Test Questions with Answers
Chapter 12. Supply and Demand Together.
Equilibrium. Maximum Total Surplus
Chapter 12 ― Question 1
The law of diminishing marginal utility implies that consumer surplus from the second banana
- is equal to that from the first banana
- is lower than that from the first banana
- C. is higher than that from the first banana
- none of the above
*B.
Chapter 12 ― Question 2
A tax is imposed on Commodity A and Commodity B. Demand for A is more elastic than demand for B.
Which of the following is likely to happen
A. consumers bear a greater burden of the tax on Commodity A than of the tax on Commodity B
B. consumers bear a greater burden of the tax on Commodity B than of the tax on Commodity A
C. consumers will buy more of A
D. sellers will bear the burden of the tax on B.
* B. The bulk of the burden is always borne by the people whose demand/supply is less elastic. C is wrong because elasticity stands for having alternatives, i.e. for the availability of substitutes.
Chapter 12 ― Question 3
If a tariff is raised on a commodity,
- foreign producers charge a lower price
- foreign producers receive a higher price
- domestic producers receive a higher price
- domestic producers charge a lower price
*C. The tariff raises the price of imports. This enables domestic producers to raise their prices. B is wrong because the tariff must be deducted from the higher price importers receive.
Chapter 12 ― Question 4
If the government sets a price floor above equilibrium price of a commodity, which of the following will happen
- an increase in tax revenues for the government
- an increase in demand for the commodity
- excess supply of the commodity
- excess demand for the commodity
*C. Price floors above equilibrium price attract new suppliers, for instance, more workers seek jobs when the minimum wage has been raised.
Answer A is nonsense. Government do not raise revenues by setting price floors. Answers B and D are also nonsense. Why should there be an increase in demand when prices increase?
Chapter 12 ― Question 5
An increase in the tax on petrol causes
- the demand curve for petrol to shift upwards
- the demand curve for petrol to shift downwards
- a movement upwards the demand curve
- a movement downwards the demand curve.
*C. Questions about petrol and tobacco taxes are very frequent and very tricky.
If you assume demand for petrol to be elastic, the answer is C. Consumers buy less at the higher price.
If you assume demand to be completely inelastic and the demand curve to be vertical, the answer is also C. Consumers by the same quantity as before and pay the higher price.
In either case, the supply curve shifts up.
There is a second complication As I wrote in the book, most textbook authors, with the notable exception of Samuelson, say that Answer B is correct. Discuss the question with your instructor and ask him which answer he expects.
Chapter 12 ― Question 6
If consumers expect the price of bananas to rise, the following will happen
- equilibrium price rises, equilibrium quantity rises
- equilibrium price declines, equilibrium quantity declines
- equilibrium price rises, equilibrium quantity declines
- equilibrium price declines, equilibrium quantity rises
*A. A change in consumer expectations is a change in an exogenous variable and therefore leads to a shift of the demand curve. Equilibrium quantity rises and with it price, a larger quantity is sold at a higher price.
It is best to tackle such questions by sketching the standard graph.
Chapter 12 ― Question 7
What is the effect of each of the following on the market for cinema tickets
- an increase in the prices of DVDs
- an increase in consumer incomes
- an increase in the price of cinema tickets
- a long period of good weather
*1) The supply curve shifts to the right
*2) The supply curve shifts to the right
*3) A lower equilibrium quantity and a higher equilibrium price
*4) The supply curve shifts to the left
Remember that changes in exogenous variables - that is, variables other than price - always cause shifts of curves.
Chapter 12 ― Question 8
What precisely does it mean to say that suppliers must bear a tax because supply is inelastic?
* It means that they cannot lower quantity supplied. They supply a quantity that exceeds quantity demanded at the new price. As a result, they must lower their net prices.
Chapter 12 ― Question 9
Which are the effects of rent control
- the quality of many flats will deteriorate with time
- landlords have more possibilities of discriminating against certain tenants
- the future supply of flats will fall
- all of the above
*D.
Chapter 12 ― Question 10
Indirect tax revenues are likely to be higher when demand is inelastic. True or false? Explain your answer.
* True. Consumers are unable or unwilling to switch to substitutes. They are likely to continue consumption of the taxed good.
Chapter 12 ― Question 11
The demand function for strawberries is q = 80 - 8p. Its supply function is q = 40 + 12p. What is the equilibrium price?
- $10
- $ 2
- $4
- $5
*B. For such questions it is best to try the suggested solutions.
For Answer A the quantity demanded is zero at a price of 10; the quantity supplied is 160 at a price of 10.
For Answer B the quantity demanded is 64 at a price of $2; the quantity supplied is also 64 at a price of $2.
Chapter 12 ― Question 12
If a commodity's value to its buyer is higher than the marginal cost to the firm producing the commodity
- this is the normal outcome on a market with perfect competition
- there is a surplus of the commodity
- there is a shortage of the commodity
- there is no producer surplus
*A. The statement is about consumer surplus. Answer D is wrong. Consumer surplus does not rule out producer surplus.
Chapter 12 ― Question 13
The quantity sold is 400 units. The equilibrium price is $30. The highest value ascribed to the commodity is $80. The lowest marginal cost incurred by a supplier is $20. What is total surplus?
A. $60
B. $24,000
C. $9,000
D. $12,000
*D. The formula is: Base x Height 400 x 60
2 2
The base is the quantity on the x-axis. The height is value ascribed minus cost incurred on the y-axis.
Chapter 12 ― Question 14
What is the difference between profit and producer surplus?
* Profit = Price minus ATC. Producer surplus = Price minus MC.
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