuries
C. normal goods
D. substitutes
ANS: D PTS: 1 DIF: Moderate TOP: The cross-price
67. Food and clothing tend to have:

A. small income elasticities because consumers, regardless of their
incomes, choose to buy these goods
B. small income elasticities because consumers will buy proportionately
more at higher income levels than they will at low income levels
C. large income elasticities because they are necessities
D. large income elasticities because they are relatively cheap
ANS: A PTS: 1 DIF: Moderate TOP: The income elasticity

of demand
68. The demand for rare butterflies tends to be income:

A. elastic because they are relatively expensive
B. inelastic because butterflies are small animals
C. elastic because most buyers feel that they can do without it
D. inelastic because butterflies are difficult to breed

of demand
69. Suppose the government increases the tax on petrol in order to raise revenue.
Since raising the petrol tax would increase the price of petrol, the government
must be assuming that the:
A. demand for petrol is price elastic
B. demand for petrol is price inelastic
C. demand for petrol is price unit elastic
D. tax on petrol will not affect the consumption of petrol

70. Get Smart University (GSU) is contemplating increasing tuition to enhance

revenue. If GSU feels that raising tuition would enhance revenue they are:
A. necessarily ignoring the law of demand
B. assuming that the demand for university education is elastic
C. assuming that the supply of university education is elastic
D. assuming that the demand for university education is inelastic
ANS: D PTS: 1 DIF: Moderate TOP: Total revenue and the

71. Suppose that 50 candy bars are demanded at a particular price. Using the
midpoint method, if the price of candy bars rises by four per cent, the number of
candy bars demanded falls to 48 candy bars. This means that the:
A. demand for candy bars in this price range is elastic
B. demand for candy bars in this price range is inelastic
C. price elasticity of demand for candy bars is zero
D. demand for candy bars is unit elastic
ANS: D PTS: 1 DIF: Moderate TOP: Computing the price

72. Last year, Amy bought two lenses for her SLR camera. Her income was $30 000.
This year her income is $40 000. She has bought four new lenses for her camera.
All else being constant it is obvious:
A. Amy prefers to photograph with an SLR camera
B. Amy considers lenses to be a normal good
C. Amy considers SLR cameras to be an inferior good
D. Amy considers lenses to be an inferior good
ANS: B PTS: 1 DIF: Moderate TOP: The income elasticity

of demand
73. The main reason for using the midpoint method is that it:
A. gives the same answer regardless of the direction of change
B. uses fewer numbers
C. rounds prices to the nearest dollar
D. rounds quantities to the nearest whole unit

curves
74. If the quantity supplied of a good responds strongly to a change in the price of an
input:
A. the price elasticity of demand is inelastic
B. the income elasticity of supply is inelastic
C. the income elasticity of supply is elastic
D. the price elasticity of supply is elastic

75. The price elasticity of supply measures how responsive:

A. buyers are to a change in income
B. sellers are to a change in price
C. buyers are to a change in price
D. sellers are to a change in buyers’ income

76. Suppose that after a five per cent increase in the price of timber, a forestry
company increases its supply of timber by 10 per cent in the next three months,
and 15 per cent by 12 months. This means that the elasticity of supply is _____.
A. 3 at three months and 2 at 12 months
B. 0.5 at three months and 0.3 at 12 months
C. 2 at three months and 3 at 12 months
D. 0.3 at three months and 0.5 at 12 months
ANS: C PTS: 1 DIF: Difficult TOP: Computing the price

77. If sellers respond substantially to changes in the price, then:

A. sellers are considered to be relatively price sensitive
B. sellers are considered to be relatively price insensitive
C. the supply curve will shift substantially when the price rises
D. the price elasticity of supply equals one
ANS: A PTS: 1 DIF: Easy TOP: The variety of supply

curves
78. If the quantity supplied responds only slightly to changes in price, then:
A. the elasticity of supply is greater than one
B. the elasticity of supply is less than zero
C. supply is said to be inelastic
D. the supply curve slopes upwards steeply
ANS: C PTS: 1 DIF: Easy TOP: The variety of supply

curves
79. The main determinant of the price elasticity of supply is:

A. time
B. the definition of the market
C. the number of close substitutes
D. luxuries versus necessities

80. Suppose that an increase in the price of jumping castles from $650 to $850
prompts party shops to increase the quantity of these jumping castles that they
offer from 80 to 320. Using the midpoint method, what would be the elasticity of
supply?
A. 0.50
B. 0.24
C. 0.34
D. 1.08
ANS: B PTS: 1 DIF: Moderate TOP: Computing the price
81. In the long run, the quantity supplied of most goods:

A. can respond substantially to a change in price
B. cannot respond much to a change in price
C. cannot respond at all to a change in price
D. will naturally increase regardless of what happens to price
ANS: A PTS: 1 DIF: Moderate TOP: The price elasticity of

82. If the elasticity of supply of a product is greater than zero, then supply is:
A. elastic
B. inelastic
C. unit elastic
D. there is not enough information to answer the question
ANS: D PTS: 1 DIF: Easy TOP: The variety of supply

curves
83. If for a given price, the supply curve becomes flatter, the elasticity of supply at
this point will:
A. have got relatively more elastic
B. have got relatively more inelastic
C. be unchanged
D. be unitary

curves
84. If sellers do NOT respond at all to a change in price:

A. supply must be perfectly inelastic
B. supply must be perfectly elastic
C. a long period of time must have elapsed
D. the rate of technological advancement must be great
ANS: A PTS: 1 DIF: Moderate TOP: The variety of supply

curves
85. If an increase in the price of a good results in an increase in total revenue for the
firm, then:
A. the supply of the good must be unit elastic
B. the supply of the good must be inelastic
C. the supply of the good must be elastic
D. nothing can be said about price elasticity of supply from the information
given
ANS: D PTS: 1 DIF: Moderate TOP: The variety of supply
curves
86. The discovery of a new hybrid wheat would tend to increase the supply of wheat.
Under what conditions would wheat farmers realise an increase in revenue?
A. if the supply of wheat is elastic
B. if the supply of wheat is inelastic
C. if the demand for wheat is inelastic
D. if the demand for wheat is elastic
ANS: D PTS: 1 DIF: Difficult TOP: Can good news for

87. The development of a new, more productive hybrid wheat would tend to decrease
the total revenue of wheat farmers because:
A. the demand for wheat tends to be elastic
B. the supply of wheat tends to be elastic
C. the demand for wheat tends to be inelastic
D. the supply of wheat tends to be inelastic
ANS: C PTS: 1 DIF: Difficult TOP: Can good news for

88. If the demand for illegal drugs is inelastic, drug education campaigns should:
A. reduce both drug use and drug-related crime
B. reduce drug use and increase drug-related crime
C. increase both drug use and drug-related crime unchanged
D. increase drug use and reduce drug-related crime
ANS: A PTS: 1 DIF: Difficult TOP: Do drug bans increase

89. Which of the following was NOT a reason why OPEC failed to keep the price of oil
high?
A. over the long run, producers of oil outside of OPEC responded to high
prices by increasing oil exploration and by building new extraction
capacity
B. consumers responded to higher prices with greater conservation
C. consumers replaced old inefficient cars with newer efficient ones
D. the agreement OPEC members signed allowed each country to produce
as much oil as each wanted
ANS: D PTS: 1 DIF: Difficult TOP: Why did OPEC fail to

keep the price of oil high?
90. If law enforcement agencies prohibit the use of drugs such as heroin, cocaine and
crack and the demand for drugs is inelastic, it is possible that:
A. the price of drugs will fall and drug-related crime will fall
B. the price of drugs will fall and drug-related crime will increase
C. the price of drugs will rise and drug-related crime will increase
D. the price of drugs will rise and drug-related crime will fall
ANS: C PTS: 1 DIF: Difficult TOP: Do drug bans increase

91. Supply tends to be:

A. less price elastic in the long run
B. more price elastic in the long run
C. perfectly price inelastic in the long run
D. perfectly price inelastic in the short run
ANS: B PTS: 1 DIF: Easy TOP: Computing the price

92. A vertical supply curve signifies that:

A. a change in price will have no effect on quantity supplied
B. a change in price will change quantity supplied in the opposite direction
C. an infinite quantity will be supplied at a given price
D. the relationship between price and quantity supplied is inverse

curves
93. In general, a firm will be able to generate the greatest response to a price
increase:
A. just after the change
B. after three years
C. in the months following the change
D. around one week after the change
ANS: B PTS: 1 DIF: Moderate TOP: The variety of supply

curves
94. Suppose that you are in charge of pricing at a local surf rental shop. The business
needs to increase revenue and your job is on the line. If the supply of surf boards
is elastic, you:
A. should increase the rental price of surf boards
B. should decrease the rental price of surf boards
C. should not change the rental price of surf boards
D. cannot determine what to do with rental price until you determine
whether demand is elastic or inelastic
ANS: D PTS: 1 DIF: Moderate TOP: The variety of supply

curves
NARRBEGIN: 5-5
Graph 5-5
NARREND
95. In Graph 5-5, which supply curve is perfectly inelastic?

