Chapter 2: Supply and Demand

Section A
1. Two goods are substitutes if a decrease in the price of one good
a. decreases the demand for the other good.
b. decreases the quantity demanded of the other good.
c. increases the demand for the other good.
d. increases the quantity demanded of the other good.

2. The law of demand says that

a. an increase in quantity demanded causes price to decrease.
b. an increase in price causes quantity demanded to increase.
c. an increase in price causes quantity demanded to decrease.
d. an increase in quantity demanded causes price to increase.

3. Which of the following events would cause a movement upward and to the
right along the supply curve for tomatoes?
a. The number of sellers of tomatoes increases.
b. There is an advance in technology that reduces the cost of producing
tomatoes.
c. The price of fertilizer decreases, and fertilizer is an input in the production
of tomatoes.
d. The price of tomatoes rises.

4. Which of the following events could cause an increase in the supply of ceiling
fans?
a. The number of sellers of ceiling fans increases.
b. There is an increase in the price of air conditioners, and consumers regard
air conditioners and ceiling fans as substitutes.
c. There is an increase in the price of the motor that powers ceiling fans.
d. All of the above are correct.

5. If, at the current price, there is a shortage of a good,

a. sellers are producing more than buyers wish to buy.
b. the market must be in equilibrium.
c. the price is below the equilibrium price.
d. quantity demanded equals quantity supplied.

6. A decrease in input costs to firms in a market will result in

a. a decrease in equilibrium price and a decrease in equilibrium quantity.
b. an increase in equilibrium price and no change in equilibrium quantity.
c. an increase in equilibrium price and an increase in equilibrium quantity.
d. a decrease in equilibrium price and an increase in equilibrium quantity.

7. 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.
c. Equilibrium quantity would decrease, but the impact on equilibrium price
would be ambiguous.
d. Both equilibrium price and equilibrium quantity would increase.

8. Which of the following would not be a determinant of the demand for a

particular good?
a. prices of related goods
b. income
c. tastes
d. the prices of the inputs used to produce the good

9. Two goods are complements if a decrease in the price of one good

a. decreases the quantity demanded of the other good.
b. decreases the demand for the other good.
c. increases the quantity demanded of the other good.
d. increases the demand for the other good.

10. A drop in the price of a compact disc shifts the demand curve for prerecorded
tapes leftward. From that you know compact discs and prerecorded tapes are
a. complements.
b. substitutes.
c. inferior goods.
d. normal goods.

11. A reduction in the price of a good

a. shifts the good’s demand curve leftward and also decreases the quantity
demanded.
b. shifts the good’s demand curve leftward but does not decrease the quantity
demanded.
c. does not shift the good’s demand curve leftward but does decrease the
quantity demanded.
d. neither shifts the good’s demand curve leftward nor decreases the quantity
demanded.
 12.

The figure above represents the market for candy. People become more
concerned that eating candy causes them to gain weight, which they do not
like. As a result, the
a. demand curve shifts from D2 to D1 and the supply curve will not shift.
b. demand curve shifts from D1 to D2 and the supply curve shifts from S1 to S2.
c. demand curve shifts from D2 to D1 and the supply curve shifts from S2 to S1.
d. demand curve will not shift, and the supply curve shifts from S1 to S2.

13. Which of the following correctly describes how price adjustments eliminate a
shortage?
a. As the price rises, the quantity demanded decreases while the quantity
supplied increases.
b. As the price rises, the quantity demanded increases while the quantity
supplied decreases.
c. As the price falls, the quantity demanded decreases while the quantity
supplied increases.
d. As the price falls, the quantity demanded increases while the quantity
supplied decreases.

14. The demand for hot dogs is given by QD = 8000 – 7000P, where QD is the
quantity demanded and P is the price in dollars. The supply for hot dogs is
given by QS = 4000 + 1000P, where QS is the quantity supplied and P is the
price in dollars. Given these supply and demand relationships,
a. At the equilibrium, the price = $0.50 and the quantity = 4500 hot dogs.
b. At a price of $1, there is a shortage of 4000 hot dogs.
c. At a price of $1, there is a surplus of 4000 hot dogs.
d. Both answers A and C are correct.

15. Which of the following statements is correct?

 a. A price ceiling is not binding when the price ceiling is set above the
equilibrium price.
b. A price floor is not binding when the price floor is set below the equilibrium
price.
c. A binding price ceiling causes a shortage and a binding price floor causes a
surplus.
d. All of the above are correct.

16. A price ceiling will be binding only if it is set

a. equal to equilibrium price.
b. above equilibrium price.
c. below equilibrium price.
d. none of the above; a price ceiling is never binding.

17. A minimum wage that is set above a competitive market's equilibrium wage
will result in
a. an excess demand for labour, that is, unemployment.
b. an excess demand for labour, that is, a shortage of workers.
c. an excess supply of labour, that is, unemployment.
d. an excess supply of labor, that is, a shortage of workers.

