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Chap-4.5.6 - Micro

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Chapter 4

The Market Forces of Supply and Demand

1. Which of the following shows the workings of supply and demand?
a. A cold snap hits Florida, resulting in higher orange juice prices in supermarkets.
b. A warm summer in New England results in lower hotel prices in the Caribbean.
c. A war breaks out in the Middle East, causing gasoline prices in the United States to rise.
d. All of the above are correct.

2. 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

3. In a free market, who determines how much of a good will be sold and the price at which it is sold?
a. suppliers
b. demanders
c. the government
d. both suppliers and demanders

4. A market is
a. a place where only buyers come together.
b. a place where only sellers meet.
c. a group of demanders and suppliers of a particular good or service.
d. a group of people with common desires.

5. Who is it that ultimately determines the demand for a product or service?

a. the government
b. those who buy the product or service
c. the producers who create the product or service
d. those who supply the raw materials used in the production of the good or service

6. A competitive market is
a. a market in which there are many buyers and many sellers so that each has a negligible impact
on price.
b. a market where consumers cannot freely interact with sellers.
c. a market where suppliers are under no government restrictions.
d. a market with many buyers but few sellers.

7. Generally, the market for ice cream would be considered

a. a monopolistic market.
b. a competitive market.
c. more organized than an auction.
d. a market where individual sellers have significant pricing power.

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2 Chapter 4/The Market Forces of Supply and Demand

8. 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.

9. 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.

10. If buyers and/or sellers are price takers, then individually

a. they can somewhat influence the market price.
b. they have ultimate control over market price.
c. buyers will be able to find prices lower than those determined in the market.
d. they have no influence on market price because there are so many in the market.

11. 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.

12. 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.

13. A monopoly is
a. a market with few sellers.
b. a market with one seller.
c. a market with one buyer.
d. a market where the government sets the price.

14. Which of the following would be an example of a monopoly?

a. a local cable television company
b. local cement companies
c. a bakery in a large city
d. a potato farmer

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Chapter 4/The Market Forces of Supply and Demand 3

15. A market with only a few sellers would be

a. a monopoly.
b. a competitive market.
c. an oligopoly.
d. a monopolistically competitive market.

16. Which of the following would be an example of an oligopolistic market?

a. a domestic wheat market
b. air travel
c. the software industry
d. electrical power for residential consumers

17. A market with many sellers offering similar but slightly different products is called
a. a monopoly.
b. oligopolistic.
c. monopolistically competitive.
d. perfectly competitive.

18. If a seller is supplying a product that is slightly different than that of many close competitors and is
able to charge a different price than competitors, then the seller
a. is a monopolist.
b. is producing a homogeneous product.
c. will eventually have to decrease the price.
d. is participating in a monopolistically competitive market.

19. When we are studying the behavior of buyers, we are studying

a. supply.
b. demand.
c. government regulation.
d. an entire market.

20. Which of the following would NOT be a determinant of demand?

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

21. 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.

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4 Chapter 4/The Market Forces of Supply and Demand

22. If the price of a substitute to good X increases, then

a. the demand for good X will increase.
b. the market price of good X will decrease.
c. the demand for good X will decrease.
d. the demand for good X will not change.

23. Suppose that a decrease in the price of X results in less of good Y sold. This would mean that X and
Y are
a. complementary goods.
b. substitute goods.
c. unrelated goods.
d. normal goods.

24. Suppose you like banana cream pie made with vanilla pudding. Assuming all other things are
constant, you notice that the price of bananas is higher. How would your demand for vanilla
pudding be affected by this?
a. It would decrease.
b. It would increase.
c. It would be unaffected.
d. There is insufficient information given to answer the question.

25. 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.

26. If a decrease in income increases the demand for a good, then

a. the good is a substitute good.
b. the good is a complement good.
c. the good is a normal good.
d. the good is an inferior good.

27. 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

28. What will happen in the rice market if buyers are expecting higher prices in the near future?
a. The demand for rice will increase.
b. The demand for rice will decrease.
c. The demand for rice will be unaffected.
d. The supply of rice will increase.

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Chapter 4/The Market Forces of Supply and Demand 5

29. Holding all else constant, a higher price for ski lift tickets would be expected to
a. increase the number of skiers.
b. decrease ski sales.
c. decrease the demand for other winter recreational activities.
d. decrease the supply of ski resorts.

30. A demand schedule is a

a. table showing the relationship between the price of a good and the quantity supplied.
b. table showing the relationship between income and the quantity of the good demanded.
c. table showing the relationship between the price of a good and the quantity buyers are willing
and able to purchase.
d. table showing the relationship between the determinants of demand and the quantity
demanded.

31. A demand curve is

a. the downward-sloping line relating the price of the good with the quantity demanded.
b. the upward-sloping line relating price with quantity supplied.
c. the curve that relates income with quantity demanded.
d. None of the above answers is correct.

32. The movement from point A to point B on the graph would be caused by
a. an increase in price.
b. a decrease in price.
c. a decrease in the price of a substitute good.
d. an increase in income.

33. The movement from point A to point B on the graph shows

a. a decrease in demand.
b. an increase in demand.
c. an increase in quantity demanded.
d. a decrease in quantity demanded.

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6 Chapter 4/The Market Forces of Supply and Demand

34. When we move up or down a given demand curve,

a. only price is held constant.
b. all nonprice 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.