A. S1
B. S2
C. S3
D. it is impossible to tell without more information
ANS: A PTS: 1 DIF: Moderate TOP: The variety of supply

curves NAR: 5-5
96. In Graph 5-5, which supply curve is most likely the long-run supply curve?
A. S1
B. S2
C. S3
D. all of the above are equally likely to be the long-run supply curve
ANS: C PTS: 1 DIF: Difficult TOP: The variety of supply

curves NAR: 5-5
97. Suppose a producer is able to separate customers into two groups, one having a
price inelastic demand and the other having a price elastic demand. If the
producer’s objective is to increase total revenue, she should:
A. increase the price charged to customers with the price elastic demand
and decrease the price charged to customers with the price inelastic
demand
B. decrease the price charged to customers with the price elastic demand
and increase the price charged to customers with the price inelastic
demand
C. charge the same price to both groups of customers
D. increase the price for both groups of customers

98. The price of product X is reduced from $45 to $20 and, as a result, the quantity
demanded increases from 20 to 25 units. From this we can conclude that the
demand for X in this price range:
A. has declined
B. is of unit elasticity
C. is inelastic
D. is elastic
ANS: C PTS: 1 DIF: Moderate TOP: Computing the price

99. A perfectly inelastic demand curve:

A. rises upward and to the right but has a constant slope
B. can be drawn as a line parallel to the vertical axis
C. cannot be shown on a two-dimensional graph
D. can be represented by a line parallel to the horizontal axis

curves
100. A given leftward shift in the supply curve of product X will increase equilibrium
price to a greater extent, the:
A. more elastic the supply curve
B. larger the elasticity of demand
C. more elastic the demand for the product
D. more inelastic the demand for the product

curves
101. If an increase in the demand for Monet paintings increases their equilibrium price
but not the equilibrium quantity, this means that:
A. the supply of Monet paintings is perfectly elastic
B. the supply of Monet paintings is perfectly inelastic
C. the price elasticity of demand for Monet paintings is perfectly elastic
D. the price elasticity of supply for Monet paintings is perfectly inelastic
ANS: B PTS: 1 DIF: Difficult TOP: The variety of demand
curves
102. In which of the following cases will total revenue increase?

A. price falls and demand is inelastic
B. price falls and supply is elastic
C. price rises and demand is inelastic
D. price rises and demand is elastic

103. Supply curves tend to be:

A. perfectly elastic in the long run, because consumer demand will have
sufficient time to adjust fully to changes in supply
B. more elastic in the long run, because there is time for firms to enter or
leave the industry and to change the size of factories
C. perfectly inelastic in the long run, because the law of scarcity imposes
absolute limits upon production
D. less elastic in the long run, because there is time for firms to enter or
leave an industry
ANS: B PTS: 1 DIF: Easy TOP: The variety of supply

curves
104. If the cross-price elasticity of demand between goods X and Y is 0.9 this means:
A. the two goods are complements and demand is elastic
B. the two goods are complements and the demand is inelastic
C. the two goods are substitutes and the demand is elastic
D. the two goods are substitutes and the demand is inelastic
ANS: D PTS: 1 DIF: Easy TOP: The cross-price

SHORT ANSWER
1. What is elasticity and why do economists use the concept?
ANS:
Elasticity is a measure of the relative responsiveness of supply or demand to
changes in one of the determinants of supply or demand. Economists use the
concept in order to analyse the percentage change in supply or demand that
occurs as a result of a one per cent change in a determinant. It allows economists
to conduct a quantitative analysis of supply and demand, rather than simply a
qualitative analysis.
PTS: 1 DIF: Easy TOP: The cross-price elasticity of demand
2. Use the graphs below to answer the following questions.
a. Determine equilibrium price and quantity for each graph.

b. Given demand and supply, what would total revenue be for each graph?
c. Assume that supply shifts to the left on both graphs by 100, raising price.
Given the new equilibrium price and equilibrium quantity, what would total
revenue be for each graph?
d. What do your answers to part c tell you about the relationship between
elasticity of demand and total revenue?
ANS:
a. The equilibrium price would be $60 and the equilibrium quantity would be 350.
b. Total revenue for both graphs would be $21 000 ($60 × 350).
c. On graph A, equilibrium price is now $72 and equilibrium quantity is 325. Total
revenue for graph A would now be $23 400. On graph B, equilibrium price is now
$65 and equilibrium quantity is now 300. Total revenue for graph B would now be
$19 500. (See the graphs for this answer.)
d. The answer to C shows the expected outcome. Since the demand curve in
graph A is inelastic, we would expect that when price increased, total revenue
would increase (from $21 000 to $23 400). On graph B, since the demand is
elastic, we would expect an increase in price to lower total revenue (from $21
000 to $19 500).
PTS: 1 DIF: Difficult TOP: Total revenue and the price elasticity of
demand
3. Suppose a demand function yields an equilibrium price of $5.00 and an

equilibrium quantity of 50 000 individual units. The equilibrium quantity could
also be expressed in units of 1000, yielding an equilibrium of $5.00 and 50 units.
How would expressing the quantity in units of 1000 affect the value of the slope
and the elasticity?
ANS:
Changing the units of measure would change the value of the slope. It has no
effect on the value of the elasticity. This is why the elasticity measure is preferred
to identify the responsiveness of demand.
PTS: 1 DIF: Moderate TOP: Computing the price elasticity of

demand
4. What are the determinants of price elasticity of demand and how does each
affect elasticity?
ANS:
Determinants of price elasticity of demand include:
1. whether the good is a luxury or a necessity. Luxuries tend to have higher price
elasticities of demand and necessities tend to have small price elasticities of
demand.
2. availability of close substitutes. Goods with close substitutes tend to have
more elastic demand than do goods without close substitutes.
3. definition of the market. Narrowly defined markets tend to have more elastic
demand, and broadly defined markets tend to have less elastic demand.
4. time horizon. The longer the time horizon over which demand is measured, the
greater is the ability of buyers of the good to find substitutes for products whose
prices have risen. Therefore the longer the time horizon, ceteris paribus, the
larger is the elasticity of demand.
PTS: 1 DIF: Easy TOP: The price elasticity of demand and its
determinants
5. Use the graph below to answer the following questions. Put the correct letter in
the blank.
a. The elastic section of the graph is represented by section _____.

b. The inelastic section of the graph is represented by section _____.
c. The unit elastic section of the graph is represented by section _____.
d. The portion of the graph in which a decrease in price would cause total
revenue to fall is _____.
e. The portion of the graph in which a decrease in price would cause total
revenue to rise is _____.
f. The portion of the graph in which a decrease in price would not cause a change
in total revenue is _____.
g. The section of the graph in which total revenue would be at a maximum is
_____.
h. The section of the graph in which elasticity is greater than one is _____.
i. The section of the graph in which elasticity is equal to one is _____.
j. The section of the graph in which elasticity is less than one is _____.
ANS:
a. A
b. C
c. B
d. C
e. A
f. B
g. B
h. A
i. B
j. C
PTS: 1 DIF: Moderate TOP: The variety of demand curves
6. Consider the following pairs of goods. Which would you expect to have the more
elastic demand? Why?
a. water or diamonds
b. insulin or nasal decongestant spray
c. food in general or breakfast cereal
d. gasoline over the course of a week or gasoline over the course of a year
e. personal computers or IBM personal computers
ANS:
a. Diamonds are luxuries and water is a necessity. Therefore, diamonds have the
more elastic demand.
b. Insulin has no close substitutes but decongestant spray does. Therefore, nasal
decongestant spray has the more elastic demand.
c. Breakfast cereal has more substitutes than does food in general. Therefore,
breakfast cereal has the more elastic demand.
d. The longer the time period, the more elastic is demand. Therefore, gasoline
over the course of a year has the more elastic demand.
e. There are more substitutes for IBM personal computers than there are for
personal computers. Therefore, IBM personal computers have the more elastic
demand.
PTS: 1 DIF: Difficult TOP: The price elasticity of demand and its
determinants
7. If two demand curves with different slopes pass through the same point, which
demand curve will have the greater price elasticity of demand if the price falls
from that point?
ANS:
The curve with the smaller slope will have the larger elasticity.
8. List the following goods in order of increasing price elasticity of demand and
explain why they are ranked that way: a first class ticket to your dream holiday
destination, a two-day ferry cruise, a local bus ticket to work, hiring a sports car
for a day.
ANS:
In order of increasing price elasticity of demand, the list is: a local bus ticket to
work, hiring a sports car for a day, a two-day ferry cruise, a first class ticket to
your dream holiday destination. The ranking is based on how much the goods are
considered luxuries.
PTS: 1 DIF: Moderate TOP: The price elasticity of demand and its
determinants
9. When the price of digital SLR cameras was $2000, consumers bought 4000. When
the price fell to $1200, consumers bought 5000. What was the price elasticity of
demand between these two prices, calculated with the midpoint method? Is
demand elastic or inelastic?
ANS:
The price elasticity of demand is 0.44. The demand for digital SLR cameras is
price inelastic.

demand
10. Sketch three demand curves. Curve A should be perfectly elastic, curve B should
be perfectly inelastic and curve C should be unit elastic.
ANS:
PTS: 1 DIF: Easy TOP: The variety of demand curves
11. Using the midpoint method, compute the elasticity of demand between points A
and B. Is this portion of the curve elastic or inelastic? Interpret your answer with
regard to price and quantity demanded. Now compute the elasticity of demand
between points B and C. Is this portion of the curve elastic or inelastic?
ANS:
In the section of the demand curve from A to B, the elasticity of demand would be
2.5. This would be an elastic portion of the curve. This would mean that for every
one per cent change in price, quantity demanded would change by 2.5 per cent.
In the section of the demand curve from B to C, the elasticity of demand would be
0.75. This would be an inelastic portion of the curve. This would mean that for
every one per cent change in price, quantity demanded would change by 0.75
per cent.

