Part 2 Market Mechanism

1. )A illustrates the quantity buyers would purchase at each possible price.

(A) demand curve
(B) supply curve
(C) market
(D) equilibrium

2. A fundamental property of the demand curve is that it is .

(A) upward sloping
(B) vertical
(C) downward sloping
(D) horizontal

3. The is the highest price an individual is willing to pay for a good.

(A) buyer’s reservation price
(B) seller’s reservation price
(C) equilibrium price
(D) quantity

4. The is the lowest price the seller would be willing to sell for.
(A) buyer’s reservation price
(B) seller’s reservation price
(C) equilibrium price
(D) quantity

5. The is the price at which the supply and demand curves intersect.
(A) buyer’s reservation price
(B) seller’s reservation price
(C) equilibrium price
(D) quantity

6. Demand for a good increases when income increases.

(A) normal
(B) inferior
(C) Giffen
(D) substitute

7. A(n) is a good for which demand will increase if the price of a related good increases.
(A) normal
(B) inferior
(C) Giffen
(D) substitute
8. A(n) is a good for which demand will increase if more of a related good is purchased.
(A) normal
(B) inferior
(C) complement
(D) substitute

9. A(n) good is one for which the demand curve shifts rightward when the incomes of buyers
decrease.
(A) normal
(B) inferior
(C) complement
(D) substitute

10. The tendency for consumers to purchase more of a good or service as its price falls is called
(A) the law of supply.
(B) the law of increasing cost.
(C) the Low-Hanging Fruit principle.
(D) the law of demand.

11. If a decrease in the price of gasoline increases the demand for large cars, then
(A) gasoline and large cars are substitutes in consumption.
(B) gasoline and large cars are complements in consumption.
(C) gasoline is an inferior good.
(D) large cars are an inferior good.

12. A illustrates when the prices of goods are higher more sellers would like to produce that item.
(A) demand curve
(B) supply curve
(C) market
(D) equilibrium

13. A fundamental property of the supply curve is that it is .

(A) upward sloping
(B) vertical
(C) downward sloping
(D) horizontal

14. A seller's reservation price is generally equal to:

(A) the buyer's reservation price.
(B) the seller's average cost.
(C) the seller's marginal cost.
(D) the market price.
15. Which of the following explains why supply curves slope upward?
(A) prices and income
(B) increasing marginal cost
(C) resources and technology
(D) substitutes in production and complements in production

16. In a market, the demanders are the ___ ____, and the suppliers are the __ ____.
(A) bosses; workers
(B) poor; wealthy
(C) buyers; sellers
(D) sellers; buyers

17. A(n) _______ occurs when quantity demanded exceeds quantity supplied.
(A) equilibrium
(B) surplus
(C) shortage
(D) opportunity cost

18. According to the figure above. In this market, equilibrium price and quantity would be
(A) $15; 400.
(B) $20; 600.
(C) $25; 500.
(D) $25; 800.

19. According to the figure above. If price is $15, quantity supplied would be
(A) 200.
(B) 400.
(C) 500.
(D) 700.

20. According to the figure above, if the price is $25, there would be a
(A) surplus of 300 and price would fall.
(B) surplus of 200 and price would fall.
 (C) shortage of 200 and price would rise.
(D) shortage of 300 and price would rise.

21. Refer to the figure above. At a price of $3, the market will experience ______________ in the amount
of _________ units.
(A) excess demand; 5 units
(B) excess supply; 7 units
(C) equilibrium; 4 units
(D) excess supply; 3 units

22. Refer to the figure above. The equilibrium price and quantity for this market are:
(A) $8; 6.
(B) $6; 4.
(C) $4; 6.
(D) $2; 8.

Price Quantity supplied Quantity demanded

(dollars per pound) (pounds) (pounds)
3 1 7
4 2 5
5 4 4
6 5 2
7 6 1

23. The above table shows the demand schedule and supply schedule for chocolate chip cookies. If the
price is $4.00 per pound, there is a shortage of pounds of chocolate chip cookies.
(A) 2
(B) 3
(C) 4
(D) 5
24. In the above figure, a change in quantity demanded with unchanged demand is represented by a
movement from
(A) point a to point e.
(B) point a to point b.
(C) point a to point c.
(D) None of the above represent a change in the quantity demanded with an unchanged demand.

25. In the above figure, a change in quantity supplied with unchanged supply is represented by a movement
from
(A) point a to point e.
(B) point b to point a.
(C) point e to point c.
(D) point b to point e.

