Lesson 2 – Demand and Supply Analysis

Practice Questions

Question 1:
If the demand and supply curve for computers are:
D = 100 - 6P, S = 28 + 3P

where P is the price of computers, what is the quantity of computers bought and sold at equilibrium.

Question 2:
The quantity demanded of Good Z depends upon the price of Z (Pz), monthly income (Y), and the price of a related
Good W (Pw). Demand for Good Z (Qz) is given by equation 1 below: Qz = 150 - 8Pz + 2Y - 15Pw
Find the demand equation for Good Z in terms of the price for Z (Pz), when Y is $50 and Pw = $6.

Question 3:
Beef supplies are sharply reduced because of drought in the beef-raising states, and consumers turn to lamb as a
substitute for beef. How would you illustrate this change in the beef-market in supply-and-demand terms?

Question 4:
A firm charges $800 for its unique word processor. If total revenue is $56,000 in July, how many word processors
were sold that month?

Question 5:
Find the slope of an assumed linear demand curve for theater tickets, when persons purchase 1,000 at $5.00 per
ticket and 200 at $15.00 per ticket.

Question 6:
Given the following data:
WIDGETS P = 80 - Q (Demand)
P = 20 + 2Q (Supply)
Given the above demand and supply equations for widgets, find the equilibrium price and quantity.

Question 7:
Given the following data:
WIDGETS P = 80 - Q (Demand)
P = 20 + 2Q (Supply)
Now suppliers must pay a tax of $6 per unit. Find the new equilibrium price-inclusive price and quantity.

Question 8:
Given the following data:
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WIDGETS P = 80 - Q (Demand)
P = 20 + 2Q (Supply)
We saw in the last question the equilibrium quantity will now be 18 (instead of 20) and the equilibrium price is now 62
(instead of 20). Which of the following statements is true:

(a) Tax revenue will equal $108

(b) Price increases by $4
(c) Quantity decreases by 4 units
(d) Consumers pay $70
(e) Producers pay $36

Question 9:
Which of the following factors will cause the demand curve for labor to shift to the right?
(a) the demand for the product by labor declines.

(b) the prices of substitute inputs falls.

(c) the productivity of labor increases.

(d) the wage rate declines.

(e) None of the above.

Elasticity of Demand and Supply - Multiple Choice Questions

1. The price elasticity of demand measures

a. how responsive buyers are to a change in income.

b. how responsive sellers are to a change in price.
c. how responsive buyers are to a change in price.
d. how responsive sellers are to a change in buyers' income.

2. Demand is said to be elastic

a. if the price of the good responds substantially to changes in demand.

b. if demand shifts substantially when the price of the good changes.
c. if the quantity demanded responds substantially to changes in the price of the good.
d. if buyers don't respond much to changes in the price of the good.

3. If a good is a luxury, demand for the good would tend to be

a. elastic.
b. inelastic.
c. unit elastic.
d. horizontal.

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4. Demand for a good would tend to be more elastic,

a. the greater the availability of complements.

b. the longer the period of time considered.
c. the broader the definition of the market.
d. the fewer substitutes there are.

5. If there are very few, if any, good substitutes for good A, then

a. the supply of good A would tend to be price elastic.

b. the demand for good A would tend to be price elastic.
c. the demand for good A would tend to be price inelastic.
d. the demand for good A would tend to be income elastic.

6. Economists compute the price elasticity of demand as

a. the percentage change in the price divided by the percentage change in quantity demanded.
b. the percentage change in the quantity demanded divided by the percentage change in price.
c. the change in quantity demanded divided by the change in the price.
d. the percentage change in the quantity demanded divided by the percentage change in income.

7. Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the quantity of
X demanded. Price elasticity of demand for X is

a. 1.
b. 6.
c. 0.
d. infinite.

8. Suppose the price of product X is reduced from $1.45 to $1.25 and, as a result, the quantity of X demanded
increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for X in the given price
range is

a. 2.00.
b. 1.55.
c. 1.00.
d. .64.

9. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price would result in a

a. 4.0 percent decrease in the quantity demanded.

b. 10 percent decrease in the quantity demanded.
c. 40 percent decrease in the quantity demanded.
d. 400 percent decrease in the quantity demanded.

10. Demand is inelastic if

a. elasticity is less than 1.

b. elasticity is equal to 1.
c. elasticity is greater than 1.
d. elasticity is equal to 0.

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11. On the graph shown, 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

12. A perfectly elastic 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.

13. Alice says that she would buy one banana split a day regardless of the price. If she is telling the truth,

a. Alice's demand for banana splits is perfectly inelastic.

b. Alice's price elasticity of demand for banana splits is 1.
c. Alice's income elasticity of demand for banana splits is negative.
d. None of the above answers are correct.

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14. In the graph shown, 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.

15. 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.

16. Suppose that 50 candy bars are demanded at a particular price. Using the midpoint method, if the price of candy
bars rises by 4 percent, the number of candy bars demanded falls to 46 candy bars. This means that

a. the demand for candy bars in this price range is elastic.

b. the demand for candy bars in this price range is inelastic.
c. the price elasticity of demand for candy bars is 0.
d. the demand for candy bars is unit elastic.

17. Last year, Sheila bought 10 DVD movies when her income was $40,000. This year, her income is $50,000 and
she purchased 20 DVD movies. All else constant, it is obvious that

a. Sheila prefers DVD movies to VHS videos.

b. Sheila considers DVD movies to be a normal good.
c. Sheila considers DVD movies to be an inferior good.
d. Sheila has a price elastic demand for DVD movies.

18. Income elasticity of demand measures

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 a. how the quantity demanded changes as consumer income changes.
b. how consumer purchasing power is affected by a change in the price of a good.
c. how the price of a good is affected when there is a change in consumer income.
d. how many units of a good a consumer can buy given a certain income level.

19. Last year, Joan bought 50 pounds of hamburger when the household income was $40,000. This year, the
household income was only $30,000 and Joan bought 60 pounds of hamburger. All else 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 to be an inferior good.
d. negative, so Joan considers hamburger to be a normal good.

20. Assume that a 4 percent increase in income results in a 2 percent 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.

Quantities Purchased
Income Good X Good Y
$30,000 2 20
50,000 5 10

21. Refer to the table. Using the midpoint method, what is the income elasticity of good Y?

a. -0.75
b. 0.75
c. -1.33
d. 0

22. Cross-price elasticity of demand measures

a. how the quantity demanded of a good changes as price changes.

b. how the quantity demanded of one good changes as the price of another good changes.
c. how the quantity demanded of a good changes as income changes.
d. how the price of a good is affected when income changes.

23. Cross-price elasticity of demand is calculated as

a. the percentage change in quantity demanded of good 1 divided by the percentage change in the price of
good 2.
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.

24. If the cross-price elasticity of demand is 1.25, then the two goods would be

a. complements.
b. luxuries.
c. normal goods.
d. substitutes.
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25. Suppose the government increases the tax on gasoline in order to raise revenue. Since raising the gasoline tax
would increase the price of gasoline, the government must be assuming that

a. the demand for gasoline is price elastic.

b. the demand for gasoline is price inelastic.
c. the demand for gasoline is price unit elastic.
d. the tax on gasoline will not affect the consumption of gasoline.

26. Suppose the price elasticity of demand for basketballs is 1.20. A 15 percent increase in price will result in

a. an 18 percent decrease in the quantity of basketballs demanded.

b. a 15 percent decrease in the quantity of basketballs demanded.
c. an 8 percent reduction in the number of basketballs demanded.
d. a 12.5 percent reduction in the number of basketballs demanded.

27. The price elasticity of supply measures

a. how much the quantity supplied responds to changes in input prices.

b. how much the quantity supplied responds to changes in the price of the good.
c. how much the price of the good responds to changes in supply.
d. how much sellers respond to changes in technology.