demand
12. Andy has discovered a new way to make clothes pegs more cheaply than his
competitors. He believes that since he can now sell his clothes pegs at a lower
price than other clothes-peg providers on the market, he will be able to increase
his revenue by attracting more customers. He estimates the price elasticity of
demand for clothes pegs to be 0.7. What will happen to his total revenue if he
decreases the price of his clothes pegs? What should Andy do?
ANS:
The price elasticity of demand for his clothes pegs is less than one, so a decrease
in price will decrease his total revenue. This is because, since buyers are not very
responsive to price changes, the increase in the number of buyers will not be
enough to offset his price cut. Andy should increase the price of his clothes pegs
since demand is inelastic, and an increase in price will increase total revenue.
demand
13. Suppose you are the manager of a theatre. You currently charge the same
admission price to all customers, regardless of age. You hire an economist to
determine the price elasticity of demand for admissions by age and he tells you
that at the current price, demand by adults is inelastic and demand by children is
elastic. If you want to increase your total revenue by adjusting admission prices,
how should they be adjusted?
ANS:
Since the demand for admissions by adults is inelastic, if you raise the price of
admission, your total revenue will increase from that group. However, since the
demand by children is elastic, raising the admission price will reduce total
revenue from that group. The solution is a two-tier price system, with higher
prices for adults and lower prices for children.
demand
14. You have just been hired by a forestry company as a consultant. The company
wishes to know whether increasing or decreasing A-grade log prices will increase
revenue. What information do you need? Suppose you have been given this
information, what would you recommend?
ANS:
The necessary information is the price elasticity of demand for A-grade logs. If
you find that the demand for logs is inelastic, then you should recommend a price
increase in order for total revenue to rise. If you find that demand is elastic, you
should recommend a price decrease in order for total revenue to rise.
PTS: 1 DIF: Moderate TOP: Total revenue and the price elasticity of
demand
15. Why is the demand for luxury goods generally more elastic than for necessities?
ANS:
A necessity is by definition a good or service that people require to live, therefore
they will not be so willing to give it up, even if the price of the good rises. Buying
luxury goods, however, is a matter of choice and as such when the price rises
people will be more willing to forego the good.
PTS: 1 DIF: Easy TOP: The price elasticity of demand and its
determinants
16. The president of the university is concerned about increasing operating costs and
decides to raise tuition fees in an attempt to increase university revenue. Do you
think the rise in tuition fees will accomplish the president’s goal?
ANS:
Whether the increase in fees will cause university revenue to increase depends
on the price elasticity of demand for courses. If demand for courses is inelastic,
the tuition increase will increase revenue. However, if the demand for courses is
elastic, the tuition increase will reduce university revenue.
demand
17. What is the definition of the income elasticity of demand. What does it measure?
How can it be used to determine whether a good is normal or inferior. What
happens to the demand for an inferior good is income decreases?
ANS:
The income elasticity of demand is defined as the percentage change in quantity
demanded divided by the percentage change in income. It measures how the
quantity demanded changes as income changes. If the income elasticity is
positive it means that the good is normal. If it is negative it means that the good
is inferior. If income decreases, demand for an inferior good will increase.
PTS: 1 DIF: Easy TOP: The income elasticity of demand
18. Define cross-price elasticity of demand. What does it measure? What does it
mean if the cross-price elasticity is negative or positive?
ANS:
Cross-price elasticity of demand is defined as the percentage change in the
quantity demanded of good one divided by the percentage change in the price of
good two. It measures how the quantity demanded of one good changes as the
price of another good changes. If two goods are substitute goods, the cross-price
elasticity is positive. If two goods are complement goods, the cross-price
elasticity is negative.
PTS: 1 DIF: Easy TOP: The cross-price elasticity of demand
19. When Anna was studying at university, she had a monthly income of $900 and
bought 4 items of second-hand clothing. Now, she is working full-time with a
monthly income of $3000. She now buys 20 items of second-hand clothing a
month. Compute Anna’s income elasticity of demand using the midpoint method.
What type of goods are second-hand clothes for Anna?
ANS:
The income elasticity of demand for Anna is 0.81. Since the income elasticity of
demand is positive, second-hand clothes would be interpreted as a normal good
for Anna.
PTS: 1 DIF: Moderate TOP: The income elasticity of demand
20. Recently, the price of a Kit Kat fell from $1.80 to $1.50. As a result, the quantity
demanded of Mars Bars decreased from 1200 to 1000. What would be the
appropriate elasticity to compute? What does your answer tell you?
ANS:
The appropriate elasticity to compute would be the cross-price elasticity. The two
goods are substitutes because the cross-price elasticity is positive.
PTS: 1 DIF: Moderate TOP: The cross-price elasticity of demand
21. Draw a linear, downward-sloping demand curve on a graph. Identify the part of
the demand curve that is elastic, the part that is inelastic and the part that is unit
elastic. At what price on a linear demand curve will total revenue be highest?
ANS:
The student should identify the top half of the demand curve as elastic, the
bottom half as inelastic and the midpoint as unit elastic. Total revenue is
maximised at the midpoint of a linear demand curve.
22. What is the price elasticity of supply?
ANS:
The price elasticity of supply measures how much the quantity supplied responds
to changes in the price and is equal to the percentage change in quantity
supplied divided by the percentage change in price. If elasticity is greater than
one, the supply curve is elastic; if less than one, the supply curve is inelastic and
if equal to one, the supply curve is unit elastic.
PTS: 1 DIF: Easy TOP: The price elasticity of supply and its
determinants
23. At a price of $35, Brent rents out 80 sets of skis in one day. In peak season he can
charge $45 per set and so he will rent out up to 150 sets of skis. What is Brent’s
price elasticity between the two ski prices, using the midpoint formula?
ANS:
The price elasticity of supply is 2.43.
PTS: 1 DIF: Moderate TOP: Computing the price elasticity of supply
24. Rate the supply curves on the graph shown from shortest time frame to longest
time frame. Which curve is the most inelastic? Which curve is the most elastic?
ANS:
The order from shortest time frame to longest would be: S 1, S2, S3. S1 is the most
inelastic—it is perfectly inelastic. S3 is the most elastic supply curve.
PTS: 1 DIF: Moderate TOP: The variety of supply curves
25. In the aftermath of the US decision to halt logging of Pacific North-West forests in
1990 to protect spotted owls, the global demand for Australian and New Zealand
timber jumped. Predict how Australasian forestry companies responded to the
increased demand in the short run and in the long run.
ANS:
In the very short run, forestry companies would be unable to quickly increase
output as supply would be very inelastic, so prices would have increased greatly.
In the short-run, output could be increased by building more roads, hiring more
staff and building more sawmills. In the long run, more tree plantations could be
planted and timber supply would become increasingly elastic.
PTS: 1 DIF: Difficult TOP: The variety of supply curves
26. What factors contributed to the inability of OPEC to keep oil prices high? What
determinants of elasticity played a key role?
ANS:
Demand is more elastic over the long run than the short run. Thus in the short
run, when OPEC raised its prices demand was relatively inelastic, as people were
not easily able change the way they consumed petrol. However, over the long
run, people can modify their behaviour to avoid the high OPEC prices, thus
causing the price of OPEC petrol to decline.
PTS: 1 DIF: Moderate TOP: Why did OPEC fail to keep the price of oil
high?
27. The Conservation Reserve Program pays farmers to take out of production highly
erodible land. How will this program affect farm income and the wellbeing of
consumers?
ANS:
The program will affect farm income in two ways. First, farmers receive income
from taking the land out of production but they lose the income from the output
which would have been produced on that land. Second, because the supply of
agricultural products will be reduced as a result of this program, agricultural
commodity prices will increase. Because the demand for agricultural products is
inelastic, the increase in price will also increase total revenue to farmers.
Consumers will be worse off as a result of the program, because they will have to
pay higher prices for agricultural products.
PTS: 1 DIF: Difficult TOP: Can good news for farming be bad news
for farmers?
28. How does the price elasticity of demand affect total revenue? In what case will a
change in price cause no change in total revenue?
ANS:
The elasticity of demand determines how total revenue changes as one moves
along the demand curve. If demand is inelastic, an increase in the price will cause
total revenue to rise. If demand is elastic, an increase in price will cause total
revenue to fall. This is because the price rise will cause the quantity demanded of
the good to fall more than the increase in price can cause revenue to rise. A
change in price will cause no change in revenue when demand is unit elastic.
demand
29. What are the determinants of the price elasticity of supply and how does each
affect elasticity?
Price elasticity of supply depends on the flexibility of sellers to changes in price.

