EXERCISE 1

1. In a market economy, supply and demand determine

a. both the quantity of each good produced and the price at which it is sold.
b. the quantity of each good produced but not the price at which it is sold.
c. the price at which each good is sold but not the quantity of each good produced.
d. neither the quantity of each good produced nor the price at which it is sold.

2. In a market economy,
a. supply determines demand and demand, in turn, determines prices.
b. demand determines supply and supply, in turn, determines prices.
c. the allocation of scarce resources determines prices and prices, in turn, determine supply and
demand.
d. supply and demand determine prices and prices, in turn, allocate the economy’s scarce resources.

3. In a competitive market, the price of a product

a. is determined by buyers, and the quantity of the product produced is determined by sellers.
b. is determined by sellers, and the quantity of the product produced is determined by buyers.
c. and the quantity of the product produced are both determined by sellers.
d. None of the above is correct.

4. A competitive market is a market in which

a. an auctioneer helps set prices and arrange sales.
b. there are only a few sellers.
c. the forces of supply and demand do not apply.
d. no individual buyer or seller has any significant impact on the market price.

5. Assume Diana buys computers in a competitive market. It follows that

a. Diana has a limited number of sellers to turn to when she buys a computer.
b. Diana will find herself negotiating with sellers whenever she buys a computer.
c. if Diana buys a large number of computers, the price of computers will rise noticeably.
d. None of the above is correct.

6. An increase in quantity demanded

a. results in a movement downward and to the right along a demand curve.
b. results in a movement upward and to the left along a demand curve.
c. shifts the demand curve to the left.
d. shifts the demand curve to the right.

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

a. the supply curve shifts in the opposite direction.
b. the demand curve shifts in the opposite direction.
c. the demand curve shifts in the same direction.
d. there is a movement along a given demand curve.
8. The law of demand states that, other things equal, an increase in
a. price causes quantity demanded to increase.
b. price causes quantity demanded to decrease.
c. quantity demanded causes price to increase.
d. quantity demanded causes price to decrease.

9. The demand curve for a good is a line that relates

a. price and quantity demanded.
b. income and quantity demanded.
c. quantity demanded and quantity supplied.
d. price and income.

10. When quantity demanded increases at every possible price, the demand curve has
a. shifted to the left.
b. shifted to the right.
c. not shifted; rather, we have moved along the demand curve to a new point on the same curve.
d. not shifted; rather, the demand curve has become steeper

11. The market demand curve

a. is the sum of all individual demand curves.
b. is the demand curve for every product in an industry.
c. shows the average quantity demanded by individual demanders at each price.
d. is always flatter than an individual demand curve.

12. The quantity supplied of a good is the amount that

a. buyers are willing and able to purchase.
b. sellers are able to produce.
c. buyers and sellers agree will be brought to market.
d. sellers are willing and able to sell

13. Which of the following would cause a movement along the supply curve for cupcakes?
a. an improvement in technology for commercial mixers
b. a decrease in the price of cupcakes
c. an increase in the price of cake flour
d. All of the above are correct.

14. Which of these statements best represents the law of supply?

a. When input prices increase, sellers produce less of the good.
b. When production technology improves, sellers produce less of the good.
c. When the price of a good decreases, sellers produce less of the good.
d. When sellers’ supplies of a good increase, the price of the good increases.
15. A improvement in production technology will shift the
a. supply curve to the right.
b. supply curve to the left.
c. demand curve to the right.
d. demand curve to the left.

16. If car manufacturers begin using new labor-saving technology on their assembly lines, we would
not expect
a. a smaller quantity of labor to be used.
b. the supply of cars to increase.
c. the firms’ costs to fall.
d. individual car manufacturers to move up and to the right along their individual supply curves.

17. At the equilibrium price, the quantity of the good that buyers are willing and able to buy
a. is greater than the quantity that sellers are willing and able to sell.
b. exactly equals the quantity that sellers are willing and able to sell.
c. is less than the quantity that sellers are willing and able to sell.
d. Either a) or c) could be correct.

18. Buyers are able to buy all they want to buy and sellers are able to sell all they want to sell at
a. prices at and above the equilibrium price.
b. prices at and below the equilibrium price.
c. prices above and below the equilibrium price, but not at the equilibrium price.
d. the equilibrium price but not above or below the equilibrium price.