26. If a price decrease results in your expenditure on a good decreasing, your demand must be
(A) inelastic.
(B) unit.
(C) elastic.
(D) linear.

27. Perfectly elastic demand is represented by a demand curve that

(A) upward sloping
(B) vertical
(C) downward sloping
(D) horizontal

28. The elasticity of demand for luxuries tends to be

(A) greater than 1.
(B) less than 1.
(C) equal to 1.
 (D) equal to 0.

29. Positive income elasticity is a _______

(A) normal good
(B) inferior good
(C) Giffen good
(D) substitution good

30. Goods _______ have more elastic demands.

(A) with many substitutes
(B) which are necessities
(C) with few substitutes
(D) whose purchase represents a small percentage of income

31. ____ ___is the percentage change in quantity demanded that results from a 1 percent change in price.
(A) Price elasticity of demand
(B) Price elasticity of supply
(C) Price elasticity of substitute
(D) Price elasticity of complement

32. If the price of cheese falls by 1 percent and the quantity demanded rises by 3 percent, then the price
elasticity of demand for cheese has a value of:
(A) 30.
(B) 0.30.
(C) 0.333.
(D) 3.

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

34. If the price of a good increases by 20% and that leads to a decrease in quantity demanded by 60%, what
is the price elasticity of demand for that good?
(A) 30.
(B) 3.
(C) 1/3.
(D) 1/6.
35. If the cross elasticity of demand between coffee and tea is positive, an increase in the price of tea will
shift the demand curve for
(A) tea rightward.
(B) tea leftward.
(C) coffee rightward.
(D) coffee leftward.

36. measures how much the quantity supplied responds to changes in the price of the good.
(A) Price elasticity of demand
(B) Price elasticity of supply
(C) Price elasticity of substitute
(D) Price elasticity of complement

37. The elasticity of a perfectly elastic supply curve equals

(A) 0.
(B) 1.
(C) infinity.
(D) less than 1 but greater than 0.

38. As elasticity rises, the supply curve gets

(A) flatter.
(B) steeper.
(C) vertical.
(D) downward sloping.

39. If a supplier 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, since elasticity is equal to 1.11.
(B) inelastic, since elasticity is equal to 1.11.
(C) inelastic, since elasticity is equal to 0.90.
(D) elastic, since elasticity is equal to 0 .90.

40. If sellers respond substantially to changes in price, then

(A) the supply curve will shift substantially when the price rises.
(B) sellers are considered to be relatively price insensitive.
(C) sellers are considered to be relatively price sensitive.
(D) the price elasticity of supply equals 1.
41. (C) Suppose a market is in equilibrium. The area between the demand curve and the market price is:
(A) the total economic surplus.
(B) producer surplus.
(C) consumer surplus.
(D) the surplus loss.
42. (D) If an individual consumer is willing to pay $11 for one unit of a good but finds he can purchase it
for $7, he has a consumer surplus of:
(A) $18.00.
(B) $11.00.
(C) $7.00.
(D) $4.00.

43. (C) Refer to the figure above. If the market is unregulated, the value of consumer surplus is:
(A) $4.
(B) $8.
(C) $16.
(D) $24.
44. (D) In the above figure, at the equilibrium price and quantity, producer surplus is _____ ___.
(A) $90
(B) $60
(C) $45
(D) $30
45. (C) If an individual producer is willing to produce one unit of a good for $2.50 but finds he can sell it
for $7.50, he has a producer surplus of:
(A) $10.00.
(B) $7.50.
(C) $5.00.
(D) $6.25.

46. (A) The cumulative difference between the price producers actually receive and the price for which
they are willing to produce is:
(A) producer surplus.
(B) lost surplus.
(C) total economics surplus.
(D) consumer surplus.
47. (C) Refer to the figure above. When the market is unregulated, producer surplus equals:
(A) (DB) × (BC).
(B) ½ × (DG) × (GF).
(C) ½ × (DB) × (BC).
(D) ½ × (FH) × (HC).

48. (B) Refer to the figure above. When the market is unregulated, consumer surplus equals:
(A) ½ × (AJ) × (JE).
(B) ½ × (AB) × (BC).
(C) ½ × (AG) × (GI).
(D) ½ × (EH) × (HC).