For resources like land of a specific type and location, there is practically no
flexibility. For manufactured products, there is greater flexibility. In most markets,
the time period over which supply is measured is a key determinant. Over short
time periods, supply curves tend to be less elastic and over longer periods,
supply curves tend to be more elastic.
PTS: 1 DIF: Easy TOP: The price elasticity of supply and its
determinants
CHAPTER 6—Supply, demand and government policies
TRUE/FALSE
1. The consequences of economic policies are often predicted or intended by their advocates.
ANS: F PTS: 1 DIF: Easy TOP: Controls on prices
2. Market prices are an efficient and impersonal way to ration goods.
ANS: T PTS: 1 DIF: Easy TOP: Controls on prices
3. Taxes are employed by policy makers for two reasons. The first is to raise revenue. The second is to
adjust market outcomes.
ANS: T PTS: 1 DIF: Easy TOP: Controls on prices
4. A price floor is a legal minimum on the price of a good or service.
ANS: T PTS: 1 DIF: Easy TOP: How price ceilings affect

market outcomes
5. If a price ceiling is non-binding, it will have no effect on the market.

market outcomes
6. Suppose a price ceiling is placed on rice. The price ceiling is set below the equilibrium price. This will
result in the quantity demanded of rice exceeding the quantity supplied.

market outcomes
7. A binding price ceiling allows consumers to buy all the goods they demand at a lower price.
ANS: F PTS: 1 DIF: Moderate TOP: How price ceilings affect

market outcomes
8. Suppose the market equilibrium price for cigarettes is $20 before the government introduced a $22
price floor. This price floor will not be binding as it is above market price.
ANS: F PTS: 1 DIF: Moderate TOP: How price floors affect

market outcomes
9. Common rationing mechanisms under price ceilings include waiting in long lines and biases of the
sellers.

market outcomes
10. Suppose the local government decides to implement rent controls. The housing shortage in the short
run is likely to be less severe than the housing shortage in the long run.
ANS: T PTS: 1 DIF: Moderate TOP: Case Study: Rent control in

the short run and long run
11. If the government sets the minimum price which a good can be traded, this is defined as a price floor.
ANS: T PTS: 1 DIF: Easy TOP: How price floors affect

market outcomes
12. A binding price floor causes a surplus.

market outcomes
13. A binding price floor in a competitive market will result in persistent shortages of a product.
ANS: F PTS: 1 DIF: Easy TOP: How price floors affect

market outcomes
14. Suppose a price floor on alcohol is set above the equilibrium price. This will increase the supply of
alcohol, leading to an increase in sales of alcohol.
ANS: F PTS: 1 DIF: Moderate TOP: How price floors affect

market outcomes
15. Suppose that the equilibrium wage rate in an industry is $10 per hour. The government then sets a
minimum wage of $12 per hour. The result will be a surplus of labour supply.

market outcomes
16. Rent control reduces the incentive for landlords to properly maintain their properties.
ANS: T PTS: 1 DIF: Easy TOP: Case Study: Rent control in

17. The minimum wage creates the most benefits for teenage workers as their wages are typically much
lower than adult workers.
ANS: F PTS: 1 DIF: Easy TOP: Evaluating price controls
18. Opponents of the minimum wage note that a high minimum wage creates unemployment, causes
teenagers to drop out of school and prevents some unskilled workers from getting the on-the-job
training that they need.
ANS: T PTS: 1 DIF: Moderate TOP: Evaluating price controls
19. Price controls are an effective way of allocating resources in an economy. For this reason there is
widespread support for price controls among economists.
20. Price controls often help those in need.
21. Rent subsidies and wage subsidies are better than price controls at helping the poor because they have
no costs associated with them.
ANS: F PTS: 1 DIF: Moderate TOP: Evaluating price controls
22. Economists use the term tax incidence to refer to the proportion of tax paid by sellers relative to
buyers.
ANS: T PTS: 1 DIF: Easy TOP: Taxes
23. If sellers of a product are required to pay a tax, the supply curve for the product will shift left by
exactly the size of the tax.
ANS: F PTS: 1 DIF: Moderate TOP: How taxes on buyers affect

market outcomes
24. The effect of a tax on a product is always to reduce the total size of its market.
ANS: T PTS: 1 DIF: Easy TOP: How taxes on buyers affect

market outcomes
25. A tax on golf clubs will cause the equilibrium market price of golf clubs to increase and the
equilibrium quantity sold to decrease.
ANS: T PTS: 1 DIF: Moderate TOP: How taxes on buyers affect

market outcomes
26. If a tax is imposed on the buyer of a product, the tax incidence will fall entirely on the buyer.
ANS: F PTS: 1 DIF: Easy TOP: How taxes on buyers affect

market outcomes
27. If a tax is levied on a market, sellers will receive more for their goods and buyers will have to pay
more for their purchases.
ANS: F PTS: 1 DIF: Easy TOP: How taxes on buyers affect

market outcomes
28. A tax on sellers shifts the supply curve upward by exactly the size of the tax.
ANS: T PTS: 1 DIF: Easy TOP: How taxes on sellers affect

market outcomes
29. A tax on sellers will cause the equilibrium market price to rise but the equilibrium quality sold will
fall.
ANS: T PTS: 1 DIF: Easy TOP: How taxes on sellers affect

market outcomes
30. When sellers are legally required to pay a tax, the burden of the tax falls solely on the sellers.
ANS: F PTS: 1 DIF: Easy TOP: How taxes on sellers affect

market outcomes
31. The incidence of a tax is determined by whether the tax is imposed on the seller or the buyer.
ANS: F PTS: 1 DIF: Easy TOP: Elasticity and tax incidence
32. Lawmakers can decide whether the buyer or the seller must send a tax to the government but they
cannot legislate the true burden of a tax.
ANS: T PTS: 1 DIF: Moderate TOP: Elasticity and tax incidence
33. Who pays the majority of a tax levied on a product depends on whether the tax is placed on the buyer
or the seller.
34. Tax incidence ultimately depends on the legislated burden.
35. Most of the burden of a luxury tax falls on the middle-class workers who supply luxury goods, rather
than on the rich who buy them.
ANS: T PTS: 1 DIF: Difficult TOP: Elasticity and tax incidence

36. If demand is less elastic than supply, then the burden of a tax will fall more heavily upon sellers of a
good.
ANS: F PTS: 1 DIF: Moderate TOP: Elasticity and tax incidence
37. When analysing government policies, supply and demand are not very useful tools.
38. The benefits of the First Home Owners Grant scheme fall primarily to the sellers of housing.
ANS: T PTS: 1 DIF: Easy TOP: How subsidies affect market

outcomes
39. If supply is perfectly inelastic, then a subsidy paid to buyers of a good can never increase the size of
the market.
ANS: T PTS: 1 DIF: Difficult TOP: How subsidies affect market

outcomes
40. A subsidy paid to suppliers of a good will grow a market.
ANS: T PTS: 1 DIF: Easy TOP: How subsidies affect market

outcomes
41. The world price for fuel is a price ceiling mechanism.

market outcomes
42. Domestic producers of natural gas would welcome being a signatory to the world price regime if it is
set above the equilibrium, as they can export the surplus.
ANS: T PTS: 1 DIF: Moderate TOP: How price ceilings affect

market outcomes
MULTIPLE CHOICE
1. A price ceiling that is not binding:

A. is a detriment to society
B. will cause a shortage
C. will cause a surplus
D. has no effect
ANS: D PTS: 1 DIF: Easy TOP: How price ceilings affect

market outcomes
NARRBEGIN: 6-1
Graph 6-1
NARREND
2. In Graph 6-1, a price ceiling that is not binding is shown in:

A. panel a
B. panel b
C. both panel a and panel b
D. neither panel a nor panel b
ANS: A PTS: 1 DIF: Moderate TOP: How price ceilings affect

market outcomes NAR: 6-1
3. In which panel(s) in Graph 6-1 would there be a shortage for a good at the market price?
A. panel a
B. panel b
C. panel a and panel b
D. neither panel a nor panel b
ANS: B PTS: 1 DIF: Moderate TOP: How price ceilings affect

4. Price controls are:

A. usually enacted when policymakers believe that the market price of a good or service is
unfair to buyers or sellers
B. used to make markets more efficient
C. nearly always effective in eliminating inequities
D. established by firms with monopoly power
ANS: A PTS: 1 DIF: Easy TOP: Controls on prices
5. Suppliers of a good are likely to favor a binding:

A. price floor, as the quantity sold will be higher than in a competitive market
B. price floor, as the price received will be higher than in a competitive market
C. price ceiling, as the quantity demanded will be higher than in a competitive market
D. price ceiling, as the price received will be higher than in a competitive market
ANS: B PTS: 1 DIF: Easy TOP: Controls on prices

6. A legal maximum price at which a good can be sold is a price:
A. floor
B. stabilisation
C. support
D. ceiling
ANS: D PTS: 1 DIF: Easy TOP: How price ceilings affect

market outcomes
7. A legal minimum price at which a good can be sold is a price:

A. floor
B. stabilisation
C. ceiling
D. cut
ANS: A PTS: 1 DIF: Easy TOP: How price floors affect

market outcomes
8. If a price ceiling is binding:

A. the equilibrium price is above the ceiling and there will be a shortage
B. the equilibrium price is above the ceiling and there will be a surplus
C. the equilibrium price is below the ceiling and there will be a shortage
D. the equilibrium price is below the ceiling and there will be a surplus
ANS: A PTS: 1 DIF: Easy TOP: How price ceilings affect

market outcomes
9. If a price ceiling is leading to a shortage then:

A. supply must be greater than demand
B. the equilibrium price must be below the price ceiling
C. the equilibrium price must be above the price ceiling
D. market forces will restore the price to equilibrium
ANS: C PTS: 1 DIF: Easy TOP: How price ceilings affect

market outcomes
NARRBEGIN: 6-2
Graph 6-2
NARREND
10. According to Graph 6-2, if the government imposes a binding price floor in this market at a price of
$8.00, the result will be a:
A. shortage of 20 units
B. shortage of 40 units
C. surplus of 30 units
D. surplus of 40 units
ANS: B PTS: 1 DIF: Moderate TOP: How price floors affect

11. According to Graph 6-2, a binding price ceiling would exist at:
A. any price above $8.00
B. any price below $6.00
C. any price above $5.00
D. any price below $8.00

12. Some developing countries have used price ceilings to keep rice cheap to assist the poor. At the ceiling
price:
A. the quantity demanded will be greater than the quantity supplied and a shortage will result
B. the quantity demanded will be greater than the quantity supplied and a surplus will result
C. the quantity demanded will be less than the quantity supplied and a shortage will result
D. the quantity demanded will be less than the quantity supplied and a surplus will result

market outcomes
13. A hot summer’s day can lead to dramatic increases in the demand for electricity. Suppose the
government decides a binding price ceiling is necessary so pensioners can continue to afford their
power bills. The effect of this policy will be such that:
A. the quantity of electricity supplied will be unchanged
B. electricity producers will increase supply, leading to a decrease in price
C. electricity producers will supply less than demanded, leading to a shortage
D. demand will decrease, leading to a decrease in price
ANS: C PTS: 1 DIF: Moderate TOP: How price ceilings affect

market outcomes
14. After a natural disaster, a price ceiling on bottled water will lead to:
A. a shortage of bottled water
B. an increase in supply of bottled water
C. quantity demanded of bottled water to equal to quantity supplied
D. bottled water to be distributed more equitably
ANS: A PTS: 1 DIF: Easy TOP: How price ceilings affect

market outcomes
15. Which of the following is an example of a price-ceiling?