28. Holding all else constant, if a pencil manufacturer increases production by 20 percent when the market price of
pencils increases from $0.50 to $0.60, then the price elasticity of supply, using the midpoint method, must be

a. elastic.
b. very inelastic.
c. slightly inelastic.
d. unit elastic.

29. If the quantity supplied responds only slightly to changes in price, then

a. supply is said to be elastic.

b. increases in supply resulting from an increase in price will not shift the supply curve very much.
c. supply is said to be inelastic.
d. supply is said to be unit elastic.

30. Suppose that an increase in the price of carrots from $1.20 to $1.40 per pound raises the amount of carrots that
carrot farmers produce from 1.2 million pounds to 1.6 million pounds. Using the midpoint method, what would be
the elasticity of supply?

a. 0.54
b. 0.50
c. 2.00
d. 1.86

31. 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. technological advancement must be great.

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32. The discovery of a new hybrid wheat would tend to increase the supply of wheat. Under what conditions would
wheat farmers realize 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.

Suppose there is a baseball park with 10,000 seats and a demand for seats in the park as follows:

Price per Ticket Quantity Demanded

$20 2,000
16 4,000
12 6,000
8 8,000
6 10,000
4 12,000
2 14,000

33. Referring to the given information, if the management of the baseball park charges $8 per ticket

a. there will be a shortage of tickets.

b. there will be 2,000 empty seats.
c. there will be 4,000 empty seats.
d. revenue will be maximized.

34. Referring to the given information, the supply of seats

a. is perfectly inelastic.
b. is perfectly elastic.
c. increases as price increases.
d. decreases as price increases.

35. Suppose that you are in charge of pricing at a local ski rental shop. The business needs to increase revenue and
your job is on the line. If the supply of skis is elastic

a. you should increase the rental price of skis.

b. you should decrease the rental price of skis.
c. you should not change the rental price of skis.
d. you could not determine what to do with rental price until you determine whether demand is elastic or
inelastic.

36. If a price ceiling is not binding,

a. the equilibrium price is above the ceiling.

b. the equilibrium price is below the ceiling.
c. it has no legal enforcement mechanism.
d. people must voluntarily agree to abide by it.

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37. In which panel(s) in the figure shown would there be a shortage for CDs at the market price?

a. panel (a)
b. panel (b)
c. panel (a) and panel (b)
d. neither panel (a) nor panel (b)

38. A binding price ceiling in the computer market will cause

a. a surplus of computers.
b. a shortage of computers.
c. quantity demanded of computers to be equal to quantity supplied.
d. an increase in the demand for computers.

39. According to the graph shown, if the government imposes a binding price ceiling in this market at a price of $5.00,
the result would be

a. a shortage of 20 units.
b. a shortage of 30 units.
c. a surplus of 20 units.
d. a surplus of 40 units.

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40. When OPEC raised the price of crude oil in the 1970s, this caused

a. the demand for gasoline to increase.

b. the demand for gasoline to decrease.
c. the supply of gasoline to increase.
d. the supply of gasoline to decrease.

41. According to the graph shown above, when the supply curve for gasoline shifts from S1 to S2

a. the price will increase to P3.

b. a surplus will occur at the new market price of P2.
c. the market price will stay at P1 due to the price ceiling.
d. a shortage will occur at the price ceiling of P2.

42. 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.

43. Under rent control, landlords cease to be responsive to tenants' concerns about the quality of the housing
because

a. with shortages and waiting lists, they have no incentive to maintain and improve their property.
b. they know they can never please their tenants.
c. the law no longer requires them to maintain their buildings.
d. that is the government's responsibility.

44. A binding price floor causes

a. excess demand.
b. a shortage.
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 c. a surplus.
d. equilibrium price to fall.

45. In panel (b), 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.

46. The minimum wage is an example of

a. a price ceiling.
b. a price floor.
c. a free-market process.
d. an efficient labor allocation mechanism.

47. If the minimum wage is above the equilibrium wage,

a. the quantity demanded of labor will be greater than the quantity supplied.
b. the quantity demanded of labor will equal the quantity supplied.
c. the quantity demanded of labor will be less than the quantity supplied.
d. anyone who wants a job at the minimum wage can find one.