35. Ceteris paribus is a Latin phrase that literally means

a. “other things being 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.”

36. The term ceteris paribus refers to

a. a central market price.
b. a real world situation in which every variable is held constant.
c. a hypothetical situation in which some variables are assumed to be constant.
d. a situation in which only the price is held constant.

37. 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

38. If the number of buyers in the market decreases,

a. the demand in the market will increase.
b. the supply in the market will increase.
c. the demand in the market will decrease.
d. the supply in the market will decrease.

39. Sally tells you that she thinks the price of her favorite 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 anymore stationery.

40. 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.

41. A market demand curve reflects

a. the fact that the level of income is inversely related to quantity demanded.
b. how quantity demanded changes when the number of buyers changes.
c. how much all buyers are willing and able to buy at each possible price.
d. when the buyers are willing to buy the most.

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Chapter 4/The Market Forces of Supply and Demand 7

The table shows individual demand schedules for a market.

Quantities Demanded
Price of the Good John Sally Jane Billy
$0.00 25 22 10 5
0.50 20 20 6 4
1.00 15 18 2 3
1.50 10 16 0 2
2.00 5 14 0 1
2.50 0 12 0 0

42. Refer to the table shown. When the price of the good is $1.00, the quantity demanded in this market
would be
a. 38 units.
b. 18 units.
c. 15 units.
d. 5 units.

43. Refer to the table shown. If the price increases from $1.00 to $1.50,
a. the market demand increases by 20 units.
b. the quantity demanded in the market decreases by 10 units.
c. individual demands will increase.
d. the quantity demanded in the market increases by 5 units.

44. Suppose that the American Medical Association announces that men who shave their heads are less
likely to die of heart failure. We could expect
a. the current demand for razors to decrease.
b. the current demand for combs to increase.
c. the current demand for razors to increase.
d. the demand for hair dye for men to increase.

45. Suppose that scientists find evidence that proves 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.

46. When the price of a good or service changes,

a. there is a movement along a stable demand curve.
b. demand shifts in the opposite direction.
c. demand shifts in the same direction.
d. supply shifts in the opposite direction.

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8 Chapter 4/The Market Forces of Supply and Demand

47. Suppose that John receives a pay increase. We would expect

a. John’s demand for normal goods to remain unchanged.
b. John’s demand for inferior goods to decrease.
c. John’s demand for luxury goods to decrease.
d. John’s demand for normal goods to decrease.

48. Doug likes tomatoes today more than he did yesterday.

a. Doug is now willing to pay more than before for tomatoes.
b. Doug must have received an increase in income.
c. Doug must now consider tomatoes a luxury.
d. The supply of tomatoes must have increased.

49. The downward-sloping demand curve reflects which of the following?

a. The price is positively related to quantity supplied.
b. There is an inverse relationship between price and quantity demanded.
c. There is a direct relationship between price and quantity demanded.
d. When the price falls, buyers willingly buy less.

50. What is the law of demand?

a. When the price of a good or service rises, buyers respond by purchasing more.
b. When income levels increase, buyers respond by purchasing more.
c. When buyers tastes for the good increase, they purchase more of the good.
d. When the price of a good falls, buyers respond by purchasing more.

51. An increase in the number of scholarships issued for college education would
a. increase the supply of education.
b. decrease the supply of education.
c. increase the demand for education.
d. decrease the demand for education.

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Chapter 4/The Market Forces of Supply and Demand 9

52. 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.

53. 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.

54. If the demand curve shifts from D1 to D on the graph, this means that
a. firms would be 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.

55. 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.

56. 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.

57. The relationship between price and quantity supplied is

a. positive, or direct.
b. negative, or inverse.
c. nonexistent.
d. the same as the relationship between price and quantity demanded.

58. Other things equal, when the price of a good rises, the quantity supplied of the good also rises. This
is
a. the law of increasing costs.
b. the law of diminishing returns.
c. the law of supply.
d. the law of demand.

59. If the number of sellers in a market increases,

a. the demand in that market will increase.
b. the supply in that market will decrease.
c. the supply in that market will increase.
d. the demand in that market will not change.

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10 Chapter 4/The Market Forces of Supply and Demand

60. Suppose you make jewelry. If the price of gold falls, we would expect
a. you to be willing and able to produce more jewelry than before at each possible price.
b. you to be willing and able to produce less jewelry than before at each possible price.
c. you will face a greater demand for your jewelry.
d. you will face a weaker demand for your jewelry.

61. A technological advancement

a. will shift the demand curve to the right.
b. will shift the demand curve to the left.
c. will shift the supply curve to the right.
d. will shift the supply curve to the left.

62. A dress manufacturer is expecting higher prices for dresses in the near future. We would expect
a. the dress manufacturer to supply more dresses now.
b. the demand for this manufacturer’s dresses to fall.
c. the dress manufacturer to supply fewer dresses now.
d. the demand for this manufacturer’s dresses to rise.

63. Holding the nonprice 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.

64. A supply curve slopes upward because

a. an increase in price gives producers incentive to supply a larger quantity.
b. an increase in input prices increases supply.
c. a decrease in input prices decreases supply.
d. as more is produced, per unit costs of production fall.