A. a minimum wage
B. a sales tax
C. none of the above
D. a rent control
ANS: D PTS: 1 DIF: Moderate TOP: How price ceilings affect

market outcomes
16. If a price ceiling results in a shortage of the good, which of the following will NOT ration the demand:
A. queuing mechanisms that get people to wait in long lines
B. discrimination by the seller
C. an increase in the price of the good
D. none of the above
ANS: C PTS: 1 DIF: Easy TOP: How price ceilings affect

market outcomes
17. Suppose the equilibrium price of bananas is $5 and a price ceiling of $7 is implemented. This will
result in:
A. a shortage, as the price ceiling is above the equilibrium price
B. a surplus, as the price ceiling is above the equilibrium price
C. no change in the quantity of bananas sold
D. the demand for bananas to exceed the supply of bananas
ANS: C PTS: 1 DIF: Moderate TOP: How price ceilings affect

market outcomes
18. A binding price floor on wheat will:

A. force otherwise profitable farmers out of business
B. result in a shortage of wheat
C. result in a surplus of wheat
D. act as an efficient and impersonal rationing mechanism
ANS: C PTS: 1 DIF: Easy TOP: How price floors affect

market outcomes
19. Water shortages caused by droughts can be lessened by:

A. allowing price to equate the demand for water with the supply of water
B. restricting water usage of consumers
C. arresting anyone who wastes water
D. imposing tight price controls on water

market outcomes
20. When OPEC raised the price of crude oil in the 1970s, this lead to long lines at the petrol station
because:
A. a price ceiling was preventing prices from rising until supply and demand were in
equilibrium
B. a cut in oil supply resulted in there being less petrol
C. the demand for petrol increased
D. the demand for petrol decreased
ANS: A PTS: 1 DIF: Moderate TOP: Case study: Lines at the

petrol station
NARRBEGIN: 6-3
Graph 6-3
NARREND
21. According to Graph 6-3, which panel(s) best represent(s) a binding rent control in the short run?
A. panel a
B. panel b
C. neither panel
D. both panels
ANS: A PTS: 1 DIF: Moderate TOP: Case study: Rent control in
the short run and long run NAR: 6-3
22. According to Graph 6-3, which panel(s) best represent(s) a binding rent control in the long run?
A. panel a
B. panel b
C. neither panel
D. both panels
ANS: B PTS: 1 DIF: Moderate TOP: Case study: Rent control in

the short run and long run NAR: 6-3
23. Which of the following is NOT a mechanism of rationing used by landlords in cities with rent control?
A. waiting lists
B. race
C. price
D. bribes
ANS: C PTS: 1 DIF: Moderate TOP: Case study: Rent control in

NARRBEGIN: 6-4
Graph 6-4
NARREND
24. According to Graph 6-4, when the supply curve for gasoline shifts from S 1 to S2:
A. the price will increase to P3
B. a surplus will occur at the new market price of P 2
C. the market price will stay at P1 due to the price ceiling
D. a shortage will occur at the price ceiling of P2
ANS: D PTS: 1 DIF: Difficult TOP: How price ceilings affect

25. According to Graph 6-4, when the supply curve shifts from S1 to S2:
A. the new market quantity will be Q3
B. the new market quantity will be less than Q3
C. the new market quantity will be greater than Q3
D. there will be a surplus at the new market price of P2

NARRBEGIN: 6-5
Graph 6-5
NARREND
26. According to Graph 6-5, if the government imposes a binding price floor of $6.00 in this market, the
result will be a:
A. surplus of 15
B. surplus of 35
C. shortage of 30
D. shortage of 50

27. According to Graph 6-5, a binding price floor would exist at a price of:
A. $6.00
B. $5.00
C. $2.00
ANS: A PTS: 1 DIF: Moderate TOP: How price floors affect
28. Rent controls lead to:

A. a shortage of housing in the short run and a surplus of housing in the long run
B. a surplus of housing in the short run and a surplus of housing in the long run
C. a small shortage of housing in the short run and a large shortage of housing in the long run
D. a large shortage of housing in the short run and a small shortage of housing in the long run
ANS: C PTS: 1 DIF: Easy TOP: Case study: Rent control in

29. A binding price ceiling causes:

A. excess supply
B. a shortage
C. a surplus
D. equilibrium price to rise
ANS: B PTS: 1 DIF: Easy TOP: How price ceilings affect

market outcomes
NARRBEGIN: 6-6
Graph 6-6
NARREND
30. According to Graph 6-6, in panel b, at the actual price there will be:
A. cheaper wheat for consumers
B. equilibrium in the market
C. a surplus of wheat
D. rationing of demand with long waiting lines
ANS: C PTS: 1 DIF: Moderate TOP: How price floors affect

31. According to Graph 6-6, in panel a, at the actual price there will be:
A. a shortage of wheat
B. equilibrium in the market
C. a surplus of wheat
D. an excess demand for wheat

32. The minimum wage is an example of:

A. a price ceiling
B. a free-market process
C. a price floor
D. an efficient labour allocation mechanism

market outcomes
33. Minimum wage laws dictate the:

A. average price employers must pay for labour
B. highest price employers may pay for labour
C. lowest price employers may pay for labour
D. quality of labour which must be supplied

market outcomes
34. The justification for the minimum wage is to:

A. increase the jobs available for workers
B. reduce the jobs available for unskilled workers
C. ensure all workers get an adequate standard of living
D. provide benefits to middle-class part-time workers

market outcomes
35. Which of the following is a correct statement about the labour market?
A. workers determine the supply of labour and firms determine the demand for labour
B. workers determine the demand for labour and firms determine the supply of labour
C. workers determine the supply of labour and government determines the demand for labour
D. government determines the supply of labour and firms determine the supply of labour
ANS: A PTS: 1 DIF: Moderate TOP: How price floors affect

market outcomes
36. If the minimum wage is below the equilibrium wage:

A. the quantity demanded of labour will be greater than the quantity supplied
B. the quantity demanded of labour will equal the quantity supplied
C. the quantity demanded of labour will be less than the quantity supplied
D. anyone who wants a job at the minimum wage can find one
ANS: CA PTS: 1 DIF: Moderate TOP: How price floors affect

market outcomes
37. Workers with high levels of skill and experience are not affected by the minimum wage because:
A. they belong to unions
B. they are not legally guaranteed the minimum wage
C. they generally earn wages less than the minimum wage
D. their equilibrium wages are well above the minimum wage
ANS: D PTS: 1 DIF: Moderate TOP: Evaluating price controls
38. The minimum wage has its greatest adverse impact on the market for:
A. the most experienced workers
B. the most skilled workers
C. engineers
D. teenage labour
ANS: D PTS: 1 DIF: Moderate TOP: How price floors affect

market outcomes
39. If the government lowered the minimum wage but this had no effect on unemployment, one possible
explanation could be:
A. those who are already unemployed refuse to work for such a low wage
B. the equilibrium wage was already above the minimum wage
C. most of the unemployed are teenagers who don’t require high wages
D. the equilibrium wage was below the minimum wage

market outcomes
40. In general, advocates of the minimum wage:

A. believe that there are no adverse effects of minimum-wage laws
B. believe that adverse effects are small, and generally a higher minimum wage makes the
poor better off
C. believe that the minimum wage is the answer to society’s economic problems
D. are socialists who want to replace the market system with central economic planning
ANS: B PTS: 1 DIF: Moderate TOP: Evaluating price controls
41. A tax paid by buyers of a good or service:

A. encourages market activity and decreases the price received by sellers
B. encourages market activity and increases the price paid by buyers
C. discourages market activity and decreases the price received by sellers
D. discourages market activity and increases the price received by sellers
ANS: C PTS: 1 DIF: Moderate TOP: How taxes on sellers affect

market outcomes
42. The term tax incidence refers to the:

A. division of income tax between high-income and low-income earners
B. level of tax levied on a buyer of a good
C. division of the tax burden between buyers and sellers
D. division of tax between federal and local government
ANS: C PTS: 1 DIF: Easy TOP: Taxes
43. The initial effect of a tax on the sellers of a good is on:

A. the supply of that good
B. the demand for that good
C. both the supply of the good and the demand for the good
D. the price of the good
ANS: A PTS: 1 DIF: Moderate TOP: How taxes on buyers affect

market outcomes
44. Which of the following is NOT a function of prices in a market system?

