Unit 2 · 20 to 25% of the exam

Unit 2 practice test: Supply and Demand

twelve questions, every option explained

12 exam-style questions from the unit, free, with an explanation for every option. Most are multiple choice, as on the real exam; a few ask for a number or have you shift a curve on a graph, and sets share one data table, graph or scenario. Covers: Demand; Supply; Price Elasticity of Demand; Price Elasticity of Supply; Other Elasticities; Market Equilibrium and Consumer and Producer Surplus; Market Disequilibrium and Changes in Equilibrium; The Effects of Government Intervention in Markets; International Trade and Public Policy.

Start at question 1

Data

A cafe raises the price of coffee

Daily sales at the Lantern Cafe before and after the price of a cup of coffee rises from $2.50 to $3.00, other prices unchanged (invented data for practice)
ItemSales beforeSales after
Cups of tea100110
Small pitchers of cream200188
Postcards3030

1. Cream sales fell from 200 to 188 pitchers. What does the cross-price elasticity say about coffee and cream?

  1. Complements: the cross-price elasticity is −0.3-0.3
  2. Substitutes: the cross-price elasticity is −0.3-0.3
  3. Complements: the cross-price elasticity is 0.30.3
  4. Unrelated: the change is under 10%
Show the answer

Cream: 188−200200×100\frac{188 - 200}{200} \times 100=−6%= -6\%; coffee price: +20%+20\%. Cross-price elasticity: −6÷20=−0.3-6 \div 20 = -0.3. Negative: the goods are complements, used together.

  • Correct: Complements: the cross-price elasticity is −0.3-0.3: Right: a higher coffee price lowered cream sales.
  • Substitutes: the cross-price elasticity is −0.3-0.3: Cream sales fell as the coffee price rose; goods that move like that are complements.
  • Complements: the cross-price elasticity is 0.30.3: Cream sales fell, so the sign is negative.
  • Unrelated: the change is under 10%: Any clear negative response marks complements.

2. Postcard sales did not change. What is the cross-price elasticity, and what does it mean?

  1. Zero: coffee and postcards are complements
  2. Infinite: postcard buyers are very sensitive
  3. Negative: postcards are an inferior good
  4. Zero: coffee and postcards are unrelated
Show the answer

Postcard sales changed 0%, so the cross-price elasticity is 0÷20=00 \div 20 = 0: the goods are unrelated.

  • Zero: coffee and postcards are complements: Complements have a negative cross-price elasticity.
  • Infinite: postcard buyers are very sensitive: No change in quantity gives zero, not infinity.
  • Negative: postcards are an inferior good: Inferior is an income idea, and the elasticity here is zero.
  • Correct: Zero: coffee and postcards are unrelated: Right: no response to the coffee price.

3. Suppose instead the cafe cut the price of coffee by 20%. Based on the table, what would most likely happen to tea sales?

  1. They would rise by about 10%
  2. They would fall by about 10%
  3. They would not change
  4. They would fall by about 40%
Show the answer

Tea is a substitute (cross-price elasticity 0.5). A 20% fall in the price of coffee would lower tea sales by about 0.5×20%=10%0.5 \times 20\% = 10\%, from 100 to about 90 cups.

  • They would rise by about 10%: Cheaper coffee draws buyers away from tea.
  • Correct: They would fall by about 10%: Right: substitutes move with the other good's price.
  • They would not change: Tea responded to the coffee price before, so it would again.
  • They would fall by about 40%: Multiply 0.5 by 20%, which gives 10%.

Data

Three buyers of smoothies at a gym cafe

Smoothies each buyer would buy per week at each price (invented data for practice)
PriceAnaBenCai
$2645
$3534
$4422
$5310

4. The cafe cuts the smoothie price from $4 to $3. What happens in the market for its smoothies?

  1. Demand shifts right because the smoothies are cheaper
  2. A movement along demand: quantity demanded falls from 12 to 8
  3. A movement along demand: quantity demanded rises from 8 to 12
  4. Demand shifts left because each smoothie earns the cafe less
Show the answer

A change in the good's own price is a movement along the demand curve. The market quantity demanded rises from 8 to 12; demand itself does not change.

  • Demand shifts right because the smoothies are cheaper: A lower own price does not shift demand; it moves buyers along it.
  • A movement along demand: quantity demanded falls from 12 to 8: That is the change for a price rise from $3 to $4.
  • Correct: A movement along demand: quantity demanded rises from 8 to 12: Right: the own price changed, so buyers move along the curve.
  • Demand shifts left because each smoothie earns the cafe less: The cafe's earnings do not move the buyers' curve.

5. Which buyer's quantity demanded falls the most, in smoothies, when the price rises from $4 to $5?

  1. Cai, by 2 smoothies
  2. Ana, by 1 smoothie
  3. Ben, by 1 smoothie
  4. Ana and Ben together, by 1 each
Show the answer

Ana falls from 4 to 3 (down 1), Ben from 2 to 1 (down 1) and Cai from 2 to 0 (down 2). Cai's quantity falls the most.