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Chapter 4/The Market Forces of Supply and Demand 11

65. The movement from point A to point B on the graph would be caused by
a. an increase in the price of the good.
b. a decrease in the price of the good.
c. an increase in technology.
d. an increase in input prices.

66. 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.

67. 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.

68. Suppose that there is an increase in input prices. We would expect

a. supply to increase.
b. supply to decrease.
c. supply could increase or decrease.
d. supply to remain unchanged.

69. 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.

70. Wheat is the main input in the production of flour. If the price of wheat increases, all else equal, we
would expect
a. the supply of flour to be unaffected.
b. the supply of flour to decrease.
c. the supply of flour to increase.
d. the demand for flour to decrease.

71. An increase in the price of oranges would

a. lead to an increased supply of oranges.
b. lead to a movement up the supply curve for oranges.
c. lead to an increased demand for oranges.
d. lead to a reduction in the prices of inputs used in orange production.

72. All else 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.

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12 Chapter 4/The Market Forces of Supply and Demand

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Chapter 4/The Market Forces of Supply and Demand 13

73. On the graph, the movement from S to S1 is called

a. a decrease in supply.
b. an increase in supply.
c. a decrease in quantity supplied.
d. an increase in quantity supplied.

74. On the graph, the movement from S to S1 could be caused by

a. a decrease in the price of the good.
b. an increase in income.
c. an improvement in technology.
d. an increase in input prices.

75. The unique point at which the supply and demand curves intersect is called
a. market unity.
b. equilibrium.
c. cohesion.
d. an agreement.

76. The price where quantity supplied equals quantity demanded is called
a. the equilibrium price.
b. the monopoly price.
c. the coordinating price.
d. All of the above are correct.

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

a. the price is below the equilibrium price.
b. the market can be in equilibrium.
c. sellers are producing more than buyers wish to buy.
d. All of the above answers are correct.

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14 Chapter 4/The Market Forces of Supply and Demand

78. 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.

79. According to the graph, equilibrium price and quantity are

a. $7, 20.
b. $7, 60.
c. $5, 40.
d. $3, 60.

80. 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.

81. According to the graph, at a price of $3,

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.

82. 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.

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Chapter 4/The Market Forces of Supply and Demand 15

83. According to the graph, at a price of $7,

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.
d. the market would be in equilibrium.

PRICE QUANTITY DEMANDED QUANTITY SUPPLIED

$10 10 100
$8 20 80
$6 30 60
$4 40 40
$2 50 20

84. In the table shown, the equilibrium price and quantity would be
a. $2, 50.
b. $4, 40.
c. $8, 80.
d. $10, 100.

85. In the table shown, if the price were $8,

a. a surplus of 30 units would exist and price would tend to fall.
b. a surplus of 60 units would exist and price would tend to rise.
c. a surplus of 60 units would exist and price would tend to fall.
d. a shortage of 30 units would exist and price would tend to rise.

86. In the table shown, if the price were $2,

a. a shortage of 30 units would exist and price would tend to fall.
b. a surplus of 60 units would exist and price would tend to rise.
c. a surplus of 60 units would exist and price would tend to fall.
d. a shortage of 30 units would exist and price would tend to rise.

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16 Chapter 4/The Market Forces of Supply and Demand

87. Refer to the graph shown. In this market, equilibrium price and quantity would be
a. $15, 400.
b. $20, 600.
c. $25, 500.
d. $25, 800.

88. Refer to the graph shown. If price is $25, quantity demanded would be
a. 400.
b. 500.
c. 600.
d. 800.

89. Refer to the graph shown. If price is $15, quantity supplied would be
a. 200.
b. 400.
c. 500.
d. 700.

90. Refer to the graph shown. If the price is $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.
d. the market would be in equilibrium.

91. Refer to the graph shown. If the price is $10,

a. there would be a shortage of 200.
b. there would be a surplus of 200.
c. there would be a surplus of 600.
d. there would be a shortage of 600.

92. Refer to the graph shown. 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

93. Refer to the graph shown. 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.

94. When the price is higher than the equilibrium price,

a. a shortage will exist.
b. buyers desire to purchase more than is produced.
c. sellers desire to produce and sell more than buyers wish to purchase.
d. quantity demanded equals quantity supplied.

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Chapter 4/The Market Forces of Supply and Demand 17

95. When there is a surplus in a market,

a. there is downward pressure on price.
b. there is upward pressure on price.
c. the market could still be in equilibrium.
d. there are too many buyers chasing too few goods.

96. When there is a shortage in a market,

a. there is downward pressure on price.
b. there is upward pressure on price.
c. the market could still be in equilibrium.
d. the price must be above equilibrium.

97. 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 would eventually require a higher price.
d. buyers would not be willing to purchase the output sellers desire to sell.

98. 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.

99. Which of the following is NOT one of the steps in analyzing how some event affects a market?
a. Determine the names of the market participants.
b. Decide whether the curve shifts to the right or to the left.
c. Determine whether the event shifts the supply, the demand, or both curves.
d. Use a supply-demand diagram to examine how the shift(s) affect the equilibrium.

100. 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 are correct.

101. A shift in the demand curve is called

a. a “change in demand.”
b. a “movement along the demand curve.”
c. a “change in the quantity demanded.”
d. All of the above are correct.