A. prices have the crucial job of balancing supply and demand
B. prices send signals to buyers and sellers to help them make rational economic decisions
C. prices coordinate economic activity
D. prices make an equitable distribution of goods and services among consumers possible
45. The main reason policymakers use price controls is because:

A. they are better at coordinating economic activity than the free market
B. they believe that in some cases the market outcome is not fair
C. they need a reason to justify their jobs
D. all of the above is true
ANS: B PTS: 1 DIF: Easy TOP: Evaluating price controls
46. Which of the following is the most correct statement about price controls?
A. Price controls always help those they are designed to help.
B. Price controls never help those they are designed to help.
C. Price controls often hurt those they are designed to help.
D. Price controls always hurt those they are designed to help.
ANS: C PTS: 1 DIF: Easy TOP: Evaluating price controls
47. Unlike minimum wage laws, wage subsidies:

A. discourage firms from hiring the working poor
B. cause unemployment
C. help only wealthy workers
D. raise living standards of the working poor without creating unemployment
48. To fund new green energy research, suppose the government requires every buyer of a new car to pay a
$100 tax. When compared to the pre-tax equilibrium, such a tax will:
A. make buyers $100 worse off without affecting sellers
B. make buyers $100 worse off, but make sellers better off
C. increase the price sellers receive for cars
D. make both buyers and sellers worse off, but we cannot say by how much without more
information
ANS: D PTS: 1 DIF: Moderate TOP: How taxes on buyers affect

market outcomes
NARRBEGIN: 6-7
Graph 6-7
NARREND
49. According to Graph 6-7, the amount of the tax imposed in this market is:
A. $1.00
B. $1.50
C. $2.50
D. $3.00

50. According to Graph 6-7, the equilibrium price in the market before the tax is imposed is:
A. $8.00
B. $6.00
C. $5.00
D. $3.50
ANS: B PTS: 1 DIF: Easy TOP: How taxes on buyers affect

51. According to Graph 6-7, the price buyers will pay after the tax is imposed is:
A. $8.00
B. $6.00
C. $5.00
D. $3.50
ANS: A PTS: 1 DIF: Difficult TOP: How taxes on buyers affect

52. According to Graph 6-7, the price sellers receive after the tax is imposed is:
A. $8.00
B. $6.00
C. $5.00
D. $3.50
ANS: C PTS: 1 DIF: Difficult TOP: How taxes on buyers affect

53. According to Graph 6-7, the amount of the tax that buyers would pay would be:
A. $1.00
B. $1.50
C. $2.00
D. $3.00
ANS: C PTS: 1 DIF: Difficult TOP: How taxes on buyers affect

54. According to Graph 6-7, the amount of the tax that sellers would pay would be:
A. $1.00
B. $1.50
C. $2.00
D. $3.00
ANS: A PTS: 1 DIF: Difficult TOP: How taxes on buyers affect

55. If sellers are required to pay a $0.70 tax on each cup of coffee, the supply of coffee will shift:
A. right by $0.70 per cup
B. left by $0.70 per cup
C. up by $0.70 per cup
D. down by $0.70 per cup

market outcomes
56. A subsidy on the sellers of coffee:

A. increases the size of the coffee market
B. reduces the size of the coffee market
C. has no effect on the size of the coffee market
D. the benefit will accrue entirely to the sellers of coffee
ANS: A PTS: 1 DIF: Moderate TOP: How subsidies affect market

outcomes
57. A subsidy paid to the sellers of coffee will:
A. increase the equilibrium price of coffee and reduce the equilibrium quantity
B. reduce the equilibrium price of coffee and increase the equilibrium quantity
C. increase the equilibrium price of coffee and increase the equilibrium quantity
D. reduce the equilibrium price of coffee and reduce the equilibrium quantity
ANS: B PTS: 1 DIF: Moderate TOP: How subsidies affect market

outcomes.
58. A tax on the sellers of coffee will cause the price the buyer pays:
A. and the price the seller receives to rise
B. and the price the seller receives to fall
C. to rise and the price the seller receives to fall
D. to fall and the price the seller receives to rise

market outcomes
59. Which is the most correct statement about the benefits of a subsidy on toothbrushes?
A. buyers will receive most of the benefit of the subsidy
B. sellers will receive most of the benefit of the subsidy
C. buyers and sellers will share the benefits of the subsidy
D. the government enjoys the entire benefit of the subsidy
ANS: C PTS: 1 DIF: Easy TOP: How subsidies affect market

outcomes.
60. The initial impact of a tax on the sellers of a product is on:

A. the supply of the product
B. the demand for the product
C. both the supply of the product and the demand for the product
D. the price of the product
ANS: A PTS: 1 DIF: Easy TOP: How taxes on sellers affect

market outcomes
NARRBEGIN: 6-8
Graph 6-8
NARREND
61. According to Graph 6-8, the equilibrium price in the market before the tax is imposed is:
A. $1.00
B. $3.50
C. $5.00
D. $6.00
ANS: C PTS: 1 DIF: Easy TOP: How taxes on sellers affect

62. According to Graph 6-8, the price buyers will pay after the tax is imposed is:
A. $1.00
B. $3.50
C. $5.00
D. $6.00
ANS: D PTS: 1 DIF: Difficult TOP: How taxes on sellers affect

63. According to Graph 6-8, the price sellers receive after the tax is imposed is:
A. $1.00
B. $3.50
C. $5.00
D. $6.00
ANS: B PTS: 1 DIF: Difficult TOP: How taxes on sellers affect

64. According to Graph 6-8, the amount of the tax imposed in this market is:
A. $1.00
B. $1.50
C. $2.50
D. $3.50

65. According to Graph 6-8, the amount of the tax that buyers would pay would be:
A. $1.00
B. $1.50
C. $2.50
D. $3.00
ANS: A PTS: 1 DIF: Difficult TOP: How taxes on sellers affect

66. According to Graph 6-8, the amount of the tax that sellers would pay would be:
A. $1.00
B. $1.50
C. $2.50
D. $3.00
ANS: B PTS: 1 DIF: Difficult TOP: How taxes on sellers affect

67. A tax on the sellers of coffee:

A. leads sellers to supply a smaller quantity at every price
B. leads buyers to demand a smaller quantity at every price
C. leads sellers to supply a larger quantity at every price
D. causes the supply curve to shift to the right
ANS: A PTS: 1 DIF: Moderate TOP: How taxes on sellers affect

market outcomes
68. If buyers of bananas are required to pay a $1.00 tax on each bunch of bananas purchased, then the
demand curve for bananas will shift:
A. right by $1.00 per bunch
B. left by $1.00 per bunch
C. up by $1.00 per bunch
D. down by $1.00 per bunch

market outcomes
69. A tax on the sellers of popcorn will:

A. reduce the size of the popcorn market
B. increase the size of the popcorn market
C. affect the price of popcorn but not the size of the market
D. not have a predictable effect on the size of the popcorn market
ANS: A PTS: 1 DIF: Easy TOP: How taxes on sellers affect

market outcomes
70. A tax on the sellers of popcorn will:

A. reduce the equilibrium price of popcorn and increase the equilibrium quantity
B. reduce the equilibrium price of popcorn and reduce the equilibrium quantity
C. increase the equilibrium price of popcorn and increase the equilibrium quantity
D. increase the equilibrium price of popcorn and reduce the equilibrium quantity
ANS: D PTS: 1 DIF: Moderate TOP: How taxes on sellers affect

market outcomes
71. A tax on the sellers of popcorn will cause the price the buyers pay:
A. and the effective price the sellers receive to rise
B. and the effective price the sellers receive to fall
C. to rise and the effective price the sellers receive to fall
D. to fall and the price the sellers receive to rise

market outcomes
72. In the end, tax incidence:

A. is determined by the policymakers
B. falls entirely on the buyers
C. depends on the relative elasticities of supply and demand
D. falls entirely on the sellers
ANS: C PTS: 1 DIF: Easy TOP: Elasticity and tax incidence
NARRBEGIN: 6-9
Graph 6-9
NARREND
73. Refer to Graph 6-9. In which market will the majority of a tax be paid by the buyer?
A. market a
B. market b
C. market c
D. all of the above
ANS: B PTS: 1 DIF: Difficult TOP: Elasticity and tax incidence

NAR: 6-9
74. Refer to Graph 6-9. In which market will the majority of a tax be paid by the seller?
A. market a
B. market b
C. market c
D. all of the above
ANS: A PTS: 1 DIF: Difficult TOP: Elasticity and tax incidence

NAR: 6-9
75. Refer to Graph 6-9. In which market will the tax be most equally divided between the buyer and the
seller?
A. market a
B. market b
C. market c
D. all of the above
ANS: C PTS: 1 DIF: Difficult TOP: Elasticity and tax incidence