19. Which of the following events must cause equilibrium price to rise?
a. demand increases and supply decreases
b. demand and supply both decrease
c. demand decreases and supply increases
d. demand and supply both increase

20. Suppose roses are currently selling for $20 per dozen, but the equilibrium price of roses is $30
per
dozen. We would expect a
a. shortage to exist and the market price of roses to increase.
b. shortage to exist and the market price of roses to decrease.
c. surplus to exist and the market price of roses to increase.
d. surplus to exist and the market price of roses to decrease.

21. In general, elasticity is a measure of

a. the extent to which advances in technology are adopted by producers.
b. the extent to which a market is competitive.
c. how firms’ profits respond to changes in market prices.
d. how much buyers and sellers respond to changes in market conditions.
22. When studying how some event or policy affects a market, elasticity provides information on the
a. equity effects on the market by identifying the winners and losers.
b. magnitude of the effect on the market.
c. speed of adjustment of the market in response to the event or policy.
d. number of market participants who are directly affected by the event or policy.

23. The price elasticity of demand measures how much

a. quantity demanded responds to a change in price.
b. quantity demanded responds to a change in income.
c. price responds to a change in demand.
d. demand responds to a change in supply

24. Demand is said to be inelastic if

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

25. Demand is elastic if the price elasticity of demand is

a. less than 1.
b. equal to 1.
c. equal to 0.
d. greater than 1

26. Goods with many close substitutes tend to have

a. more elastic demands.
b. less elastic demands.
c. price elasticities of demand that are unit elastic.
d. income elasticities of demand that are negative.

27. For a good that is a necessity, demand

a. tends to be inelastic.
b. tends to be elastic.
c. has unit elasticity.
d. cannot be represented by a demand curve in the usual way.

28. The discovery of a new hybrid wheat would increase the supply of wheat. As a result, wheat
farmers
would realize an increase in total revenue if the
a. supply of wheat is elastic.
b. supply of wheat is inelastic.
c. demand for wheat is inelastic.
d. demand for wheat is elastic.
29. The supply of oil is likely to be
a. inelastic in both the short run and long run.
b. elastic in both the short run and long run.
c. elastic in the short run and inelastic in the long run.
d. inelastic in the short run and elastic in the long run.

1) The price elasticity of demand is a measure of:

A) the change in quantity demanded of a good that results from a change in its price.
B) how consumers respond to excess demand.
C) the change in price of a good that results from a change in its quantity demanded.
D) the demand for a good.

2) When calculating price elasticity of demand, if the percentage change in price is

negative, then the percentage change in quantity demanded is typically:
A) greater than one.
B) negative.
C) less than one.
D) positive.

3) The price elasticity of demand is typically expressed as a positive number because:

A) it's convenient to use absolute values.
B) both the numerator and the denominator are negative, so the formula yields a
positive number.
C) price and quantity move in the same direction.
D) the demand curve has a positive slope

4) If the price of textbooks increases by one percent and the quantity demanded falls by
one-half percent, then demand for textbooks is:
A) elastic.
B) negative.
C) inelastic.
D) unit elastic

5) If the absolute value of the price elasticity of demand for tickets to a football game is
2, then if the price increases by 1%, quantity demanded decreases by:
A) 1%.
B) 2%.
C) ½%.
D) 4%.

6) If 20% increase in the price of a good leads to a 60% decrease in the quantity
demanded, then what is the price elasticity of demand?
A) 1/6.
B) 1/3.
C) 30.
D) 3.

7) If the price elasticity of demand for pineapples is 0.75, then a 4% increase in the
price of pineapples will lead to a:
A) 0.75% increase in the quantity of pineapples demanded.
B) 0.75% decrease in the quantity of pineapples demanded.
C) 3% decrease in the quantity of pineapples demanded.
D) 3% increase in the quantity of pineapples demanded.

8) The demand for a good is elastic if the price elasticity of demand is:
A) greater than one.
B) less than one.
C) equal to one.
D) equal to zero

9) The demand for a good is inelastic with respect to price if the price elasticity of
demand is:
A) less than one.
B) equal to one.
C) equal to negative one.
D) greater than one.

10) If the percentage change in the price of a good is less than the resulting percentage
change in the quantity demanded of that good, then the demand for that good is:
A) unit elastic.
B) perfectly inelastic.
C) inelastic.
D) elastic.