18. The term tax incidence refers to

a. the matter of whether buyers or sellers of a good are required to send tax
payments to the government.
b. the matter of whether the demand curve or the supply curve shifts when the
tax is imposed
c. the distribution of the tax burden between buyers and sellers.
d. All of the above are correct.

Section B

Question 1
Given the following demand and supply functions of product X (units/day).
Demand : Qd = 20 – 2P
Supply : Qs = 2 + 4P

a) Currently, price = 2, is the market in equilibrium? if not, is there a shortage and surplus and
how many units?
b) Graph the demand and supply. Label the equilibrium price and equilibrium quantity.

Question 2
Suppose that the demand and supply for standard microwaves is described by the following
equations: QD = 20,000 – 100P and QS = –1,000 + 50P where P is the price in dollars; QD is
the quantity demanded in units per month; QS is the quantity supplied in units per month.
a) Solve for the equilibrium price and quantity.
 b) Determine the price the buyers pay and the price the sellers receive if a $30 unit tax is
imposed on the sellers.

Question 3
Using the graph shown, 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?

Section C
Question 1
Using supply and demand analysis, explain the effect on the equilibrium price and quantity
traded of houses in a country of each of the following events. (Consider each event separately.)
(a) A rise in real incomes.
(b) A fall in the rate of interest on loans for house purchases for an extended period of time.
(c) A rise in the level of taxes to be paid on the sale of a house.
(d) The relaxation of planning controls allowing more land to be used for building new houses.

Question 2
Using supply and demand analysis, consider the effect on the market price and quantity traded of
beef traded in a country following:
a. An outbreak of a disease which affects the beef stock in the country.
b. The introduction of new regulation for beef production which raises the cost of supplying
beef.
c. An effective advertising campaign promoting the consumption of beef.
 Chapter 3: Elasticity
Section A
1. Which of the following is not a determinant of the price elasticity of demand
for a good?
a. The time horizon.
b. The steepness or flatness of the supply curve for the good.
c. The definition of the market for the good.
d. The availability of substitutes for the good.

2. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in
price results in a
a. 0.4 percent decrease in the quantity demanded.
b. 2.5 percent decrease in the quantity demanded.
c. 4 percent decrease in the quantity demanded.
d. 40 percent decrease in the quantity demanded.

3. The case of perfectly elastic demand is illustrated by a demand curve that is

a. vertical.
b. horizontal.
c. downward-sloping but relatively steep.
d. downward-sloping but relatively flat.

4. If a 6 percent increase in income results in a 10 percent increase in the

quantity demanded of pizza, then the income elasticity of demand for pizza is
a. negative and therefore pizza is an normal good.
b. negative and therefore pizza is a inferior good.
c. positive and therefore pizza is an inferior good.
d. positive and therefore pizza is a normal good.

5. Other things equal, the demand for a good tends to be more inelastic, the
a. fewer the available substitutes.
b. longer the time period considered.
c. more the good is considered a luxury good.
d. more narrowly defined is the market for the good.

6. An increase in price causes an increase in total revenue when

a. demand is elastic.
b. demand is inelastic.
c. demand is unit elastic.
d. All of the above are possible

7. A person who takes a prescription drug to control high cholesterol most likely
has a demand for that drug that is
a. inelastic.
b. elastic.
 c. unit elastic.
d. highly responsive to changes in income.

8.

The figure above illustrates a linear demand curve. In the price range from $8
to $6, demand is ____ and in the price range $4 to $2, demand is ____.
a. elastic; elastic
b. elastic; inelastic
c. inelastic; elastic
d. inelastic; inelastic
 Chapter 4: Theory of Consumer Behavior
Section A

1. The theory of consumer choice examines how

a. firms make profit-maximizing decisions.
b. consumers make utility-maximizing decisions.
c. wages are determined in competitive labor markets.
d. prices are determined in competitive goods markets.

2. Karen, Tara, and Chelsea each buy ice cream and paperback novels to enjoy
on hot summer days. Ice cream costs $5 per gallon, and paperback
novels cost $8 each. Karen has a budget of $80, Tara has a budget of $60,
and Chelsea has a budget of $40 to spend on ice cream and paperback
novels. Who can afford to purchase 8 gallons of ice cream and 5
paperback novels?

a. Karen, Tara, and Chelsea

b. Karen only
c. Tara and Chelsea but not Karen
d. none of the women

3. An increase in income will cause a consumer's budget constraint to

a. shift outward, parallel to its initial position.
b. shift inward, parallel to its initial position.
c. pivot along the horizontal axis.
d. pivot along the vertical axis.

4. Suppose a consumer spends her income on two goods: iTunes music

downloads and books. The consumer has $100 to allocate to these two goods,
the price of a downloaded song is $1, and the price of a book is $20. What is
the maximum number of books the consumer can purchase?
a. 100
b. 20
c. 10
d. 5

Section B
An income of a consumer is I = 55. He spends all his budget on buying X and Y with Px = 10
and Py = 5. The total utility is shown in the table below. Finding his optimum.