49. (D) The above figure illustrates the market for bagels. If the number of bagels is cut from 20 to 10 an
 hour, the deadweight loss is ________.
(A) $0.50 a bagel
(B) -$5.00 an hour
(C) $0 an hour
(D) $5.00 an hour

50. (B) The above figure illustrates the market for bagels. If the number of bagels is increased from 20 to
30 an hour, consumer surplus plus producer surplus ______ __ and deadweight loss is ______ __.
(A) decreases; negative
(B) decreases; positive
(C) increases; positive
(D) increases; negative

51. (A) The relative price of a good is

(A) an opportunity cost.
(B) equal to the money price of a good.
(C) equal to the price of that good divided by the quantity demanded of the good.
(D) what you get paid for babysitting your cousin.

52. (C) The law of demand concludes that a rise in the price of a golf ball ________ the quantity demanded
and ________.
(A) increases; shifts the demand curve for golf balls rightward.
(B) decreases; shifts the demand curve for golf balls leftward.
(C) decreases; creates a movement up along the demand curve for golf balls.
(D) increases; creates a movement down along the demand curve for golf balls.
53. (C) A normal good is one
(A) with a downward sloping demand curve.
(B) for which demand increases when the price of a substitute rises.
(C) for which demand increases when income increases.
(D) none of the above

54. (C) Changes in which of the following shifts the supply curve of hamburgers?
(A) a rise in the price of soda, a complement for hamburgers
(B) new research that establishes a link between hamburgers and heart problems
(C) an increase in the price of meat used to produce hamburgers
(D) an economy-wide decrease in income because of a long recession

55. (B) Blank DVDs and prerecorded DVDs are substitutes in production. An increase in the price of a
blank DVD will lead to
(A) an increase in the supply of prerecorded DVDs.
(B) a decrease in the supply of prerecorded DVDs.
(C) an increase in the quantity supplied of prerecorded DVDs but not in the supply of prerecorded
DVDs.
(D) a decrease in the quantity supplied of prerecorded DVDs but not in the supply of prerecorded
DVDs.

56. (B) Which of the following results in a movement along the supply curve of spinach but does not shift
the supply curve of spinach?
(A) Disastrous weather that destroys half of this year's spinach crop.
(B) A rise in the price of spinach.
(C) An increase in wages for workers in spinach fields.
(D) Great weather that produces a bumper spinach crop this year.

57. (A) The figure above shows the market for candy. People become more concerned that eating candy
causes them to gain weight, which they do not like. As a result, the
(A) demand curve shifts from D2 to D1 and the supply curve does not shift.
(B) demand curve shifts from D1 to D2 and the supply curve shifts from S1 to S2.
 (C) demand curve shifts from D2 to D1 and the supply curve shifts from S2 to S1.
(D) demand curve does not shift, and the supply curve shifts from S1 to S2.

58. (A) If good A is a normal good and income increases, the equilibrium price of A ________ and the
equilibrium quantity of A ________.
(A) rises; increases
(B) rises; decreases
(C) falls; decreases
(D) falls; increases

59. (D) The price elasticity of demand equals magnitude of the

(A) change in the price divided by the change in quantity demanded.
(B) change in the quantity demanded divided by the change in price.
(C) percentage change in the price divided by the percentage change in the quantity demanded.
(D) percentage change in the quantity demanded divided by the percentage change in the price.

60. (A) If the price elasticity of demand for a good is 0.8, then a
(A) 1 percent rise in the price leads to a 0.8 percent decrease in the quantity demanded.
(B) one dollar rise in the price leads to a 0.8 percent decrease in the quantity demanded.
(C) 1 percent rise in the price leads to an 80 percent decrease in the quantity demanded.
(D) 1 percent rise in the price leads to an 8 percent decrease in the quantity demanded.

61. (D) Suppose that the demand for corn is price inelastic. If a technological advance makes corn farms
more productive, the equilibrium price of corn will ________ and the farmers' total revenue will
________.
(A) rise; increase
(B) rise; decrease
(C) fall; increase
(D) fall; decrease

62. (A) Donuts and coffee are complements. When the price of a donut increases, the demand for coffee
________ and the cross elasticity of demand for coffee with respect to the price of a donut is ________.
(A) decreases; negative
(B) increases; negative
(C) increases; positive
(D) decreases; positive
63. (B) The figure shows the relationship between Moira's income and the quantity of macaroni that she
demands. When income is less than $350 per month, macaroni ________.
(A) is an inferior good
(B) is a normal good
(C) has many substitutes
(D) has negative income elasticity

64. (A) Which goods have more elastic demands?

