Microeconomics Practice: Elasticity, Shifts, and Price Controls
English with a size of 541.98 KBMicroeconomics Practice Questions: Market Dynamics
Section 1: Time, Elasticity, and Substitutes
The time period over which supply and demand curves are drawn is important. If we increase the time period, we would expect the curves to become:
- a. Demand and supply curves to become steeper
- b. Demand and supply curves to become flatter (Increased time allows for greater adjustment, leading to higher elasticity.)
- c. Demand curve to become flatter while the supply curve becomes steeper
- d. The demand curve to become steeper while the supply curve to become flatter
Consider the market for Hershey’s chocolate. If the price of Godiva chocolate (a substitute) increased, we would expect the equilibrium price of Hershey’s chocolate to change by a larger percentage than the equilibrium quantity if:
- a. Demand is relatively elastic
- b. Demand is relatively inelastic
- c. Supply is relatively elastic
- d. Supply is relatively inelastic
In Louisiana, people enjoy eating gumbo or crawfish étouffée (substitutes). As a result of an increase in the price of étouffée, more gumbo is consumed. Economists would say that:
- a. There has been an increase in demand for gumbo and a decrease in quantity demanded of étouffée
- b. There has been an increase in demand for gumbo and a decrease in demand for étouffée
- c. There has been an increase in quantity demanded of gumbo and a decrease in demand for étouffée
- d. There has been an increase in quantity demanded of gumbo and a decrease in quantity demanded of étouffée
Section 2: Income, Perfect Elasticity, and Price Floors
A quasilinear good is one in which, when income increases:
- a. Demand stays the same (Income elasticity is zero.)
- b. Demand increases
- c. Demand decreases
Suppose the price elasticity of demand for a good is equal to 0. From this, we can deduce that:
- a. The demand for the good is perfectly elastic
- b. The demand for the good is perfectly inelastic
- c. The demand for the good is relatively elastic
- d. The demand for the good is relatively inelastic
A farmer produces and sells honey and beeswax. Economists notice that the supply of beeswax increased, and the quantity supplied of honey increased. From this, we can deduce that:
- a. The price of beeswax increased which, in turn, caused the price of honey to increase
- b. The price of beeswax and honey both increased at the same time
- c. The price of honey increased which, in turn, caused the price of beeswax to increase
- d. The price of protective gear, an essential component of working with bees, increased, which in turn increased the price of honey and beeswax
Suppose there is a preexisting binding price floor on peanuts. If the demand for peanuts decreased, we would expect:
- a. The price to stay the same and the quantity traded in the market to decrease (The price floor prevents the price from falling to the new, lower equilibrium.)
- b. The price and the quantity traded in the market to stay the same
- c. The price to decrease and the quantity traded in the market to stay the same
- d. The price to stay the same and the quantity traded in the market to increase
Section 3: Cross-Price Elasticity and Market Shifts
Consider the markets for coffee and energy drinks. If the cross-price elasticity between these two is -2.5, we can deduce that for most people, coffee and energy drinks are:
- a. Very strong substitutes
- b. Very strong complements (Negative cross-price elasticity indicates complements; large magnitude indicates strength.)
- c. Rather weak substitutes
- d. Rather weak complements
Consider the market for cupcakes. If the price of flour increases at the same time that news reports indicate that eating cupcakes decreases people’s life expectancy, we would expect:
- a. The equilibrium price to increase but we could not deduce what would happen to the equilibrium quantity without more information
- b. The equilibrium price to increase and the equilibrium quantity to stay the same
- c. The equilibrium quantity to decrease and the equilibrium price to stay the same
- d. The equilibrium quantity to decrease but we could not deduce what would happen to the equilibrium price without more information
- e. The equilibrium price to increase and the equilibrium quantity to decrease
Section 4: Economic Definitions Matching
Match the economic concept to the statement that best describes it:
- 10. Demand
- b. When the price of cupcakes is $1, I usually buy 6 of them
- 11. Supply
- c. I can make 10 cupcakes when the price is $2/each
- 12. Marginal Benefit
- d. I would buy another cupcake if I could buy it for $0.75
- 13. Marginal Cost
- a. I would make another cupcake to sell, but it is going to cost me an additional $4
Section 5: Brain Breaks and Market Outcomes
Brain Break: Which is the prettiest flower?