NAR: 6-9
NARRBEGIN: 6-10
Graph 6-10
NARREND
76. In Graph 6-10, the equilibrium price before the tax is:
A. P0
B. P1
C. P2
ANS: B PTS: 1 DIF: Easy TOP: Tax implications NAR: 6-10
77. In Graph 6-10, the price that will be paid after the tax is:
A. P0
B. P1
C. P2
D. impossible to determine
ANS: C PTS: 1 DIF: Moderate TOP: Tax implications NAR: 6-10
78. In Graph 6-10, the price sellers receive after the tax is:
A. P0
B. P1
C. P2
D. impossible to determine
ANS: A PTS: 1 DIF: Moderate TOP: How taxes on buyers affect

market outcomes: Tax implications NAR: 6-10
79. In Graph 6-10, the per-unit burden of the tax on buyers is:
A. P2 minus P0
B. P2 minus P1
C. P1 minus P0
D. Q1 minus Q0
ANS: B PTS: 1 DIF: Moderate TOP: Tax implications NAR: 6-10
80. In Graph 6-10, the per-unit burden of the tax on the sellers is:
A. P2 minus P0
B. P2 minus P1
C. P1 minus P0
D. Q1 minus Q0
ANS: C PTS: 1 DIF: Moderate TOP: Tax implications NAR: 6-10
81. Australia exports cattle to Indonesia. If Australia puts an export subsidy on cattle and the Australian
supply of cattle is elastic while the demand for cattle in Indonesia is inelastic then:
A. Australian sellers of cattle will enjoy most of the subsidy’s benefit
B. Indonesian buyers of cattle will enjoy most of the subsidy’s benefit
C. the benefit of the subsidy will be shared equally
D. it is impossible to determine how the burden of the tax will be shared
ANS: B PTS: 1 DIF: Difficult TOP: Elasticity and tax incidence
82. If the demand for coffee and the supply of coffee are both elastic then:
A. coffee buyers will bear most of the burden of the tax
B. coffee sellers will bear most of the burden of the tax
C. the burden of the tax will be shared equally between buyers and sellers
D. it is impossible to determine how the burden of the tax will be shared
ANS: D PTS: 1 DIF: Difficult TOP: Elasticity and tax incidence
83. Since July 1st 2000, Australian states and territories have paid a cash grant to first home buyers.
Considering the supply of housing is less elastic than the demand for housing, the benefits of such a
grant will:
A. be enjoyed mostly by those buying a house
B. be enjoyed mostly by those selling a house
C. be enjoyed entirely by those buying a house, as it is a cash grant
D. be split equally by both buyers and sellers of housing
ANS: B PTS: 1 DIF: Moderate TOP: Case Study: Who gets the
benefits from the First Home Owners Grant scheme?
84. Payroll taxes are paid by employers therefore:

A. the burden of these taxes is borne entirely by the employer
B. wages are not lower as a result of the tax
C. do not discourage firms from hiring labour
D. the burden of the tax is shared between workers and employers
ANS: D PTS: 1 DIF: Easy TOP: Tax implications
85. Most labour economists believe that the supply of labour is less elastic than demand. This means:
A. most of the payroll tax burden is borne by workers
B. most of the payroll tax burden is borne by employers
C. the payroll tax burden is shared equally between employers and workers
D. the payroll tax burden falls onto employers as lawmakers intended
ANS: A PTS: 1 DIF: Moderate TOP: Elasticity and tax incidence
86. When analysing the economic effects of government policies:

A. supply and demand are the most useful tools of analysis
B. one finds that the effects are always those stated in the legislation
C. supply and demand are not useful, since they apply only to unregulated markets
D. one usually finds them to be the random outcome of economic shocks
ANS: A PTS: 1 DIF: Easy TOP: Elasticity and tax incidence
SHORT ANSWER
1. Suppose the government imposes a binding price ceiling on interest rates in the mortgage lending
market. What would benefit from such actions and who would bear the costs?
ANS:
People who are able to obtain a loan at the lower interest rates would benefit but people who would
have otherwise got a loan will miss out. Likewise lenders (suppliers) will have lower rates of return.
With a shortage of mortgage-finance, people may have to wait longer (queue) to get a house. Finally,
this may cause developers to construct fewer houses, eventually limiting the choices of people who do
qualify for a loan.
PTS: 1 DIF: Difficult TOP: How price ceilings affect market outcomes
2. Some countries in the developing world use price controls on rice to make it easier for poor people to
afford. Demonstrate the effect of a binding and non-binding price ceiling on the rice market using
supply-demand diagrams.
ANS:
The diagrams should look like panels (a) and (b) of Figure 6.1 on p 121 of the text.
PTS: 1 DIF: Easy TOP: How price ceilings affect market outcomes
3. A coffee-producing country requires all its growers to sell to a single, government-owned marketing
board. This marketing board sells the coffee on behalf of the growers into the world market. Suppose
the marketing board puts a price ceiling of $3.00 on the coffee it buys from its growers while the
market equilibrium price is $5.00. What effect will this have on coffee production in this country?
Quantity is given in kg.
ANS:
In this example, a price of $3.00 would lead to a shortage of coffee of 9000 kg. The price is below the
market equilibrium. Many people who used to produce coffee no longer do so and growers will be
getting much lower returns. The primary beneficiary of this arrangement is the marketing board.
PTS: 1 DIF: Moderate TOP: How price ceilings affect market outcomes
4. In the aftermath of hurricane Sandy the price of portable electricity generators in New York
dramatically increased, in some cases by three to four-hundred percent. Such increases in price are
referred to as “price gouging” and often lead to calls for price ceilings to be placed on essential goods
in the wake of natural disasters. What are the likely effects of such a policy?
ANS:
If the price ceiling for generators is below the equilibrium price, demand for the good will be greater
than supply, which will lead to a shortage. In the absence of price as a rationing mechanism, rationing
of generators will typically be through other means, for example long lines, bribery, or discrimination.
A price ceiling also reduces the incentive to bring in generators from neighbouring areas unaffected by
the disaster. If the price was allowed to rise, an entrepreneur could buy generators in a neighbouring
state at a low price, before transporting them to the affected areas to sell at a higher price. Such an
action will help increase the supply of generators in the affected areas. A price ceiling removes this
incentive.
PTS: 1 DIF: Moderate TOP: How price ceilings affect market outcomes
5. Using a demand-supply diagram, show how OPEC’s raising of oil prices in the 1970s combined with a
government-imposed price ceiling on petrol created a shortage of petrol.
ANS:
The graph should look like the following.
PTS: 1 DIF: Moderate TOP: Case study: Lines at the petrol station
6. Rent controls create shortages in housing markets, however, the magnitude of these shortages differs
between the long run and short run. What explains these differences?
ANS:
In the short run, both demand and supply are inelastic: landlords have a fixed supply of properties to
rent and prospective tenants need time to adjust their housing needs. This means that changes in price
will lead to relatively small changes in quantity. However, in the long run both the supply and demand
for housing is elastic: landlords can respond to lower prices by not building new properties and lower
prices encourage tenants to move out of home or relocate to the city. The effect is that a change in
price now leads to a large change in quantity supplied and quantity demanded, and therefore a larger
shortage.
PTS: 1 DIF: Moderate TOP: Case study: Rent control in the short run and long
run
7. Using the graph below, analyse the effect a $70 price floor would have on the market for tennis shoes.
Would this be a binding price floor? Why would policymakers choose to impose a price floor?
ANS:
For this example, a $70 price floor would cause a surplus of 400 pairs of tennis shoes. Since the
equilibrium price in the market is $50, this would be a binding price floor. More than one reason may
exist for policymakers to impose a price floor in a market. Often times this is done in an attempt to
increase equity.
PTS: 1 DIF: Moderate TOP: How price floors affect market outcomes
8. Some countries use price floors for their domestic farmers to guarantee them a high return on their
production. Suppose there is a price floor on wool that is binding. What will be the effect on the wool
market? Identify who benefits from this policy and who bears the cost. Are there instances of this
occurring in Australia’s history?
ANS:
Wool prices will be higher and this will benefit the domestic farmers who can sell wool at these prices.
Consumers lose because they are paying higher prices than they would otherwise pay. There will also
be a stockpile of wool that will have to be stored until it can find a customer, or dumped, as was the
case throughout the 1980s and 2000s in Australia and New Zealand.
PTS: 1 DIF: Difficult TOP: How price floors affect market outcomes
9. What are common arguments offered for and against the minimum wage?
ANS:
Advocates of the minimum wage often recognise that it has some adverse effects, but they believe that
the adverse effects are small and that a higher minimum wage makes the poor better off by providing a
minimally acceptable standard of living. Opponents of the minimum wage believe that it is not the best
way to combat poverty, noting that a high minimum wage causes unemployment, encourages teenagers
to drop out of school and prevents some unskilled workers from getting on-the-job training. They also
point out that the minimum wage is a poorly targeted policy, since many minimum-wage earners are
teenagers from middle-class homes working at part-time jobs for extra spending money, rather than
poor heads of households.
10. Many advocates of raising the minimum wage argue that the adverse effects of such a move, for
example higher unemployment, are likely to be small. Suppose the minimum wage is binding. Under
what conditions will an increase in the minimum wage lead to only a small increase in unemployment?
ANS:
A given increase in price leads to a smaller change in quantity demanded the more inelastic the
demand curve. That is, if labour demand is highly inelastic, then an increase in the minimum wage will
lead to only a small decrease in labour demanded, and correspondingly only a small rise in
unemployment.
PTS: 1 DIF: Difficult TOP: Evaluating price controls
11. Define price ceiling and price floor. When are they binding?
ANS:
A price ceiling is the legal maximum price at which a good can be sold, while a price floor is the legal
minimum price at which a good can be sold. A price ceiling is binding whenever the ceiling is set
below the equilibrium price. A price floor is binding whenever the price is set above the equilibrium
price.
PTS: 1 DIF: Easy TOP: price controls
NARRBEGIN: 6-11
Graph 6-11
NARREND
12. Using Graph 6-11, answer the following questions.

a. What was the equilibrium price in this market before the tax?
b. What is the amount of the tax?
c. How much of the tax will the buyers pay?
f. How much of the tax will the sellers pay?
e. How much will the buyer pay for the product after the tax is imposed?
f. How much will the seller receive after the tax is imposed?
g. As a result of the tax, what has happened to the level of market activity?
ANS:
a. $10
b. $3
c. $1
d. $2
e. $11
f. $8
g. As a result of the tax, the level of market activity has fallen, from 100 units being bought and sold to
only 90 units being bought and sold.
PTS: 1 DIF: Moderate TOP: How taxes on buyers affect market outcomes
NAR: 6-11
NARRBEGIN: 6-12
Graph 6-12
NARREND
13. Using Graph 6-12, answer the following questions.