102. Whenever the price of a good changes,

a. there is a change in supply and demand.
b. there is only a change in supply.
c. there would be a movement along a supply curve and/or demand curve.
d. there would be no effect in the market.

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18 Chapter 4/The Market Forces of Supply and Demand

103. Suppose there is an earthquake that destroys several corn canneries. Which of the following would
NOT occur as a direct result of this event?
a. Sellers would not be willing to produce and sell as much as before at each relevant price.
b. The supply would decrease.
c. Buyers would not be willing to buy as much as before at each relevant price.
d. The equilibrium price would rise.

104. Suppose that the number of buyers in a market increases and a technological advancement occurs
also. 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.

105. Suppose that the incomes of buyers in a particular market for a normal good declines 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.
c. Both equilibrium price and equilibrium quantity would increase.
d. Equilibrium quantity would increase, but the impact on equilibrium price would be
ambiguous.

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

107. Suppose that demand increases AND supply decreases. What would happen 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. Both equilibrium price and quantity would increase.
d. Both equilibrium price and quantity would decrease.

108. 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

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Chapter 4/The Market Forces of Supply and Demand 19

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

109. When supply and demand both increase,

a. equilibrium price will increase.
b. equilibrium price will decrease.
c. equilibrium price may increase, decrease, or remain unchanged.
d. equilibrium quantity may increase, decrease, or remain unchanged.

110. 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.

111. In a free market system, what is the mechanism for rationing scarce resources?
a. sellers
b. buyers
c. prices
d. the government

112. 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

113. If there is a shortage of farm laborers, we would expect

a. the wages of farm laborers to decrease.
b. the wages of farm laborers to increase.
c. the prices of farm commodities to decrease.
d. a decrease in the demand for substitutes of farm labor.

114. In market economies,

a. prices guide economic decisions and thereby allocate scarce resources.
b. prices ensure that quantity supplied and quantity demanded are in balance.
c. prices influence how much of a good buyers choose to purchase and how much sellers choose
to produce.
d. All of the above answers are correct.

115. Which of the following would cause both the equilibrium price and equilibrium quantity of number
two grade potatoes (an inferior good) to increase?
a. an increase in consumer income
b. greater government restrictions on agricultural chemicals
c. a decrease in consumer income
d. fewer government restrictions on agricultural chemicals

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Chapter 5
Elasticity and Its Applications
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.

2. 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.

3. Economists use the concept of price elasticity of demand to measure

a. how much buyers respond to changes in the price of the good.
b. how much sellers respond to changes in the price of the good.
c. how much worse off consumers are when the price of the good rises.
d. how much demand responds to changes in buyers' incomes.

4. The concept of elasticity is used to

a. analyze how much the economy is capable of expanding.
b. analyze supply and demand with greater precision.
c. determine the level of government invention in the economy.
d. calculate consumer credit purchases.

5. 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.

6. Demand is said to be inelastic

a. if the price of the good responds only slightly to changes in demand.
b. if demand shifts only slightly when the price of the good changes.
c. if buyers respond substantially to changes in the price of the good.
d. if the quantity demanded changes only slightly when the price of the good changes.

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2 Chapter 5/Elasticity and its Applications

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

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

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

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

9. If a person has very little concern for his/her health, demand for health care would tend to be
a. elastic.
b. inelastic.
c. unit elastic.
d. horizontal.

10. A person who lives 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

11. 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.

12. Chocolate Chip ice cream would tend to have very elastic demand because
a. other flavors of ice cream are almost perfect substitutes.
b. the market is broadly defined.
c. there are few substitutes.
d. it must be eaten quickly.

13. 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.

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Chapter 5/Elasticity and its Applications 3

14. Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline
demanded would fall substantially over a ten 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 ten 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.

15. The demand for a good tends to be more elastic

a. the greater the availability of close substitutes.
b. the narrower the definition of the market.
c. the longer the period of time.
d. All of the above are correct.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

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4 Chapter 5/Elasticity and its Applications

21. Demand is elastic 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.

22. 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.

23. Demand is unit elastic 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.

24. In the graph shown, the section of the demand curve labeled A represents
a. the elastic section of the demand curve.
b. the inelastic section of the demand curve.
c. the unit elastic section of the demand curve.
d. the perfectly elastic section of the demand curve.

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Chapter 5/Elasticity and its Applications 5

25. In the graph shown, the point on the demand curve labeled B represents
a. the elastic section of the demand curve.
b. the inelastic section of the demand curve.
c. the unit elastic section of the demand curve.
d. the perfectly elastic section of the demand curve.

26. In the graph shown, the section of the demand curve labeled C represents
a. the elastic section of the demand curve.
b. the inelastic section of the demand curve.
c. the unit elastic section of the demand curve.
d. the perfectly elastic section of the demand curve.

27. 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

28. On the graph shown, 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

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6 Chapter 5/Elasticity and its Applications

29. Demand is said to be inelastic if the

a. quantity demanded changes proportionately more than the price.
b. quantity demanded changes proportionately less than the price.
c. price changes proportionately more than income.
d. quantity demanded changes proportionately the same as the price.

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 percent than the price.
c. quantity demanded changes by the same percent as the price.
d. quantity demanded does not respond to a change in price.

31. Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers
are to a change in price, the ______________ the demand curve .
a. steeper
b. further to the right
c. flatter
d. closer to the vertical axis

32. 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.

