REVIEW – CHAPTER 2

I. Choose the best answer

1. A change in which of the following will NOT shift the demand curve for hamburgers?
A. the price of hot dogs
B. the price of hamburgers
C. the price of hamburger buns
D. the income of hamburger consumers

2. An increase in ________ will cause a movement along a given demand curve, which is
called a change in ________.
A. supply, demand
B. price, quantity demanded
C. demand, supply
D. price, quantity supplied

3. Movie tickets and film streaming services are substitutes. If the price of film streaming
increases, what happens in the market for movie tickets?
A. The supply curve shifts to the left.
B. The supply curve shifts to the right.
C. The demand curve shifts to the left.
D. The demand curve shifts to the right.

4. The discovery of a large new reserve of crude oil will shift the ________ curve for
gasoline, leading to a ________ equilibrium price.
A. supply, higher
B. supply, lower
C. demand, higher
D. demand, lower

5. If the economy goes into a recession and incomes fall, what happens in the markets for
inferior goods?
A. Prices and quantities both rise.
B. Prices and quantities both fall.
C. Prices rise and quantities fall.

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D. Prices fall and quantities rise.

6. Which of the following might lead to an increase in the equilibrium price of jelly and a
decrease in the equilibrium quantity of jelly sold?
A. an increase in the price of peanut better, a complement to jelly
B. an increase in the price of Marshmallow Fluff, a substitute for jelly
C. an increase in the price of grapes, an input into jelly
D. an increase in consumers’ incomes,

7. A life-saving medicine without any close substitutes will tend to have

A. a small elasticity of demand.
B. a large elasticity of demand.
C. a small elasticity of supply.
D. a large elasticity of supply.

8. The price of a good rises from $8 to $12, and the quantity demanded falls from 110 to
90 units. Calculated with the midpoint method, the price elasticity of demand is
A. 1/5.
B. 1/2.
C. 2.
D. 5.

9. A linear, downward-sloping demand curve is

A. inelastic
B. unit elastic.
C. elastic.
D. inelastic at some points, and elastic at others.

10. The ability of firms to enter and exit a market over time means that, in the long run,
A. the demand curve is more elastic.
B. the demand curve is less elastic.
C. the supply curve is more elastic.
D. the supply curve is less elastic.

11. An increase in the supply of a good will decrease the total revenue producers receive if
A. the demand curve is inelastic.
B. the demand curve is elastic.

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C. the supply curve is inelastic.
D. the supply curve is elastic.

12. When the government imposes a binding price floor, it causes

A. the supply curve to shift to the left.
B. the demand curve to shift to the right.
C. a shortage of the good to develop.
D. a surplus of the good to develop.

13. A market with a binding price ceiling, an increase in the ceiling will ________ the
quantity supplied, ________ the quantity demanded, and reduce the ________.
A. increase, decrease, surplus
B. decrease, increase, surplus
C. increase, decrease, shortage
D. decrease, increase, shortage

14. A $1 per unit tax levied on consumers of a good is equivalent to

A. a $1 per unit tax levied on producers of the good.
B. a $1 per unit subsidy paid to producers of the good.
C. a price floor that raises the good’s price by $1 per unit.
D. a price ceiling

15. Which of the following would increase quantity supplied, decrease quantity demanded,
and increase the price that consumers pay?
A. the imposition of a binding price floor
B. the removal of a binding price floor
C. the passage of a tax levied on producers
D. the repeal of a tax levied on producers

16. Which of the following would increase quantity supplied, increase quantity demanded,
and decrease the price that consumers pay?
A. the imposition of a binding price floor
B. the removal of a binding price floor
C. the passage of a tax levied on producers
D. the repeal of a tax levied on producers

17. When a good is taxed, the burden of the tax falls mainly on consumers if

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 A. the tax is levied on consumers.
B. the tax is levied on producers.
C. supply is inelastic, and demand is elastic.
D. supply is elastic, and demand is inelastic.

II. Applications

1. Explain each of the following statements using supply-and-demand diagrams.

a. “When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the
country.”
b. “When the weather turns warm in New England every summer, the price of hotel rooms in
Caribbean resorts plummets.”
c. “When a war breaks out in the Middle East, the price of gasoline rises and the price of a used
Cadillac falls.”

2. Consider the market for minivans. For each of the events listed here, identify which of the
determinants of demand or supply are affected. Also indicate whether demand or supply
increases or decreases. Then draw a diagram to show the effect on the price and quantity of
minivans.
a. People decide to have more children.
b. A strike by steelworkers raises steel prices.
c. Engineers develop new automated machinery for the production of minivans.
d. The price of sports utility vehicles rises.
e. A stock market crash lowers people’s wealth.

3. Suppose that the price of basketball tickets at your college is determined by

market forces. Currently, the demand and supply schedules are as follows:
a. Draw the demand and supply curves. What is unusual about this supply curve? Why might this
be true?
b. What are the equilibrium price and quantity of tickets?
c. Your college plans to increase total enrollment next year by 5,000 students. The additional
students will have the following demand schedule:
Now add the old demand schedule and the demand schedule for the new students to calculate
the new demand schedule for the entire college. What will be the new equilibrium price and
quantity?

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4. The price of coffee rose sharply last month, while the quantity sold remained the same. Five
people suggest various explanations:
Leonard: Demand increased, but supply was perfectly inelastic.
Sheldon: Demand increased, but it was perfectly inelastic.
Penny: Demand increased, but supply decreased at the same time.
Howard: Supply decreased, but demand was unit elastic.
Raj: Supply decreased, but demand was perfectly inelastic.
Who could possibly be right? Use graphs to explain your answer.

5. Two drivers, Walt and Jessie, each drive up to a gas station. Before looking at the price, each
places an order. Walt says, “I’d like 10 gallons of gas.” Jessie says, “I’d like $10 worth of gas.”
What is each driver’s price elasticity of demand?

6. A market is described by the following supply and demand curves:

QS = 2P
QD = 300 - 2P
a. Solve for the equilibrium price and quantity.
b. If the government imposes a price ceiling of $90, does a shortage or surplus (or neither)
develop? What are the price, quantity supplied, quantity demanded, and size of the shortage or
surplus?
c. If the government imposes a price floor of $90, does a shortage or surplus (or neither) develop?
What are the price, quantity supplied, quantity demanded, and size of the shortage or surplus?
d. Instead of a price control, the government levies a tax on producers of $30. As a result, the
new supply curve is: QS = 2(P − 30)
Does a shortage or surplus (or neither) develop? What are the price, quantity supplied,
quantity demanded, and size of the shortage or surplus?
e. The government levies a tax on buyers of $30.
Does a shortage or surplus (or neither) develop? What are the price, quantity supplied,
quantity demanded, and size of the shortage or surplus?