(A) goods with many substitutes
(B) goods which are necessities
(C) goods with few substitutes
(D) goods whose purchase represents a small percentage of income

65. (B) Perfectly elastic demand is represented by a demand curve that

(A) is vertical.
(B) is horizontal.
(C) has a 45° slope.
(D) is a rectangular hyperbola.

66. (D) Which of the following is not an example of a public policy?

(A) rent-control laws
(B) minimum-wage laws
(C) taxes
(D) equilibrium laws

67. (B) Rent-control laws dictate

(A) the exact rent that landlords must charge tenants.
(B) a maximum rent that landlords may charge tenants.
(C) a minimum rent that landlords may charge tenants.
 (D) both a minimum rent and a maximum rent that landlords may charge tenants.

68. (C) Minimum-wage laws dictate

(A) the exact wage that firms must pay workers.
(B) a maximum wage that firms may pay workers.
(C) a minimum wage that firms may pay workers.
(D) both a minimum wage and a maximum wage that firms may pay workers.

69. (C) Price controls

(A) always produce a fair outcome.
(B) always produce an efficient outcome.
(C) can generate inequities of their own.
(D) All of the above are correct.

70. (D) A legal maximum on the price at which a good can be sold is called a price
(A) floor.
(B) subsidy.
(C) support.
(D) ceiling.

71. (B) A price ceiling is

(A) often imposed on markets in which “cutthroat competition” would prevail without a price ceiling.
(B) a legal maximum on the price at which a good can be sold.
(C) often imposed when sellers of a good are successful in their attempts to convince the government
that the market outcome is unfair without a price ceiling.
(D) All of the above are correct.

72. (B) If a price ceiling is not binding, then

(A) the equilibrium price is above the price ceiling.
(B) the equilibrium price is below the price ceiling.
(C) it has no legal enforcement mechanism.
(D) None of the above is correct because all price ceilings must be binding.

73. (D) If a price ceiling is not binding, then

(A) there will be a surplus in the market.
(B) there will be a shortage in the market.
(C) the market will be less efficient than it would be without the price ceiling.
(D) there will be no effect on the market price or quantity sold.

74. (B) If a nonbinding price ceiling is imposed on a market, then the

(A) quantity sold in the market will decrease.
(B) quantity sold in the market will stay the same.
 (C) price in the market will increase.
(D) price in the market will decrease.
75. (C) A price ceiling will be binding only if it is set
(A) equal to the equilibrium price.
(B) above the equilibrium price.
(C) below the equilibrium price.
(D) either above or below the equilibrium price.

76. (A) If the government removes a binding price ceiling from a market, then the price paid by buyer will
(A) increase, and the quantity sold in the market will increase.
(B) increase, and the quantity sold in the market will decrease.
(C) decrease, and the quantity sold in the market will increase.
(D) decrease, and the quantity sold in the market will decrease.

77. (A) When a binding price ceiling is imposed on a market,

(A) price no longer serves as a rationing device.
(B) the quantity supplied at the price ceiling exceeds the quantity that would have been supplied
without the price ceiling.
(C) all buyers benefit.
(D) All of the above are correct.

78. (C) Which of the following would be the least likely result of a binding price ceiling imposed on the
market for rental cars?
(A) an accumulation of dirt in the interior of rental cars
(B) poor engine maintenance in rental cars
(C) free gasoline given to people as an incentive to a rent a car
(D) slow replacement of old rental cars with newer ones

79. (D) Which of the following would be the most likely result of a binding price ceiling imposed on the
market for rental cars?
(A) frequent rental programs such as “Rent nine times and the tenth rental is free!”
(B) enhanced maintenance programs to promote the high quality of the cars
(C) free gasoline given to people as an incentive to a rent a car
(D) slow replacement of old rental cars with newer ones

80. (C) A price ceiling is binding when it is set

(A) above the equilibrium price, causing a shortage.
(B) above the equilibrium price, causing a surplus.
(C) below the equilibrium price, causing a shortage.
(D) below the equilibrium price, causing a surplus.
81. (D) A binding price ceiling
(i) causes a surplus.
(ii) causes a shortage.
(iii) is set at a price above the equilibrium price.
(iv) is set at a price below the equilibrium price.
(A) (ii) only
(B) (iv) only
(C) (i) and (iii) only
(D) (ii) and (iv) only

82. (B) A nonbinding price ceiling

(i) causes a surplus.
(ii) causes a shortage.
(iii) is set at a price above the equilibrium price.
(iv) is set at a price below the equilibrium price.
(A) (i) only
(B) (iii) only
(C) (i) and (iii) only
(D) (ii) and (iv) only

83. (C) To say that a price ceiling is binding is to say that the price ceiling
(A) results in a surplus.
(B) is set above the equilibrium price.
(C) causes quantity demanded to exceed quantity supplied.
(D) All of the above are correct.