33. A perfectly elastic demand curve will be

a. vertical.
b. horizontal.
c. downward sloping to the right.
d. upward sloping to the right.

34. A perfectly inelastic demand implies that

a. buyers decrease their purchases when the price rises.
b. buyers respond substantially to an increase in price.
c. buyers increase their purchases only slightly when the price falls.
d. buyers purchase the same amount when the price rises or falls.

35. 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.

36. In any market, total revenue is

a. the price divided by the price elasticity of demand.
b. the price multiplied by the quantity.
c. the price plus the quantity.
d. the price multiplied by the quantity minus the costs of production.

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Chapter 5/Elasticity and its Applications 7

37. 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.

38. On a downward sloping, linear demand curve, total revenue would be at a maximum
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.

39. At the midpoint of a downward sloping linear demand curve, elasticity would be
a. inelastic.
b. elastic.
c. unit elastic.
d. perfectly elastic.

40. 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.

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8 Chapter 5/Elasticity and its Applications

41. In the graph shown, 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.

42. 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.

43. Refer to the graph shown. The total revenue at P1 is represented by area(s)
a. B + D.
b. A + B.
c. C + D.
d. D.

44. Refer to the graph shown. Total revenue at P2 would be represented by area(s)
a. B + D.
b. A + B.
c. C + D.
d. D.

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Chapter 5/Elasticity and its Applications 9

45. 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.

46. You produce jewelry boxes. If the demand for jewelry boxes is elastic and you want to increase your
total revenue, you should
a. decrease the price of your jewelry boxes.
b. increase the price of your jewelry boxes.
c. not change the price of your jewelry boxes.
d. None of the above answers are correct.

47. When demand is elastic in the current price range,

a. an increase in price would increase total revenue because the decrease in quantity demanded is
less than the increase in price.
b. an increase in price would decrease total revenue because the decrease in quantity demanded is
greater than the increase in price.
c. a decrease in price would decrease total revenue because the increase in quantity demanded is
smaller than the decrease in price.
d. a decrease in price would not affect the total revenue.

48. Holding all other forces constant, if raising the price of a good results in less 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. the demand for the good must be perfectly inelastic.

49. 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.

50. 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 would be less elastic than the upper part.
d. Elasticity and slope would both remain constant along the curve.

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10 Chapter 5/Elasticity and its Applications

51. 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.

52. 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.

53. Income elasticity of demand measures

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.

54. Which of the following would you expect to have the highest income elasticity of demand?
a. diamonds
b. water
c. hamburger
d. housing

55. 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.

56. 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.

57. Suppose that good X has a negative income elasticity of demand. This implies that the good is
a. a normal good.
b. a necessity.
c. an inferior good.
d. a luxury.

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Chapter 5/Elasticity and its Applications 11

58. 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.

59. Assume that a 4 percent increase in income results in a 2 percent decrease 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

60. 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

61. Refer to the table. Good X is

a. a normal good.
b. an inferior good.
c. underpriced.
d. very price elastic.

62. Refer to the table. Good Y is

a. not related to income.
b. an inferior good.
c. price inelastic.
d. a normal good.

63. 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.

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12 Chapter 5/Elasticity and its Applications

64. 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.

65. If the cross-price elasticity of demand is negative, then the two goods would be
a. substitutes.
b. luxuries.
c. complements.
d. normal goods.

66. 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.

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.

68. The demand for caviar tends to be

a. income elastic because it is relatively expensive.
b. income inelastic because it is packaged in small containers.
c. income elastic because buyers generally feel that they can do without it.
d. income inelastic because it is scarce.

69. 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.

70. 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.

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Chapter 5/Elasticity and its Applications 13

71. Get Smart University is contemplating increasing tuition to enhance revenue. If GSU feels that raising
tuition would enhance revenue,
a. they are necessarily ignoring the law of demand.
b. they are assuming that the demand for university education is elastic.
c. they are assuming that the supply of university education is elastic.
d. they are assuming that the demand for university education is inelastic.

72. 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.

73. The price elasticity of supply 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.

74. 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.

75. 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 1.

76. 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.

77. 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 vs. necessities.

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14 Chapter 5/Elasticity and its Applications

78. 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

79. 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.

80. When a supply curve is relatively flat,

a. the supply is relatively elastic.
b. the supply is relatively inelastic.
c. sellers are not at all responsive to change in price.
d. quantity supplied changes slightly when the price changes.

81. 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.

82. 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.

83. If the elasticity of supply of a product is greater than 1, then

a. supply is elastic.
b. supply is inelastic.
c. supply is unit elastic.
d. supply is not very sensitive to change in price.

84. 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.

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Chapter 5/Elasticity and its Applications 15

85. Because the demand for wheat tends to be inelastic, the development of a new, more productive
hybrid wheat would tend to
a. increase the total revenue of wheat farmers.
b. decrease the total revenue of wheat farmers.
c. weaken the demand for wheat.
d. weaken the supply of wheat.

86. Knowing that the demand for wheat is inelastic, if all farmers voluntarily plowed under 10 percent of
their wheat crop, then
a. wheat farmers would increase their revenue.
b. wheat farmers would suffer a reduction in their revenue.
c. consumers of wheat would buy more wheat.
d. the demand for wheat would decrease.

87. 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 price 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.

