Chapter 3: Supply and Demand: Multiple Choice Questions

Chapter 3: Supply and Demand

Multiple Choice Questions
MARKET PARTICIPANTS
1. The goals of market participants include the maximization of:

A) Utility, profits, and the general welfare of society.
B) Rent, wages, profit, and interest.
C) Land, labor, capital, and entrepreneurship.
D) Resource constraints, budget constraints, and legal constraints.
Answer: A Type: Basic Understanding Page: 45
2. The goals of the market participants are the maximization of:

A) Income for consumers, profits for businesses, and taxes for government.
B) Goods and services for consumers, scarce resources for businesses, and resources not used by
businesses for government.
C) Satisfaction from purchases for consumers, profits for businesses, and society's general welfare for
government.
D) Available goods and services for consumers, scarce resources for businesses, and general welfare for
government.
Answer: C Type: Basic Understanding Page: 45
3. The goals of the consumer in a market economy is to buy:

A) The greatest number of goods and services possible.
B) The goods and services that maximize profits for businesses.
C) The combination of goods and services which maximizes their utility given a limited budget.
D) Those goods and services with the lowest prices.
4. The goal of the supplier of a product or service in a market economy is:

A) The use of scarce resources subject to the constraint of taxes.
B) The use of scarce resources subject to the constraint of available profit.
C) Profits subject to the constraint of scarce resources.
D) Profits subject to the constraint of income.
5. People benefit by participating in the market because:

A) Resources are no longer limited.
B) There are always participants in the market that are more efficient than you are in production.
C) Market participation allows individuals to specialize and, ultimately, consume more.
D) Participants in the market do not have to make choices.
Answer: C Type: Complex Understanding Page: 45
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6. Which of the following are reasons why individual consumers participate in the market?
A) They do not have the time to produce all the goods and services that they desire.
B) They do not have the energy to produce all the goods and services that they desire.
C) They do not have the ability to produce all the goods and services that they desire.
D) All of the above are reasons.
Answer: D Type: Basic Understanding Page: 45
THE CIRCULAR FLOW
7. Which of the following is a market transaction?

A) A house increases in value over the thirty years that it is owned.
B) A college student purchases textbooks.
C) Weather destroys a farmer's crops leaving the farmer unable to buy groceries.
D) A radio station changes its programming from classical to rock.
Answer: B Type: Complex Understanding Page: 46
8. Which of the following is purchased in a product market?

A) A factory. B) National Defense. C) An individuals' labor. D) A bag of pretzels.
Answer: D Type: Complex Understanding Page: 46
9. A market in which final goods and services are exchanged is a:

A) Public-goods market. B) Product market. C) Factor market. D) Labor market.
Answer: B Type: Definition Page: 46
10. The four factors of production are:

A) Labor, raw materials, capital, and money.
B) Rent, wages, interest, and profit.
C) Production, distribution, pricing, and marketing.
D) Land, labor, capital, and entrepreneurship.
Answer: D Type: Definition Page: 46
11. A market in which land, labor, capital or entrepreneurship is exchanged is a:

A) Product market. B) Securities market. C) Factor market. D) Bond market.
Answer: C Type: Definition Page: 46
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12. Consumers:
A) Provide dollars to the product market.
B) Receive dollars from the product market.
C) Provide dollars to the factor market.
D) Receive goods and services from the factor market.
13. Businesses participate in:

A) Factor markets only. C) Factor and product markets.
B) Product markets only. D) Foreign markets only.
14. Governments participate in:

15. In the U.S. economy, foreigners participate in:

16. In the U.S economy, foreigners participate in:

A) The factor market only.
B) The product market only.
C) Both the product and the factor markets.
D) Foreigners do not participate in the U.S. economy.
17. When a firm offers a higher salary to an employee of another firm and lures the employee away, the firm is:
A) Using the market mechanism.
B) Bidding in the product market.
C) Shifting the demand curve in the product market.
D) Selling in the factor market.
Answer: A Type: Complex Understanding Page: 46
DEMAND
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18. A buyer is said to have a demand for a good only when:

A) The buyer wants to own the good.
B) The buyer is both willing and able to purchase the good at alternative prices.
C) The price of the good is low enough.
D) An adequate supply of the good is available for purchase.
19. Jon's demand schedule for donuts indicates:

A) How much he likes donuts. C) Why he likes donuts.
B) His opportunity cost of buying donuts. D) How many donuts he will actually buy.
20. The term opportunity costs refers to the:

A) Value of all the options given up when a good or service is produced.
B) Financial costs of all the factors of production used to produce a good or service.
C) Amount of resources used to produce a good or service.
D) Value of the best option given up when a good or service is produced.
21. The quantity of a good a consumer is willing to buy depends on:

A) The price of a good. C) The opportunity cost of purchasing that good.
B) The consumer's income. D) All of the above.
22. The maximum price a consumer is willing to pay for a good depends on:
A) The amount of utility the consumer receives from the good.
B) The consumer's income.
C) The opportunity cost of purchasing that good.
D) All of the above.
23. According to the law of demand, the quantity of a good demanded in a given time period:
A) Increases as its price rises, ceteris paribus. C) Increases as its price falls, ceteris paribus.
B) Decreases as its price falls, ceteris paribus. D) Does not change when price changes.
24. According to the law of demand, a demand curve:

A) Has a negative slope. C) Is a horizontal, or flat, line.
B) Has a positive slope. D) Exceeds the economy's ability to produce.
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25. A lower quantity demanded of a good reflects, ceteris paribus:

A) Lower income. C) A downward shift of the supply curve.
B) A higher price of the good. D) All of the above.
26. Ceteris paribus, which of the following can change without shifting demand?
A) Expectations. B) Income. C) The prices of other related goods. D) The price of the good itself.
27. Which of the following is not held constant along a given demand curve for a good?
A) Price. B) Consumer's income. C) The price of substitutes. D) Consumer tastes.
28. Which of the following determinants might change in the consumer-goods market as a result of an increase
in unemployment?
A) Income. B) Buyer expectations. C) Tastes. D) All of the above.
29. Ceteris paribus, which of the following would generally cause an increase in the demand for automobiles?
A) A decrease in the price of automobiles.
B) An increase in consumers' income.
C) The new models are perceived as ugly compared with old models.
D) Consumer expectations that the price of automobiles will be lower next year.
30. Ceteris paribus, which of the following would you expect to cause a decrease in the demand for
automobiles?
A) A rise in the price of gasoline.
B) Consumer expectation that the price of automobiles will be lower next year.
C) Consumer expectation that a significant recession will develop and last for a year.
31. Ceteris paribus, which of the following would generally cause a decrease in the demand for new
automobiles?
A) A decrease in the price of automobiles.
B) The new models are perceived as ugly compared with old models.
C) An increase in consumers' income.
D) Consumers' expectations that the price of automobiles will be higher next year.
Answer: B Type: Basic Understanding Page: 51
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32. Which determinant of demand changes in the personal computer market as more individuals become
interested in "surfing the Internet"?
A) Cost of factors of production. B) Income. C) Expectations. D) Number of buyers.
33. If consumers expect PC manufacturers to offer rebates next month, consumers will:
A) Increase their demand for PCs today.
B) Decrease their demand for PCs today.
C) Keep demand the same, but increase the quantity demanded for PCs.
D) Keep demand the same, but decrease the quantity demanded for PCs.
34. Assume Pepsi and Coke are substitutes. An increase in the price of one will result in:
A) A decrease in demand for the other.
B) A decrease in the quantity demanded of the other.
C) An increase in the demand for the other.
D) An increase in the quantity demanded of the other.
35. If bagels and donuts are substitutes, then a decrease in the price of donuts will result in:
A) An increase in the demand for donuts. C) A decrease in the demand for donuts.
B) An increase in the demand for bagels. D) A decrease in the demand for bagels.
36. If Dell computers and HP computers are substitutes, then an increase in the price of Dell computers will
result in:
A) A decrease in demand for HP computers.
B) A decrease in the quantity demanded of HP computers.
C) An increase in demand for HP computers.
D) An increase in the quantity demanded of HP computers.
37. An increase in the price of one good can cause a decrease in the demand for another good if the goods are:
A) Substitutes. B) Complements. C) Unrelated to each other. D) Both inferior.
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38. Peanut butter and jelly are complements. An increase in the price of one will result in:
A) A decrease in demand for the other.
B) A decrease in the quantity demanded of the other.
C) An increase in the demand for the other.
D) An increase in the quantity demanded of the other.
39. Assume a series of forest fires reduces the supply of lumber which is an input in the production of wooden
bats. Baseballs and wooden bats are complements. If the price of wooden bats increases, we can expect the:
A) Demand for baseballs to decrease. C) Supply of baseballs to decrease.
B) Demand for baseballs to increase. D) Supply of baseballs to increase.
40. Tennis balls and tennis rackets are commonly used together. A decrease in the price of tennis rackets will
result in:
A) An increase in the demand for tennis balls. C) An increase in the demand for tennis rackets.
B) A decrease in the demand for tennis balls. D) A decrease in the demand for tennis rackets.
41. Ceteris paribus me