48. 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.

49. The earned income tax credit is an example of

a. supply and demand.

b. a policy designed to increase efficiency.
c. a wage subsidy.
d. a price control.

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50. According to the graph shown, the equilibrium price in the market before the tax is imposed is

a. $8.00.
b. $6.00.
c. $5.00.
d. $3.50.

51. According to the graph, the price buyers will pay after the tax is imposed is

a. $8.00.
b. $6.00.
c. $5.00.
d. $3.50.

52. According to the graph, the amount of the tax imposed in this market is

a. $1.00.
b. $1.50.
c. $2.50.
d. $3.00.

53. According to the graph, the amount of the tax that buyers would pay would be

a. $1.00.
b. $1.50.
c. $2.00.
d. $3.00.

54. According to the graph, the amount of the tax that sellers would pay would be

a. $1.00.
b. $1.50.
c. $2.00.
d. $3.00.

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55. A tax on the buyers of popcorn will

a. reduce the equilibrium price of popcorn, and increase the equilibrium quantity.
b. increase the equilibrium price of popcorn, and reduce the equilibrium quantity.
c. increase the equilibrium price of popcorn, and increase the equilibrium quantity.
d. reduce the equilibrium price of popcorn, and reduce the equilibrium quantity.

56. A tax of $.10 per bag on the sellers of popcorn will

a. cause the supply curve of popcorn to shift down by $.10 per bag.
b. cause the supply curve of popcorn to shift up by $.10 per bag.
c. cause the supply curve of popcorn to shift down by $.05 per bag.
d. cause the demand curve of popcorn to shift up by $.10 per bag.

57. If a tax is imposed on a market with inelastic demand and elastic supply,

a. buyers will bear most of the burden of the tax.

b. 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.

58. If a tax is imposed on a market with elastic demand and inelastic supply,

a. buyers will bear most of the burden of the tax.

b. 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.

59. Welfare economics is

a. the study of how the allocation of resources affects economic well-being.

b. the study of welfare programs in the United States.
c. the study of the effect of income redistribution on work effort.
d. the study of the well-being of less fortunate people.

60. Suppose that John, Paul, George, and Ringo are bidding in an auction for a mint-condition recording of Elvis
Presley's first album. Each has in mind a maximum amount that he will bid. This maximum is called

a. a resistance price.
b. willingness to pay.
c. consumer surplus.
d. producer surplus.

61. Willingness to pay measures

a. the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.
b. the amount a seller actually receives for a good minus the minimum amount the seller is willing to accept.
c. the maximum amount a buyer is willing to pay minus the minimum amount a seller is willing to accept.
d. the maximum amount that a buyer will pay for a good.

62. If a consumer is willing and able to pay $15.50 for a particular good but the price of the good is $16.00, then

a. the consumer would have consumer surplus of $0.50.

b. the consumer would not purchase the good and would not have any consumer surplus.
c. the consumer would increase his/her willingness and ability to pay by earning more.
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 d. the market must not be a perfectly competitive market.

63. Caitlin would be willing to pay $50 to see Les Mis¡rables, but buys a ticket for only $30. Caitlin values the
performance at

a. $20.
b. $30.
c. $50.
d. $80.

64. Dakota is willing to pay $20 to see Independence Day for the fourth time. He finds a theater showing
Independence Day for $5. Dakota's consumer surplus is

a. $5.
b. $15.
c. $20.
d. $25.

65. Ray buys a new tractor for $99,000. He receives consumer surplus of $13,000 on his purchase. Ray's willingness
to pay is

a. $13,000.
b. $86,000.
c. $99,000.
d. $112,000.

66. Greg buys a new sound system for his dorm room for $300. He receives consumer surplus of $800 from the
purchase. How much does Greg value his sound system?

a. $300
b. $500
c. $800
d. $1,100

67. Suppose there is an early freeze in California that ruins the lemon crop. What happens to consumer surplus in the
market for lemons?

a. It increases.
b. It decreases.
c. It is not affected by this change in market forces.
d. It increases very briefly then decreases.