88. Which of the following is NOT a reason why government drug interdiction increases drug-related
crime?
a. Because demand for such drugs tends to be very inelastic.
b. Addicts would have a greater need for quick cash.
c. Government drug programs are more lenient now with drug offenders than in the 1980s.
d. The total amount of money needed to buy the amount of drugs needed increases.

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

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

89. 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.

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16 Chapter 5/Elasticity and its Applications

90. 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.

91. Refer to the given information. Notice that lowering the price from $8 to $6 per ticket decreases
revenue by $4,000. In the $6 to $8 price range, demand for baseball tickets must be
a. price elastic
b. price inelastic
c. price unit elastic
d. income elastic

92. 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.

93. 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.

94. Generally, a firm would be able to respond most to a change in price in

a. one month.
b. six months.
c. one year.
d. There would be no difference in a firm's ability to respond among answers a, b, and c.

95. 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.

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Chapter 5/Elasticity and its Applications 17

96. In the graph shown, which supply curve is perfectly inelastic?

a. S1
b. S2
c. S3
d. It is impossible to tell without more information.

97. In the graph shown, 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.

98. 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.

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Chapter 6
Supply, Demand, and Government Policies
MULTIPLE CHOICE

1. 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.

2. Price controls
a. always produce an equitable outcome.
b. always produce an efficient outcome.
c. can generate inequities of their own.
d. produce revenue for the government.

3. A legal maximum price at which a good can be sold is a

a. price floor.
b. price stabilization.
c. price support.
d. price ceiling.

4. A legal minimum price at which a good can be sold is a

a. price floor.
b. price stabilization.
c. price ceiling.
d. price cut.

5. 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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2 Chapter 6/Supply, Demand, and Government Policies

6. A price ceiling which is not binding

a. has no effect.
b. is a detriment to society.
c. will cause a shortage.
d. will cause a surplus.

7. In the figure shown, a binding price ceiling is shown in

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

8. 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)

9. If a price ceiling is a binding constraint on the market,

a. the equilibrium price must be below the price ceiling.
b. the equilibrium price must be above the price ceiling.
c. the forces of supply and demand must be in equilibrium.
d. it will have no effect on supply or demand.

10. If a price ceiling is a binding constraint,

a. the actual price will be below the price ceiling.
b. the actual price will be above the price ceiling.
c. the equilibrium price will equal the price ceiling.
d. the actual price will equal the price ceiling.

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Chapter 6/Supply, Demand, and Government Policies 3

11. A binding price ceiling is imposed on the market for peaches. At the ceiling price,
a. the quantity demanded of peaches will be greater than the quantity supplied.
b. the quantity demanded of peaches will be equal to the quantity supplied.
c. the quantity demanded of peaches will be smaller than the quantity supplied.
d. the quantity demanded of peaches will be artificially restricted by the price ceiling.

12. 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.

13. A binding price ceiling will make it necessary to

a. supply more of the product.
b. develop a way of rationing the product, because there will be a shortage.
c. develop a better marketing plan, because there will be a surplus.
d. increase demand for the product, because there will be a surplus.

14. 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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4 Chapter 6/Supply, Demand, and Government Policies

15. According to the graph shown, a binding price ceiling would exist at a price of
a. $8.00.
b. $6.00.
c. $5.00.
d. none of the above.

16. According to the graph shown, if the government imposes a binding price floor of $6.00 in this
market, the result would be
a. a surplus of 15.
b. a surplus of 35.
c. a shortage of 30.
d. a shortage of 50.

17. According to the graph shown, a binding price floor would exist at a price of
a. $6.00.
b. $5.00.
c. $2.00.
d. none of the above.

18. Rationing by long lines

a. is inefficient, because it wastes buyers’ time.
b. is efficient, because those who are willing to wait the longest get the goods.
c. is the only way scarce goods can be rationed.
d. is only necessary if price ceilings are not binding.

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Chapter 6/Supply, Demand, and Government Policies 5

19. Long lines at gas stations in the U.S. in the 1970s were primarily a result of
a. the fact that OPEC raised the price of crude oil in world markets.
b. the fact that U.S. gasoline producers raised the price of gasoline.
c. the fact that the U.S. government had imposed a price ceiling on gasoline.
d. the fact that Americans typically commute long distances.

20. 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.

21. According to the graph shown, 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.

22. 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.

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6 Chapter 6/Supply, Demand, and Government Policies

23. California’s drought-emergency water bank

a. caused a severe water shortage in 1991.
b. causes water to be fixed in supply.
c. allows farmers to lease water during dry spells.
d. caused the price of water during the last drought to fall.

24. Rent control is

a. a common example of a social problem solved by government regulation.
b. a common example of a price ceiling.
c. the most effective way to provide affordable housing.
d. the most efficient way to allocate housing.

25. Economists generally hold that rent control is

a. an efficient and equitable way to help the poor.
b. not efficient, but the best way to solve a serious social problem.
c. a highly inefficient way to help the poor raise their standard of living.
d. an efficient way to allocate housing, but not a good way to help the poor.

26. In the figure shown, 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

27. In the figure shown, 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

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Chapter 6/Supply, Demand, and Government Policies 7

28. 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

29. Under rent control, bribery is a mechanism to

a. bring the total price of an apartment (including the bribe) closer to the equilibrium price.
b. allocate housing to the poorest individuals in the market.
c. force the total price of an apartment (including the bribe) to be less than the market price.
d. allocate housing to the most deserving tenants.