(No correct answer—choose your favorite)
Consider the market for graham crackers. If the price of Ritz crackers (a substitute) increases, then:
- a. Demand for graham crackers will ↑ → a surplus at the original price → the price to ↑ → quantity supplied to ↑
- b. Demand for graham crackers will ↑ → a shortage at the original price → the price to ↑ → quantity supplied to ↓
- c. Demand for graham crackers will ↑ → a shortage at the original price → the price to ↓ → quantity supplied to ↓
- d. Demand for graham crackers will ↑ → a surplus at the original price → the price to ↓ → quantity supplied to ↓
- e. Demand for graham crackers will ↑ → a shortage at the original price → the price to ↑ → quantity supplied to ↑
Which of the following statements best describes consumer surplus?
- a. When the price of a movie ticket is $10, I go to the movies 4 times a month
- b. I would be willing to give up $10 of other things to go to a fourth movie in a month
- c. I went to the fourth movie, and found out that there was a special deal so it only cost me $7 instead of $10 (Willingness to pay ($10) minus actual price ($7).)
- d. I want to go to the movies, and I would be willing to pay $10 which the movie theater would accept, but then they were told they had to raise their price to $15 and that is too much for me
Section 6: Elasticity and Price Controls
Consider the market for cotton T-shirts. When the price of raw cotton increased (Supply decreased), the percentage change in price was less than the percentage change in quantity traded. This would be because:
- a. Demand is relatively elastic
- b. Demand is relatively inelastic
- c. Supply is relatively elastic
- d. Supply is relatively inelastic
Consider the market for red solo cups. If an increase in supply caused an increase in quantity traded with no change in equilibrium price, we can deduce that:
- a. The demand for red solo cups is perfectly elastic (A horizontal demand curve absorbs supply shifts without changing price.)
- b. The demand for red solo cups is perfectly inelastic
- c. The supply for red solo cups is perfectly elastic
- d. The supply for red solo cups is perfectly inelastic
Consider the market for papayas. If a new effective price ceiling for papayas were legislated:
- a. The producer surplus would definitely decrease while the consumer surplus may increase, decrease, or stay the same (An effective ceiling lowers price and quantity traded, hurting producers, but the effect on consumers is ambiguous due to reduced quantity.)
- b. The producer surplus would definitely increase while the consumer surplus may increase, decrease, or stay the same
- c. The consumer surplus would definitely decrease while the producer surplus may increase, decrease, or stay the same
- d. The consumer surplus would definitely increase while the producer surplus may increase, decrease, or stay the same
Section 7: Income Elasticity and Government Intervention
Yoav noticed that regardless of the price, he spent exactly $40 per week on yogurt. From this, we can deduce that Yoav’s price elasticity of demand for yogurt is:
- a. Greater than 1
- b. Equal to 1 (Constant total expenditure implies unit elasticity.)
- c. Between 0 and 1
- d. Equal to 0
- e. We would need more information to answer this question
If the income elasticity for pens is positive, then we know pens are:
- a. An inferior good
- b. A normal good
- c. A luxury good
Brain Break: What is your favorite thing to put on a bagel?
(No correct answer—choose your favorite)
Governments enact price controls for a variety of reasons. If their goal is to dramatically decrease the trade of a certain good, then they would want to legislate:
- a. A price ceiling in which the price elasticity of demand is relatively great
- b. A price ceiling in which the price elasticity of demand is relatively small
- c. A price ceiling in which the price elasticity of supply is relatively great
- d. A price ceiling in which the price elasticity of supply is relatively small
A decrease in supply is the same as:
- a. Marginal benefit increasing at every quantity
- b. Marginal benefit decreasing at every quantity
- c. Marginal cost decreasing at every quantity
- d. Marginal cost increasing at every quantity (Supply curve is the marginal cost curve.)
Section 8: Graphical Analysis Answers (Q25-Q30)
The following answers correspond to graphical questions (25-30) referenced in the images below.
Answers for Image 1: 25. A, 26. C, 27. A
Answers for Image 2: 28. B, 29. D, 30. C