a. What was the equilibrium price in this market before the tax?
b. What is the amount of the tax?
c. How much of the tax will the buyers pay?
d. How much of the tax will the sellers pay?
e. How much will the buyer pay for the product after the tax is imposed?
f. How much will the seller receive after the tax is imposed?
g. As a result of the tax, what has happened to the level of market activity?
ANS:
a. $10.00
b. $5.00
c. $2.50
d. $2.50
e. $12.50
f. $7.50
g. As a result of the tax, the level of market activity has fallen, from 100 units being bought and sold to
only 80 units being bought and sold.
PTS: 1 DIF: Moderate TOP: Tax implications NAR: 6-12
14. Does a tax encourage increased market activity? How does a tax affect the amount paid by buyers and
the amount received by sellers as a result of a tax on a good?
ANS:
A tax reduces market activity. When a good is taxed, the equilibrium quantity of the good sold is
smaller than without the tax. When a tax is imposed, the amount paid by buyers for the taxed good
increases and the amount received by sellers falls.
The only way it may encourage market activity, is if substitute choices exist for consumers.
PTS: 1 DIF: Moderate TOP: Elasticity and tax incidence
15. Russia has put on export tax on timber harvested from its Siberian forests into China. Given that
Russian exporters are legally liable for the tax but Chinese buyers are not, is it true the incidence of tax
falls entirely on the Russian exporters?
ANS:
The incidence of taxation is the same irrespective of the legal liability. So long as Chinese buyers have
a demand that is not perfectly elastic, then some of the tax incidence will fall on them. If demand is
perfectly elastic however, all of the tax incidence will fall on the Russian exporters.
16. How does elasticity affect the burden of a tax? Justify your answer using supply–demand diagrams.
ANS:
A tax burden falls more heavily on the side of the market that is less elastic.

17. Using a supply-demand diagram, show a labour market with a binding minimum wage. Now use the
diagram to show those who are helped by the minimum wage and those who are hurt by the minimum
wage.
ANS:
Those helped by the minimum wage are the workers who are still employed but now receive the higher
wage. In the diagram, these would be measured by the quantity of labour demanded at the minimum
wage. Those who are hurt by the minimum wage are those who are now unemployed. These workers
are measured as the difference between the quantity of labour supplied and the quantity demanded at
the minimum wage. The perceptive student might note that the unemployed group can be divided into
those who lose their jobs as a result of the minimum wage (the competitive equilibrium quantity of
labour minus the quantity demanded at the minimum wage) and those who enter the market as a result
of the higher wage but cannot find employment (quantity of labour supplied at the minimum wage
minus the competitive equilibrium quantity). The buyers of the labour (employers) are also worse off
because they have to pay a higher wage for labour and hence hire a smaller quantity.
18. Suppose that the government places a tax of $5 per tyre on the buyers of automobile tyres. Use a
supply-demand diagram to show the effect of the tax on the tyre market and the incidence of taxation
on buyers and sellers. Now suppose that the government switches to a tax of $5 per tyre on the sellers
of automobile tyres. Use a second supply-demand diagram to show the effects of this tax on the tyre
market and the incidence of taxation on buyers and sellers. Can you say anything about the relative
effects of the two alternative taxes on the tyre market and on the incidence of taxation?
ANS:
The student should be able to use the two diagrams to show that the buyers’ tax and the sellers’ tax are
exactly equivalent in terms of impact on the market and the division of the burden of the tax between
buyer and seller.
PTS: 1 DIF: Difficult TOP: Control on prices
19. Australia has a higher tax on luxury cars compared to other cars. Is this an effective way to raise
revenue for the government from the rich?
ANS:
The price elasticity of demand for luxury goods, like these cars, is high relative to the price elasticity
of supply. Hence, when a tax is imposed on luxury cars, there will be a significant reduction in the
quantity demanded and only a slight increase in the equilibrium market price. The burden of the tax
falls mostly on the suppliers, who suffer substantial reductions in the prices they receive and
substantial reductions in the quantities sold and in total revenue. The rich end up bearing little of the
tax burden.
20. In part as an effort to discourage smoking, Australia has some of the highest levels of cigarette taxation
in the world. Do you think a tax on cigarettes dramatically decreases the number of people smoking?
Is taxing cigarettes an effective way to raise revenue for the government from smokers? (Hint: given
that smoking is addictive, what does this imply about the elasticity of demand?)
ANS:
As smoking is addictive, the demand for cigarettes is highly inelastic. This is because there are few
products that can be substituted for cigarettes, and because cigarettes are likely to be considered a
necessary good by those who are addicted. As a result the demand for cigarettes is not very responsive
to price and a tax on cigarettes will not lead to a large reduction in the number of cigarettes sold. As
demand is inelastic relative to supply, the burden of the tax falls mostly on the buyers of cigarettes,
who suffer substantial increases in the prices they pay. As a result, most of the revenue raised will be
from smokers, rather than the sellers of cigarettes.
PTS: 1 DIF: Difficult TOP: Elasticity and tax incidence

CHAPTER 4-The Market Forces of Supply and Demand: True/False

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CHAPTER 4-The Market Forces of Supply and Demand: True/False

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CHAPTER 4—The market forces of supply and demand

ANS: T PTS: 1 DIF: Easy TOP: What is a market?

ANS: T PTS: 1 DIF: Easy TOP: What is a market?

3. In economics, a market is a place where people buy fruit and vegetables.

ANS: F PTS: 1 DIF: Easy TOP: What is a market?

ANS: T PTS: 1 DIF: Easy TOP: What is competition?

ANS: F PTS: 1 DIF: Easy TOP: What is competition?

6. Market demand is obtained by adding individual demand curves vertically.

ANS: F PTS: 1 DIF: Easy TOP: Market demand versus

7. The clothing market is a good example of perfect competition.

ANS: T PTS: 1 DIF: Easy TOP: What is competition?

ANS: F PTS: 1 DIF: Easy TOP: What is competition?

ANS: F PTS: 1 DIF: Easy TOP: What is competition?

10. A market with just one seller is said to be a monopoly.

ANS: T PTS: 1 DIF: Easy TOP: What is competition?

11. The computer software industry is an example of a perfectly competitive industry.

ANS: F PTS: 1 DIF: Easy TOP: What is competition?

12. In Australia, a public transport operator might be a monopolist.

13. The stock market is a monopoly.

ANS: F PTS: 1 DIF: Easy TOP: What is competition?

ANS: T PTS: 1 DIF: Easy TOP: What is competition?

ANS: F PTS: 1 DIF: Easy TOP: What is competition?

ANS: T PTS: 1 DIF: Easy TOP: What is competition?

17. Tastes and expectations are not determinants of individual demand.

ANS: F PTS: 1 DIF: Easy TOP: The demand curve: The

18. The quantity demanded of a product is positively related to the price.

ANS: F PTS: 1 DIF: Easy TOP: What is competition?

ANS: F PTS: 1 DIF: Easy TOP: Income

ANS: F PTS: 1 DIF: Easy TOP: Prices of related goods

ANS: F PTS: 1 DIF: Easy TOP: Prices of related goods

ANS: F PTS: 1 DIF: Easy TOP: Prices of related goods

23. Movies and popcorn are complementary goods.

ANS: T PTS: 1 DIF: Easy TOP: Prices of related goods

ANS: T PTS: 1 DIF: Moderate TOP: Market demand versus

26. If the price of a good changes, its demand curve shifts.

ANS: F PTS: 1 DIF: Easy TOP: Shifts in the demand curve

ANS: T PTS: 1 DIF: Moderate TOP: Shifts in the demand curve

ANS: T PTS: 1 DIF: Moderate TOP: Shifts in the demand curve

ANS: T PTS: 1 DIF: Moderate TOP: Shifts in the demand curve

ANS: F PTS: 1 DIF: Moderate TOP: Shifts in the demand curve

ANS: F PTS: 1 DIF: Moderate TOP: Number of buyers

ANS: F PTS: 1 DIF: Easy TOP: Demand

ANS: F PTS: 1 DIF: Easy TOP: Income

ANS: F PTS: 1 DIF: Easy TOP: Summary

ANS: T PTS: 1 DIF: Easy TOP: Supply

ANS: T PTS: 1 DIF: Easy TOP: The supply curve: The

37. The supply curve has a negative slope.

ANS: F PTS: 1 DIF: Easy TOP: The supply curve: The

ANS: F PTS: 1 DIF: Easy TOP: The supply curve: The

ANS: F PTS: 1 DIF: Moderate TOP: Shifts in the supply curve

ANS: F PTS: 1 DIF: Moderate TOP: The supply curve: The

41. Improvements in technology is demonstrated by a shift in the supply curve.

ANS: T PTS: 1 DIF: Moderate TOP: The supply curve: The

ANS: T PTS: 1 DIF: Easy TOP: Supply and demand together

43. At the equilibrium price, quantity demanded is equal to quantity supplied.

ANS: T PTS: 1 DIF: Easy TOP: Supply and demand together

ANS: F PTS: 1 DIF: Easy TOP: Equilibrium

ANS: F PTS: 1 DIF: Easy TOP: Equilibrium

ANS: T PTS: 1 DIF: Easy TOP: Equilibrium

ANS: T PTS: 1 DIF: Moderate TOP: Equilibrium

ANS: F PTS: 1 DIF: Moderate TOP: Example: A change in both

ANS: T PTS: 1 DIF: Easy TOP: Equilibrium

ANS: F PTS: 1 DIF: Moderate TOP: Equilibrium