TUTORIAL/TOPIC 4/ECO162/ODL

TOPIC 4: MARKET EQUILIBRIUM

PART A

1. Assume the government has intervened in the market and imposed a floor price on
good F and a ceiling price on good G. What would be the effect on the market for
good F and good G?

A. Surplus in both market.

B. Shortage in both market.
C. A surplus in the good F market and an increase in the quantity of good G.
D. A surplus in the good F market and a shortage in good G market.

2. The imposition of a binding ceiling price in the market will cause quantity demanded
to be

A. greater than quantity supplied.

B. less than quantity supplied.
C. equal to quantity supplied.
D. any of the above possible.

3. Suppose a tax is imposed on good F, consumers will bear no burden if the

A. demand of good F is perfectly inelastic.

B. supply for good F is perfectly inelastic.
C. demand for good F is perfectly elastic.
D. either demand or supply is inelastic.

4. When the government imposes a floor price on crude palm oil, this will result in

A. an increase in the quality of crude palm oil.

B. Shortage.
C. Surplus.
D. A fail in demand for crude palm oil.

5. If the supply of a commodity increases and at the same time the demand for it rises,
its price will

A. rise.
B. fall.
C. stay the same.
D. be indeterminate.

6. In a market system, prices and quantities are in equilibrium when

A. the cost of production is at a minimum.

B. the amount people want to buy equals the amount people wish to sell.
C. prevent large firms from driving small ones out of business.
D. force prices to the lowest level consistent with a reasonable profit.

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Questions 7 and 8 will refer to the following diagram.

7. The demand and supply curves for a commodity are illustrated as in Figure 1

Price (RM)
S

P1

Pe

D
Quantity
Q1 Q2 Q3
Figure 1

If the government wished to maintain a target price of P1 by intervening in the

market, it would

A. buy quantity Q2Q1.

B. sell quantity Q2Q1.
C. buy quantity Q1Q3.
D. sell quantity Q1Q3.

8. The target price of P1 is known as

A. maximum price.
B. minimum price.
C. equilibrium price.
D. ceiling price.

9. If the government wishes to increase revenue by imposing an indirect tax, it would be

most effective to place the tax on product which

A. has a highly elastic demand.

B. has many substitutes goods.
C. has a highly inelastic demand.
D. is a non-essential.

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The following table refers to the demand and supply conditions of commodity K in a
given market given time period.

Price of K per kg Quantity demanded for Quantity supplied of K

K (kg) (kg)
1 35 15
2 25 25
3 25 35
4 5 45

10. The government imposes a maximum price of RM1 per kg. What is the effect of this?

A. The demand curve shifts to the right.

B. There will be a surplus of 20 kg.
C. The maximum price will be higher than the market price.
D. There will be shortage of 20 kg.

11. A rightward shift in a demand curve and a rightward shift in a supply curve, both
result in a

A. lower equilibrium price

B. higher equilibrium price
C. lower equilibrium quantity
D. higher equilibrium quantity

12. An increase in import tax on tobacco will have the following immediate effect on the
cigarette market.

A. Supply of cigarette will decrease

B. Supply of cigarette will increase
C. Demand for cigarette will increase
D. Demand for cigarette will decrease

13. Suppose autoworkers receive a substantial wage increase. Other things being
equal, the price of automobiles will rise because of:

A. an increase in the demand for automobiles

B. rightward shift of the supply curve for automobiles
C. leftward shift of the supply curve for automobiles
D. reduction in the demand for automobiles

14. Which of the following statements is true of a market?

A. An increase in demand, with no change in supply, will increase the equilibrium

price and quantity
B. An increase in supply, with no change in demand, will decrease the equilibrium
price and quantity

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C. A decrease in supply, with no change in demand, will decrease the equilibrium

price and increase the equilibrium quantity
D. All the above are true
15. If the price of a product increases, most likely

A. the quantity demanded will decrease

B. the quantity supplied will decrease
C. demand will decrease
D. supply will increase

16. Which of the followings will happen if government imposed a price floor legislation?

A. Consumers will have to pay a higher price

B. Quantity supplied will decrease
C. Government will earn more revenue
D. Producers’ income will decline

17. The initial market price and quantity for good S are RM3 and 5000 units respectively.
A subsidy of RM1.00 per unit given by the government has changed the market price
and quantity to Rm2.50 and 6500 units respectively. In this case

A. producers get more benefit

B. both producers and consumers enjoy equal benefit
C. consumers get more benefit
D. government gets more benefit

18. Which of the followings will cause an increase in the equilibrium price?

A. a decrease in both demand and supply

B. a decrease in demand and supply remains unchanged
C. an increase in demand combined with a decrease in supply
D. an increase in supply and demand remains unchanged

19. In 1975 a frost destroyed nearly two-thirds of the Brazilian coffee crop. According to
the supply and demand models, this should have resulted in a (n)

A. increase in the price of tea

B. increase in the price of sugar
C. increase in the demand for coffee
D. decrease in the demand for coffee

20. Price control can lead to waste of resources if,

A. the maximum price is above the equilibrium price in the free market
B. the maximum price is below the equilibrium price in the free market
C. the minimum price is below the equilibrium price in the free market
D. the minimum price is above the equilibrium price in the free market

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PART B

1. The following data describes the gasoline market.

Table 1: The market demand and supply of gasoline

Price per litre (RM) Quantity demanded (litre) Quantity supplied (litre)
RM 1.00 22,000 16,000
RM 1.20 21,000 17,000
RM 1.40 20,000 18,000
RM 1.60 19,000 19,000
RM 1.80 18,000 20,000
RM 2.00 17,000 21,000
RM 2.20 16,000 22,000

a) Using a graph paper, plot the market demand and supply curves of gasoline. State its
equilibrium price and quantity.
(2 marks)

b) If the government imposes a sales tax of RM 0.20 per litre

i) Using the same diagram in part (a), show the effect of sales tax on the market of
gasoline.
(2 marks)

ii) What is the new equilibrium price and quantity of gasoline?