  • Correct: Cai, by 2 smoothies: Right: from 2 to 0.
  • Ana, by 1 smoothie: Ana falls by 1, less than Cai's 2.
  • Ben, by 1 smoothie: Ben falls by 1, less than Cai's 2.
  • Ana and Ben together, by 1 each: Each falls by 1; the question asks for the single largest fall.

6. A fourth regular, Dee, starts using the gym and buys 3 smoothies a week at any price from $2 to $5. How does this change the market demand for the cafe's smoothies?

  1. It does not change, because the price has not changed
  2. Quantity demanded rises along the same curve
  3. It shifts left, because each buyer gets fewer smoothies
  4. It shifts right: 3 more smoothies are demanded at each price
Show the answer

Market demand adds each buyer's quantity at each price. Dee adds 3 smoothies to the market quantity at every price, so the market demand curve shifts right.

  • It does not change, because the price has not changed: The price did not change, but the number of buyers did, and that shifts demand.
  • Quantity demanded rises along the same curve: A movement along demand needs a change in the own price.
  • It shifts left, because each buyer gets fewer smoothies: More buyers raise demand; they do not lower it.
  • Correct: It shifts right: 3 more smoothies are demanded at each price: Right: one more buyer adds to the sum at each price.

7. Over one year, the number of bubble wrap sellers stays the same, but each one offers 500 fewer rolls at every price. What has happened?

  1. Quantity supplied has fallen along the curve
  2. Supply has decreased: the curve shifted left
  3. Supply has increased: the curve shifted right
  4. Demand has decreased: the demand curve shifted
Show the answer

Less offered at every price is a decrease in supply: the supply curve shifts left. A movement along the curve needs a change in the price of bubble wrap.

  • Quantity supplied has fallen along the curve: A movement along supply happens at a new price, not at every price.
  • Correct: Supply has decreased: the curve shifted left: Right: less is offered at each price.
  • Supply has increased: the curve shifted right: Fewer rolls at each price is a decrease.
  • Demand has decreased: the demand curve shifted: The change is in what sellers offer.

8. A study finds that the price elasticity of demand for bus rides in a city is −0.4-0.4. How should demand be classified?

  1. Inelastic, because 0.4 is less than 1
  2. Elastic, because the coefficient is below zero
  3. Unit elastic, because it is close to zero
  4. Perfectly elastic, because it is negative
Show the answer

Read the absolute value: |−0.4|=0.4|-0.4| = 0.4, which is less than 1, so demand for bus rides is inelastic. The minus sign only says price and quantity move in opposite directions.

  • Correct: Inelastic, because 0.4 is less than 1: Right: compare the absolute value with 1.
  • Elastic, because the coefficient is below zero: The sign is not the test; the size of the absolute value is.
  • Unit elastic, because it is close to zero: Unit elastic is exactly 1 in absolute value.
  • Perfectly elastic, because it is negative: Perfectly elastic demand is horizontal; this is a small response.

9. When the price of fresh raspberries rises 10%, growers increase the quantity supplied by 4%. What is the price elasticity of supply?

Type a number. A four-function calculator is allowed, as on the exam.

Show the answer

Elasticity: 4%÷10%=0.44\% \div 10\% = 0.4, less than 1, so supply is inelastic.

  • Answer: 0.4

10. Four buyers would pay at most $10, $8, $6 and $4 for one concert poster each. Posters sell for $5 each. What is the total consumer surplus of the buyers who buy, in dollars?

Type a number. A four-function calculator is allowed, as on the exam.

Show the answer

Only buyers whose willingness to pay is at least $5 buy: those willing to pay $10, $8 and $6. Each gains the gap between what they would pay and the price: 5+3+1=95 + 3 + 1 = 9 dollars. The $4 buyer does not buy.

  • Answer: 9

11. In a kelp bar market, demand reaches zero at $10 and supply starts at $1, with equilibrium at $4 and 60 bars a day. Demand rises: the new demand curve reaches zero at $13, and the new equilibrium is $5 and 80 bars. By how many dollars does consumer surplus change?

Type a number. A four-function calculator is allowed, as on the exam.

Show the answer

Before: 12×60×(10−4)=$180\tfrac{1}{2} \times 60 \times (10 - 4) = $180. After: 12×80×(13−5)=$320\tfrac{1}{2} \times 80 \times (13 - 5) = $320. Consumer surplus rises by $320−$180=$140$320 - $180 = $140.

  • Answer: 140

12. Before a subsidy, 50 units are sold. The government pays sellers $2 for each unit, and the quantity sold rises to 60. What is the cost of the subsidy to the government, in dollars?

Type a number. A four-function calculator is allowed, as on the exam.

Show the answer

The government pays $2 on every unit sold after the subsidy: $2×60=$120$2 \times 60 = $120.

  • Answer: 120