68. A demand curve reflects each of the following EXCEPT

a. the willingness to pay of all buyers in the market.

b. the value each buyer in the market places on the good.
c. the highest price buyers are willing to pay for each quantity.
d. the ability of buyers to obtain the quantity they desire.

This table refers to five possible buyers' willingness to pay for Good Z.

Buyer Willingness to Pay

Cassie $8.50
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 Jamie 7.00
John 5.50
Jeremy 4.00
Sarah 3.50

69. Refer to the table shown. If the market price is $5.50, the consumer surplus in the market will be

a. $3.00.
b. $4.50.
c. $15.50.
d. $21.00.

70. Refer to the table shown. If the price of Good Z is $6.90, who will purchase the good?

a. John and Sarah

b. John, Jeremy and Sarah
c. Cassie, Jamie and John
d. Cassie and Jamie

71. The area below a demand curve and above the price measures

a. producer surplus.
b. total surplus.
c. consumer surplus.
d. willingness to pay.

72. Refer to the graph shown. When the price is P1, consumer surplus is

a. A.
b. A + B.
c. A + B + C.
d. A + B + D.

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73. Refer to the graph shown. When the price rises from P1 to P2, consumer surplus

a. increases by an amount equal to A.

b. decreases by an amount equal to B + C.
c. increases by an amount equal to B + C.
d. decreases by an amount equal to C.

74. Which of the following is NOT true when the price of a good or service falls?

a. Buyers who were already buying the good or service are better off.
b. Some new buyers, who are now willing to buy, enter the market.
c. The total consumer surplus in the market increases.
d. The total value of what is purchased remains unchanged.

75. John buys good X, and would be willing to pay more than he now has to pay. Suppose that John has a change in
his tastes such that he values good X more than before. If the market price is the same as before, then

a. John's consumer surplus would be unaffected.

b. John's consumer surplus would increase.
c. John's consumer surplus would decrease.
d. John would be wise to buy less of good X than before.

76. Cost is a measure of the

a. seller's willingness to sell.

b. seller's producer surplus.
c. producer shortage.
d. seller's willingness to buy.

77. Refer to the graph shown. What area represents consumer surplus when the price is P1?

a. A
b. B
c. C
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 d. D

78. Refer to the graph shown. What area represents producer surplus when the price is P1?

a. A
b. B
c. C
d. D

79. Suppose that the demand for French bread increases. What will happen to producer surplus in the market for
French bread?

a. It increases.
b. It decreases.
c. It is unaffected by this change in market forces.
d. It decreases briefly, then increases.

80. The Surgeon General announces that eating chocolate increases tooth decay. As a result, the equilibrium market
price of chocolate __________, and producer surplus ___________.

a. increases, increases
b. increases, decreases
c. decreases, decreases
d. decreases, increases

81. Producer surplus equals

a. Value to buyers - Amount paid by buyers.

b. Amount received by sellers - Costs of sellers.
c. Value to buyers - Costs of sellers.
d. Value to buyers - Amount paid by buyers + Amount received by sellers - Costs of sellers.

The Costs of Five Possible Sellers

Seller Cost
Kyle $1,500
Nathan 1,200
Cheslea 1,000
Hillary 750
Landon 500

82. Refer to the table shown. If the market price is $1,000, the producer surplus in the market would be

a. $700.
b. $750.
c. $2,250.
d. $3,700.

83. Producer surplus is

a. the area under the supply curve.

b. the area between the supply and demand curves.
c. the area below the price and above the supply curve.
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d. the area under the demand curve, and above the price.

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 PAGE 16

84. According to the graph shown, when the price is P2, producer surplus is

a. A.
b. A + C.
c. A + B + C.
d. D + E.

85. According to the graph shown, when the price falls from P2 to P1, producer surplus

a. decreases by an amount equal to A.

b. decreases by an amount equal to A + C.
c. decreases by an amount equal to A + B.
d. increases by an amount equal to A + B.