30. 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.

31. Which of the following statements about rent control in New York City is accurate?
a. Rent control has proven successful in providing low-cost housing for poor people.
b. Rent control has produced an increase in available rental units.
c. Many well-to-do people live in rent-controlled apartments.
d. All of the above are accurate statements.

32. A price floor is binding if

a. it is higher than the equilibrium market price.
b. it is lower than the equilibrium market price.
c. it is equal to the equilibrium market price.
d. it is set by the government.

33. A price floor is not binding if

a. the price floor is higher than the equilibrium market price.
b. the price floor is lower than the equilibrium market price.
c. people are willing to buy as much when the price floor is imposed as they did before.
d. the government sets it.

34. A binding price floor causes

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

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8 Chapter 6/Supply, Demand, and Government Policies

35. In the figure shown, which of the panels represents a binding price floor?
a. panel (a)
b. panel (b)
c. panel (a) and panel (b)
d. neither panel (a) nor panel (b)

36. 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.

37. 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.

38. Minimum wage laws dictate

a. the average price employers must pay for labor.
b. the highest price employers may pay for labor.
c. the lowest price employers may pay for labor.
d. the quality of labor which must be supplied.

39. The U.S. Congress first instituted a minimum wage in

a. 1890.
b. 1914.
c. 1974.
d. 1938.

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Chapter 6/Supply, Demand, and Government Policies 9

40. The minimum wage was instituted in order to ensure workers

a. a middle-class standard of living.
b. employment.
c. a minimally adequate standard of living.
d. unemployment compensation.

41. As of 1999, the U.S. minimum wage according to federal law was
a. $3.75 per hour.
b. $4.25 per hour.
c. $4.75 per hour.
d. $5.15 per hour.

42. Which of the following is the most accurate statement about minimum wage laws?
a. All states have legislation which establishes the same minimum wage as the federal law.
b. Some states have legislation which establishes a higher minimum wage than the federal law.
c. Some states have legislation which establishes a lower minimum wage than the federal law.
d. All states have legislation which establishes a higher minimum wage than the federal law.

43. Which of the following is a correct statement about the labor market?
a. Workers determine the supply of labor, and firms determine the demand for labor.
b. Workers determine the demand for labor, and firms determine the supply of labor.
c. Workers determine the supply of labor, and government determines the demand for labor.
d. Government determines the supply of labor, and firms determine the supply of labor.

44. 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.

45. Workers with high skills and much 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.

46. The minimum wage has its greatest impact on

a. the market for female labor.
b. the market for white workers.
c. the market for black workers.
d. the market for teenage labor.

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10 Chapter 6/Supply, Demand, and Government Policies

47. The equilibrium wages of teenagers tend to be

a. low because teenagers are among the least skilled and least experienced workers.
b. high because teenagers are among the strongest and most energetic workers.
c. low because most teenagers live at home and don t require high wages.
d. high because teenagers tend to join unions.

48. The typical study on the effect of the minimum wage on teenage employment finds that a 10 percent
increase in the minimum wage
a. depresses teenage employment by 1 to 3 percent.
b. depresses teenage employment by 10 to 13 percent.
c. has no effect on teenage employment.
d. raises wages of teenagers by 10 percent.

49. 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.

50. 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.

51. Policymakers are led to control prices because

a. they view the market’s outcome as inefficient.
b. they view the market’s outcome as unfair.
c. all politicians enjoy exercising their power.
d. they are required to do so under the Employment Act of 1946.

52. 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.

53. 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.

54. 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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Chapter 6/Supply, Demand, and Government Policies 11

55. Which is the most accurate statement about taxes and government?
a. All governments, federal, state, and local, rely on taxes to raise revenue for public purposes.
b. Federal and state governments use taxes to raise revenue, but local governments use borrowing.
c. Federal and local governments use taxes to raise revenue, but state governments use borrowing.
d. State and local governments use taxes to raise revenue, but the federal government uses
borrowing.

56. The term tax incidence refers to

a. the Boston Tea Party.
b. the "flat tax" movement.
c. the division of the tax burden between buyers and sellers.
d. the division of the tax burden between sales taxes and income taxes.

57. The initial effect of a tax on the buyers of a good

a. is on the supply of that good.
b. is on the demand for that good.
c. is on both the supply of the good and the demand for the good.
d. is on the price of the good.

58. 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.

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12 Chapter 6/Supply, Demand, and Government Policies

59. 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.

60. According to the graph, the price sellers receive after the tax is imposed is
a. $8.00.
b. $6.00.
c. $5.00.
d. $3.50.

61. 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.

62. 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.

63. 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.

64. If buyers are required to pay a $.10 tax per bag on popcorn, the demand for popcorn will
a. shift up by $.10 per bag.
b. shift up by $.05 per bag.
c. shift down by $.10 per bag.
d. shift down by $.05 per bag.

65. A tax on the buyers of popcorn

a. increases the size of the popcorn market.
b. reduces the size of the popcorn market.
c. has no effect on the size of the popcorn market.
d. may increase, decrease, or have no effect on the size of the popcorn market.

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Chapter 6/Supply, Demand, and Government Policies 13

66. 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.