11) If consumers respond to a 10% price reduction by buying twice as much of a

particular good, we would conclude that:
A) the price elasticity of demand at the original price was greater than one.
B) the price elasticity of demand at the original price was less than one.
C) there was excess demand at the original price.
D) there was excess supply at the original price.

12) If consumers cannot readily switch to a close substitute when the price of a good
increases, the demand for that good is likely to be:
A) elastic.
B) perfectly elastic.
C) unit elastic.
D) inelastic.
13) Suppose the price of a Snickers candy bar is $2.00 at both the airport and the grocery
store. The price elasticity of demand for a Snickers candy bar at an airport is likely to
be ________ the price elasticity of demand for a Snickers candy bar at the grocery
store.
A) equal to
B) greater than
C) less than
D) the reciprocal of

14) Demand tends to be ________ in the short run than in the long run.
A) more variable
B) less important
C) less elastic
D) more elastic

15) Assume the price of gasoline doubles tonight and remains at that price for the next
two years. Compared with the long-run price elasticity of demand for gasoline, the
short-run price elasticity of demand for gasoline will be ________.
A) more variable
B) the same
C) lower
D) higher

16) Economists have found that the price elasticity of demand for water is higher in the
summer than in the winter. Why is this likely to be so?
A) Winter is longer than summer, and price elasticity is lower over longer time
horizons.
B) People take more vacations in the summer and so use less water at home.
C) Winter water use tends to be for necessities such as cleaning and cooking, and
summer water use tends to be for both necessities and non-necessities such as
gardening and recreation.
D) Summer is longer than winter, and price elasticity is higher over longer time
horizons.

17) If demand is ________ with respect to price, a price increase will ________ total
revenue.
A) elastic; increase
B) inelastic; increase
C) inelastic; decrease
D) unit elastic; decrease
18) To increase total revenue, firms with ________ demand should lower price, and
firms with ________ demand should increase price.
A) unit; inelastic
B) elastic; inelastic
C) inelastic; elastic
D) elastic; unit

19) Suppose that a new drug has been approved to treat a life-threatening disease. The
demand for that drug is shown on the graph below. Prior to approval of this drug, the
only treatment for this condition was any one of several non-prescription, or
over-the-counter, pain relievers. The demand for one brand of the several
non-prescription pain relievers is also shown on the graph.

Demand for the new drug is ________ while demand for one brand of the
over-the-counter pain relievers is ________.
A) the horizontal line at $60; the line labeled B
B) the line labeled B; the line labeled A
C) the line labeled A; the line labeled B
D) the vertical line at 100; the line labeled A

20) Suppose that a new drug has been approved to treat a life-threatening disease. The
demand for that drug is shown on the graph below. Prior to approval of this drug, the
only treatment for this condition was any one of several non-prescription, or
over-the-counter, pain relievers. The demand for one brand of the several
non-prescription pain relievers is also shown on the graph.
The manufacturer of the new drug would ________ total revenue by increasing the
price from $15 to $16.
A) experience an uncertain change in
B) experience no change in
C) increase
D) decrease

21) If the demand for electricity is inelastic, then if the local utility wants to increase its
total revenue, it should ________ its price.
A) not change
B) lower
C) frequently change
D) raise

22) The responsiveness of the quantity demanded of one good to a change in the price of
a different good is measured by the:
A) income elasticity of demand.
B) price elasticity of supply.
C) price elasticity of demand.
D) cross-price elasticity of demand.

23) If cross-price elasticity of demand between two goods is positive, the two goods are:
A) substitutes.
B) normal.
C) complements.
D) inferior.

24) If the income elasticity for a particular good is negative, then:

A) the good is a normal good.
B) the good is a luxury good.
C) as income increases, consumers will tend to purchase less of the good.
D) as income increases, consumers will tend to purchase more of the good.
25) The percentage change in quantity supplied that results from a 1 percent change in
price is known as the:
A) slope of the supply curve.
B) cross-price elasticity of demand.
C) cross-price elasticity of supply.
D) price elasticity of supply.

26) If a one percent increase in the price of oranges leads to a five percent increase in the
quantity supplied, the price elasticity of supply for oranges is ________.
A) 5
B) 1/2
C) 2
D) 1/5