86. Donald produces nails at a cost of $200 per ton. If he sells the nails for $500 per ton, his producer surplus is

a. $200 per ton.

b. $300 per ton.
c. $500 per ton.
d. $700 per ton.

87. We can say that the allocation of resources is efficient if

a. producer surplus is maximized.

b. consumer surplus is maximized.
c. total surplus is maximized.
d. None of the above are correct.

88. Which of the following is NOT correct?

a. consumer surplus = value to buyers - amount paid by buyers

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 b. producer surplus = amount received by sellers - cost of sellers
c. total surplus = value to buyers - amount paid by buyers + amount received by sellers - costs of sellers
d. total surplus = value to sellers - costs of sellers

89. Total surplus in a market equals

a. Value to buyers - Amount paid by buyers.

b. Amount received by sellers - Costs of sellers.
c. Value to buyers - Costs of sellers.
d. Amount received by sellers - Amount paid by buyers.

90. In the figure shown, at the market-clearing equilibrium, total consumer surplus is represented by the area

a. A.
b. A + B + C.
c. D + E + F.
d. A + B + C + D + E + F.

91. In the figure shown, at the market-clearing equilibrium, total producer surplus is represented by the area

a. F.
b. F + G.
c. D + E + F.
d. D + E + F + G + H.

92. Economists normally assume that the goal of a firm is to

(i) sell as much of their product as possible.
(ii) maximize profit.
(iii) minimize cost.

a. (ii) and (iii)

b. (i) and (iii)
c. (ii) only

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 d. all of the above

93. Which of the following would be categorized as an opportunity cost?

(i) wages of workers
(ii) raw material costs
(iii) forgone investment opportunities

a. (i) and (iii)

b. (iii) only
c. (ii) and (iii)
d. all of the above

94. An example of an explicit cost of production would be

a. the cost of forgone labor earnings for an entrepreneur.

b. the cost of flour for a baker.
c. the lost opportunity to invest in other capital markets when the money is invested in one's business.
d. none of the above.

95. An example of an implicit cost of production would be

a. the cost of raw materials for producing bread in a bakery.

b. the cost of a delivery truck in a business that rarely makes deliveries.
c. the income an entrepreneur could have earned working for someone else.
d. all of the above.

Use the information below to answer the following questions.

Joe wants to start his own business. The business he wants to start will require that he purchase a factory that
costs $300,000. He is planning to use $100,000 of his own money, and borrow an additional $200,000 to
finance the factory purchase. Assume the relevant interest rate is 10 percent.

96. What is the explicit cost of purchasing the factory for the first year of operation?

a. $10,000
b. $20,000
c. $30,000
d. $40,000

97. What is the opportunity cost of purchasing the factory for the first year of operation?

a. $10,000
b. $20,000
c. $30,000
d. $40,000

98. Accounting profit

a. will never exceed economic profit.

b. is a better measure of profitability than economic profit.
c. is most often equal to economic profit.
d. is always at least as large as economic profit.

TRUE/FALSE QUESTIONS
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99. Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price.

100. Goods with close substitutes tend to have more elastic demands than do goods without close substitutes.

101. The price of hamburger increases by 25% and the quantity demanded per week falls by 50%. The price elasticity
of demand is 2.

102. If demand is perfectly inelastic, the demand curve is vertical, and elasticity is equal to 0.

103. The income elasticity of demand measures how hours worked change when the hourly wage changes.

104. Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of
another good changes.

105. The supply of farmland is less elastic than is the supply of wheat.

106. When the price of roller bearings increased by 10%, Acme Roller Bearing Company increased their quantity
supplied of roller bearings per week by 25%. Acme's price elasticity of supply of roller bearings is 0.4.

107. While a reduction in total agricultural production may benefit farmers as a group, it will not benefit an individual
farmer to reduce his production.

108. Rent control is an example of a price ceiling.

109. If a price ceiling of $2 per gallon is imposed on gasoline, but the market equilibrium price is $1.50, the price
ceiling is a binding constraint on the market.