(2 marks)

iii) Calculate the amount of tax burden paid by consumers and sellers.
(2 marks)

c) Assume the government sets a ceiling price of RM1.20. Sketch a diagram to show its
effect. Calculate the amount of surplus or shortage for gasoline.
(2 marks)
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2. The table below shows the demand and supply schedules of sugar per week at Bandar
Inderajaya.

Price Quantity supplied Quantity Demanded

(RM per Kg) (Kg) (Kg)
1.35 20.0 100.0
1.40 45.0 80.0
1.45 70.0 70.0
1.50 90.0 65.0
1.55 110.0 60.0
1.60 125.0 55.0
1.65 140.0 50.0
1.70 150.0 45.0

a) Using a graph paper, plot the demand and supply curve of sugar and determine its
equilibrium market price and quantity at Bandar Inderajaya.
(2 marks)

b) Calculate the coefficient of elasticity of supply when price increases from RM1.50 to
RM1.55. Comment on the elasticity value.
(2 marks)

c) Explain one (1) factor that determines the price elasticity of supply for sugar.
(1 mark)

d) Due to tsunami disaster, the production of sugar has fallen by 50kg per week at each
price level. Plot the new curve on the same diagram in part (a). Determine the
new equilibrium market price and quantity of sugar.
(1.5 marks)

e) Suppose the government has intervened in the market and set a price of RM1.40.
Name the type of pricing implemented and give one effect of such pricing policy?
(1.5 marks)

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f) If the price of sugar increases from RM1.35 to RM1.40, the demand for good H
decreases from 80kg to 65kg. Calculate the value of cross elasticity of demand between
the two goods and state their relationship.
(2 marks)

3. The following tables show the individual demand and supply schedules for Mandarin
oranges per week at Kampung Bota. Answer the questions that follow.

Price (RM) per Price after Quantity Supplied (boxes)

box Tax Samy Ali Leong
11 13 10 20 30
12 14 15 25 40
13 15 20 30 50
14 16 25 35 60
15 17 30 40 70

Price (RM) per Price after Quantity Demanded (boxes)

box Tax Ahmad Muthu Chong
11 13 40 40 60
12 14 32 38 50
13 15 24 36 40
14 16 16 34 30
15 17 8 32 20

a) Determine the market equilibrium price and quantity at Kampong Bota.

(3 marks)

b) If the government imposes a sales tax on Mandarin oranges of RM2.00 per box,
i) draw a diagram to show the effect of the sales tax on the market for Mandarin
oranges.
ii) what is the new equilibrium price and quantity for mandarin oranges in the
market?
(3 marks)

c) Calculate the amount of tax revenue for government.

(4 marks)

d) Calculate the amount of tax burden paid by the consumers and sellers.
(2 marks)
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4. The demand and supply of pizza per month is as follows.

Price per pizza Quantity demanded Quantity supplied

(Ringgit) (thousands) (thousands)
RM 20.00 100 500
16.00 200 400
12.00 300 300
8.00 400 200
4.00 500 100

a) Using the above data, graph the demand for and supply of pizza. Identify the equilibrium
point.
(3 marks)

b) Suppose the government enacts a price support of RM4 per unit. Indicate this action on
the graph and explain the effect on the pizza market.
(4 marks)

c) Now assume the government decides to set a price ceiling of RM8.00 per unit. Show and
explain the effect.
(2 marks)

d) Calculate the price elasticity of demand if price falls from RM20.00 to RM12.00. What
happens to total revenue as a result of this price fall?
(2 marks)

e) What is the price elasticity of supply if price rises from RM16.00 to RM20.00? Graph your
answer.
(3 marks)

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5. Figure 1 shows the demand and supply curves for petrol in Country PermaiDesa.

Price (RM)

S
2.00

1.50
1.00
D
1 2 3 4
Littre

a) Based on the figure above, state the equilibrium price and quantity of petrol.
(1 mark)

b) Calculate the price elasticity of demand for petrol when price increases from RM1.00 to
RM1.50. Is the demand for petrol elastic or inelastic?
(2 marks)

c) If the consumers’ income increases from RM1,000 to RM1,400, the quantity demanded
for petrol increases from 2 million litres to 3 million litres respectively. Determine the
income elasticity of demand for petrol and state the type of good.
(2 marks)

d) Assume that the government is concerned about inflation and decides to set the price of
petrol at RM1.00 per litre.
i) Is there a shortage or surplus at this price?
ii) State the amount of shortage or surplus.
(2 marks)
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e) Explain briefly two (2) consequences of government fixing the price at RM1.00.
(4 marks)

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