84. (B) To say that a price ceiling is nonbinding is to say that the price ceiling
(A) results in a surplus.
(B) is set above the equilibrium price.
(C) causes quantity demanded to exceed quantity supplied.
(D) All of the above are correct.

85. (C) A shortage results when a

(A) nonbinding price ceiling is imposed on a market.
(B) nonbinding price ceiling is removed from a market.
(C) binding price ceiling is imposed on a market.
(D) binding price ceiling is removed from a market.
86. (A) The imposition of a binding price ceiling on a market causes quantity demanded to be
(A) greater than quantity supplied.
(B) less than quantity supplied.
(C) equal to quantity supplied.
(D) Both (A) and (B) are possible.

87. (D) In response to a shortage caused by the imposition of a binding price ceiling on a market,
(A) price will no longer be the mechanism that rations scarce resources.
(B) long lines of buyers may develop.
(C) sellers could ration the good or service according to their own personal biases.
(D) All of the above are correct.

88. (B) A legal minimum on the price at which a good can be sold is called a price
(A) subsidy.
(B) floor.
(C) support.
(D) ceiling.

89. (D) price floor is

(A) a legal minimum on the price at which a good can be sold.
(B) often imposed when sellers of a good are successful in their attempts to convince the government
that the market outcome is unfair without a price floor.
(C) a source of inefficiency in a market.
(D) All of the above are correct.

90. (A) If a price floor is not binding, then

(A) the equilibrium price is above the price floor.
(B) the equilibrium price is below the price floor.
(C) there will be a surplus in the market.
(D) Both (A) and (C) are correct.

91. (C) If a price floor is not binding, then

(A) there will be a surplus in the market.
(B) there will be a shortage in the market.
(C) there will be no effect on the market price or quantity sold.
(D) the market will be less efficient than it would be without the price floor.
92. (C) A binding price floor
(i) causes a surplus.
(ii) causes a shortage.
(iii) is set at a price above the equilibrium price.
(iv) is set at a price below the equilibrium price.
(A) (i) only
(B) (iii) only
(C) (i) and (iii) only
(D) (ii) and (iv) only

93. (A) After a binding price floor becomes effective, a

(A) smaller quantity of the good is bought and sold.
(B) a larger quantity of the good is demanded.
(C) a smaller quantity of the good is supplied.
(D) All of the above are correct.

94. (B) Price controls are usually enacted

(A) as a means of raising revenue for public purposes.
(B) when policymakers believe that the market price of a good or service is unfair to buyers or sellers.
(C) when policymakers detect inefficiencies in a market.
(D) All of the above are correct.

95. (B) Chicken and fish are substitutes. If the price of chicken increases, the demand for fish will
(A) increase or decrease but the demand curve for chicken will not change.
(B) increase and the demand curve for fish will shift rightward.
(C) not change but there will be a movement along the demand curve for fish.
(D) decrease and the demand curve for fish will shift leftward.

96. (B) An increase in the number of sellers of bikes will increase the
(A) the price of a bike.
(B) demand for crash helmets, a complement of bikes.
(C) the supply of inline skates.
(D) demand for inline skates, a substitute for bikes.

97. (B) In the market for fertilizer, an

(A) increase in the wage rate will increase the demand for fertilizer.
(B) advance in technology will increase the supply of fertilizer.
(C) increase in the wage rate will increase the supply of fertilizer.
(D) increase in the cost of equipment will increase the supply of fertilizer.
98. (B) The price of a tomato increases and people buy fewer onions. You infer that onions and tomatoes
are _________________.
(A) normal goods
(B) complements
(C) substitutes
(D) inferior goods

99. (A) The quantity of a cars that people plan to buy this month depends on all of the following except the
__________________.
(A) quantity of cars that dealers have for sale
(B) price of a van
(C) population
(D) expected future price of a car