67. A tax on the buyers of popcorn will

a. cause the price the buyer pays and the price the seller receives to rise.
b. cause the price the buyer pays and the price the seller receives to fall.
c. cause the price the buyer pays to rise and the price the seller receives to fall.
d. cause the price the buyer pays to fall and the price the seller receives to rise.

68. Which is the most correct statement about the burden of a tax imposed on buyers of popcorn?
a. Buyers bear the entire burden of the tax.
b. Sellers bear the entire burden of the tax.
c. Buyers and sellers share the burden of the tax.
d. The government bears the entire burden of the tax.

69. The initial impact of a tax on the sellers of a product

a. is on the supply of the product.
b. is on the demand for the product.
c. is on both the supply of the product and the demand for the product.
d. is on the price of the product.

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14 Chapter 6/Supply, Demand, and Government Policies

70. According to the graph shown, the equilibrium price in the market before the tax is imposed is
a. $1.00.
b. $3.50.
c. $5.00.
d. $6.00.

71. According to the graph, the price buyers will pay after the tax is imposed is
a. $1.00.
b. $3.50.
c. $5.00.
d. $6.00.

72. According to the graph, the price sellers receive after the tax is imposed is
a. $1.00.
b. $3.50.
c. $5.00.
d. $6.00.

73. According to the graph, the amount of the tax imposed in this market is
a. $1.00.
b. $1.50.
c. $2.50.
d. $3.50.

74. According to the graph, the amount of the tax that buyers would pay would be
a. $1.00.
b. $1.50.
c. $2.50.
d. $3.00.

75. According to the graph, the amount of the tax that sellers would pay would be
a. $1.00.
b. $1.50.
c. $2.50.
d. $3.00.

76. A tax on the sellers of popcorn

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.

77. 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.

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Chapter 6/Supply, Demand, and Government Policies 15

78. 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.

79. 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.

80. A tax on the sellers of popcorn will cause

a. the price the buyers pay and the effective price the sellers receive to rise.
b. the price the buyers pay and the effective price the sellers receive to fall.
c. the price the buyers pay to rise, and the effective price the sellers receive to fall.
d. the price the buyers pay to fall, and the price the sellers receive to rise.

81. What is true about the burden of a tax imposed on popcorn?

a. Buyers bear the entire burden of the tax.
b. Sellers bear the entire burden of the tax.
c. Buyers and sellers share the burden of the tax.
d. The government bears the entire burden of the tax.

82. Revenue from the FICA tax is used to

a. help retire the national debt.
b. cover crop insurance claims.
c. pay the salaries of Congressmen.
d. pay for Social Security and Medicare.

83. FICA is an example of

a. a payroll tax.
b. a sales tax.
c. a farm subsidy.
d. fire insurance.

84. Congress intended that

a. the entire FICA tax be paid by workers.
b. the entire FICA tax be paid by firms.
c. the entire FICA tax be paid by consumers.
d. half the FICA tax be paid by workers, and half be paid by firms.

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16 Chapter 6/Supply, Demand, and Government Policies

85. The key feature of a payroll tax is that it

a. is a tax on poor people.
b. is a tax on corporations.
c. places a wedge between the wage that firms pay and the wage that workers receive.
d. does not affect equilibrium in labor markets.

86. When a payroll tax is enacted,

a. the wage received by workers falls and the wage paid by firms rises.
b. the wage received by workers falls and the wage paid by firms falls.
c. the wage received by workers rises and the wage paid by firms falls.
d. the wage received by workers rises and the wage paid by firms rises.

87. In the end, tax incidence

a. depends on the legislated burden.
b. is entirely random.
c. depends on the forces of supply and demand.
d. falls entirely on buyers or entirely on sellers.

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Chapter 6/Supply, Demand, and Government Policies 17

88. Refer to the graphs given. 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

89. Refer to the graphs given. 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

90. Refer to the graphs given. 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

91. In the graph shown, the equilibrium price before the tax is
a. P0.
b. P1.
c. P2.
d. none of the above.

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18 Chapter 6/Supply, Demand, and Government Policies

92. In the graph shown, the price that will be paid after the tax is
a. P0.
b. P1.
c. P2.
d. impossible to determine.

93. In the graph shown, the price sellers receive after the tax is
a. P0.
b. P1.
c. P2.
d. impossible to determine.

94. In the graph shown, 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.

95. In the graph shown, 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.

96. 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.

97. 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.

98. Which of the following is the most correct statement about tax burdens?
a. A tax burden falls most heavily on the side of the market that is elastic.
b. A tax burden falls most heavily on the side of the market that is inelastic.
c. A tax burden falls most heavily on the side of the market that is closer to unit elastic.
d. A tax burden is distributed independently of relative elasticities of supply and demand.

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Chapter 6/Supply, Demand, and Government Policies 19

99. In 1990, Congress passed a new luxury tax on items such as yachts, private airplanes, furs, jewelry, and
expensive cars. The goal of the tax was
a. to raise revenue from rich people.
b. to prevent rich people from buying luxuries.
c. to force producers of luxury goods to reduce employment.
d. to limit exports of luxury goods to other countries.

100. The burden of a luxury tax falls

a. more on the rich than on the middle class.
b. more on the poor than on the middle class.
c. more on the middle class than on the rich.
d. equally on the rich, the middle class, and the poor.

101. When analyzing 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.

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