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

111. The housing shortages caused by rent control are larger in the long run than in the short run because both the
supply for housing and the demand for housing are more elastic in the long run.

112. If buyers of a product are required to pay a tax, the demand curve for the product will shift downward by exactly
the size of the tax.

113. If a tax is imposed on a market, buyers will pay less and sellers will receive more.

114. The incidence of a tax does not depend on whether the tax is levied on buyers or sellers.

115. In general, a tax burden falls more heavily on the side of the market that is more inelastic.

116. A buyer's willingness to pay measures how much the buyer values the good.

117. Joel has a 1951 Mickey Mantle rookie baseball card, which he sells to Susie, an avid card collector. Susie is
pleased since she paid $4,000 for the card but would have been willing to pay $5,000 for the card. Susie's
consumer surplus is $1,000.

118. When the market price of a good falls, consumer surplus increases because (1) the consumer surplus received
by existing buyers becomes larger, and (2) more buyers enter the market at the lower price.

119. Producer surplus measures the volume of goods which are produced but not sold at the market price.

120. When market price increases, producer surplus increases because (1) producer surplus received by existing
sellers increases, and (2) new sellers enter the market.

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121. Efficiency refers to whether a market outcome is fair, while equity refers to whether the maximum amount of
output was produced from a given number of inputs.

Questions with Short Answers

122. When the price of PC's was $2,000, consumers bought 500. When the price fell to $1,200, consumers bought
1,500. What was the price elasticity of demand between these two prices, calculated with the midpoint method?

123. You have just been hired by Rainbow Crayons, Inc. as a marketing specialist. The CEO comes to you for advice
on how to raise revenue. She wants to know if the company should lower product prices or raise product prices
to increase revenue. What information must you know? If you have this information, what do you advise?

124. Recently, in Smalltown, the price of Twinkies fell from $.80 to $.70. As a result, the quantity demanded of Ho-
Ho's decreased from 120 to 100. What would be the appropriate elasticity to compute? Using the midpoint
method, compute this elasticity. What does your answer tell you?

125. Using the graph shown, analyze the effect a $300 price ceiling would have on the market for ten-speed bicycles.
Would this be a binding price ceiling? Why would policymakers choose to impose a price ceiling?

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126. Using the graph shown, analyze 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?

127. To what does the term "tax incidence" refer?

128. Using a supply-demand diagram, show a labor 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.

129. Suppose that the government places a tax of $5 per tire on the buyers of automobile tires. Use a supply-demand
diagram to show the effect of the tax on the tire market, and the incidence of taxation on buyers and sellers.
Now suppose that the government switches it to a tax of $5 per tire on the sellers of automobile tires. Use a
second supply-demand diagram to show the effects of this tax on the tire 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 tire
market and on the incidence of taxation?

130. Using a demand-supply diagram, show how OPEC raising oil prices in the 1970s combined with a government
imposed price ceiling on gasoline created a shortage of gasoline.

131. Megan loves donuts. The table shown reflects the value Megan places on each donut she eats:

Value of first donut $.60

Value of second donut $.50
Value of third donut $.40
Value of fourth donut $.30
Value of fifth donut $.20
Value of sixth donut $.10

a. Use this information to construct Megan's demand curve for donuts.

b. If the price of donuts is $.20, how many donuts will Megan buy?
c. Show Megan's consumer surplus on your graph. How much consumer surplus would she have at a price of
$.20?
d. If the price of donuts rose to $.40, how many donuts would she purchase now? What would happen to
Megan's consumer surplus? Show this change on your graph.

132. What is producer surplus, and how is it measured?

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133. Other things equal, what happens to producer surplus when the price of a good rises? Illustrate your answer on a
supply curve.

134. What is the total surplus in a market, and why might it be a good measure of economic well-being? Using a
demand-supply diagram, show the areas representing total surplus.

135. In what way or ways are free market outcomes, where supply equals demand, beneficial to society?

136. What are the economic arguments in favor of allowing ticket scalping?

Best Wishes!!

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