A) Holding everything else constant.
B) Allowing the free market to decide, not government.
C) Changing prices to see how demand (or supply) shifts.
D) Holding prices constant to see how each determinant of demand changes the quantity demanded.
Answer: A Type: Definition Page: 51
42. A shift in demand is defined as a change in the:

A) Price.
B) Quantity demanded because of a change in price.
C) Quantity demanded at any given price.
D) Equilibrium quantity.
43. A change in demand means there has been a shift in the demand curve, and a change in the quantity
demanded:
A) Corresponds to a movement along the demand curve.
B) Means a shortage or surplus will result from holding prices constant.
C) Results from a change in price of other goods.
D) Also means demand has shifted.
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44. A change in demand means there has been a shift in the demand curve, and a change in quantity demanded:
A) Results from a change in price of other goods.
B) Means a shortage or surplus will result from holding prices constant.
C) Also means demand has shifted.
D) Means that price has changed and there is movement along the demand curve.
45. Economists make a distinction between a change in "demand" and a change in the "quantity demanded":
A) Because the supply curve shifts whenever there is a change in demand.
B) Because the demand curve shifts whenever there is a change in quantity demanded.
C) To distinguish a shift in the demand curve from a movement along the demand curve.
D) To distinguish a shift in supply from a shift in demand.
46. When a buyer purchases a good, ceteris paribus:

A) The demand curve shifts to the left, but quantity demanded remains the same.
B) The quantity demanded of the good falls, but demand remains unchanged.
C) The demand curve shifts to the left, and the quantity demanded falls.
D) There is no change in demand or the quantity demanded.
47. Given a downward-sloping market demand curve for product X, if the price of X is reduced from $10 to $8,
then, ceteris paribus:
A) Demand for X will increase. C) Demand for X will decrease.
B) The quantity demanded of X will increase. D) The quantity demanded of X will decrease.
48. Given a downward-sloping market demand curve for web design services, if the price of web design
services is decreased from $12 per hour to $9 per hour, then, ceteris paribus:
A) Demand for web design services will increase.
B) The quantity demanded of web design services will increase.
C) Demand for web design services will decrease.
D) The quantity demanded of web design services will decrease.
49. The market demand curve for a particular good indicates:

A) Consumers will purchase more of a good at higher prices, ceteris paribus.
B) Sellers will offer more of a good only at higher prices, ceteris paribus.
C) The total quantities that buyers are willing and able to purchase at alternative prices in a given period
of time, ceteris paribus.
D) How much of a good is actually purchased in a given period of time.
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50. Which of the following is a market-demand determinant but not an individual-demand determinant?
A) Income. B) Price of other goods. C) Tastes. D) Number of buyers.
51. To calculate market demand we:

A) Add the quantities demanded for each individual demand schedule horizontally.
B) Add the quantities demanded for each individual demand schedule vertically.
C) Find the average quantity demanded at each price.
D) Find the difference between the quantity demanded and the quantity supplied at each price.
SUPPLY
52. A change in the price of a good:

A) Causes a shift in the supply curve. C) Results in a change in quantity supplied.
B) Results in a change in supply. D) Is a determinant of supply.
53. An increase in the price of a good causes a:

A) Rightward shift in the supply curve. C) Movement down the supply curve.
B) Movement up the supply curve. D) Leftward shift in the supply curve.
54. Which of the following is not held constant along a given supply curve for a good?
A) The cost of factors of production. B) Price. C) Technology. D) Taxes.
55. A change in quantity supplied is the result of:

A) A change in the price of the good. C) An increase in the number of sellers.
B) A change in technology. D) All of the above.
56. A shift in supply is defined as a change in:

A) Price.
B) Quantity supplied because of a change in price.
C) Equilibrium quantity.
D) Supply because of a change in a non-price determinant.
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57. Economists make a distinction between changes in quantity supplied and changes in supply:
A) Because the supply curve shifts whenever there is a change in quantity supplied.
B) To distinguish a movement along a supply curve from a shift in the supply curve.
C) Because the demand curve shifts whenever there is a change in quantity supplied.
D) To distinguish a supply shift from a demand shift.
58. Which of the following is a determinant of supply?

A) Suppliers' tastes for the good they produced. C) Consumers' desire for the good.
B) Consumers' income. D) Available technology.
59. Which of the following is a determinant of supply?

A) Consumer tastes or preferences. C) The prices of the factors of production.
B) Income. D) Number of buyers.
60. The amount of a good suppliers are willing and able to supply at any given price in a given time period
could depend on:
A) Buyer's income. C) The state of technology at the time.
B) Expectations on the part of buyers. D) The consumer demand for the good.
61. Which of the following provides an example of the law of supply?

A) Falling labor costs cause an increase in supply.
B) Improved technology shifts the supply curve to the right.
C) Some producers leave the industry, and the supply curve shifts to the left.
D) Price falls and the quantity supplied decreases.
62. According to the law of supply, a supply curve:

A) Has a negative slope. C) Is a horizontal, or flat, line.
B) Has a positive slope. D) Will always be less than the demand curve.
63. To calculate market supply we:

A) Add the quantities supplied for each individual supply schedule horizontally.
B) Add the quantities supplied for each individual supply schedule vertically.
C) Find the average quantity supplied at each price.
D) Find the difference between the quantity supplied and the quantity demanded at each price.
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64. The market supply curve of a particular product indicates the:

A) Total quantities that are actually sold during a given time period.
B) Total quantities that buyers are willing to purchase at alternative prices.
C) Total quantities that sellers are willing and able to offer for sale at alternative prices in a given time
period, ceteris paribus.
D) Specific quantities that an individual seller will make available at a given price in a given time period,
ceteris paribus.
65. Which of the following is a market-supply determinant but not an individual firm's supply determinant?
A) Technology. B) Factor costs. C) Seller expectations. D) Number of sellers.
66. When the number of sellers in a market changes, ceteris paribus:

A) Both individual supply curves and market supply curves shift.
B) Individual supply curves remain unchanged, but the market supply curve shifts.
C) Individual supply curves change, but the market supply curve remains unchanged.
D) There are no changes to either type of curve.
67. Which of the following events would cause a rightward shift in the market supply curve for automobiles?
A) A technological improvement which reduces the cost of production.
B) An increase in the wages of autoworkers.
C) A higher sales tax on automobiles.
D) A decrease in the number of sellers.
68. If corn and wheat are alternative pursuits for a farmer, a change in the supply of corn will take place when,
ceteris paribus:
A) The price of corn changes.
B) The price of wheat changes.
C) The demand for corn changes.
D) Consumers want to buy more corn at the same price.
69. Which of the following would not cause the market supply of cell phones to change?
A) Telecommunications are deregulated, and anyone who wants to can produce and sell cell phones.
B) A cheaper technology for producing plastics used in producing cell phones is developed.
C) A reduction in the demand for cell phones causes the price to fall.
D) Taxes levied on cell phone production are reduced.
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70. Market supply and market demand curves are similar in that both:
A) Involve the willingness and ability of a supplier to sell a product or service.
B) Involve the willingness and ability of a buyer to buy a product or service.
C) Have price on the x-axis and quantity on the y-axis.
D) Can be derived by adding horizontally all the curves of the individuals in the market.
Answer: D Type: Analytical Page: 57
71. Both a demand schedule and a supply schedule for a good indicate for a given period of time at different
prices, ceteris paribus:
A) The motives for exchanging money for various quantities of the good.
B) The actual quantities of the good exchanged for money.
C) That supply creates its own demand.
D) The quantities of the good that market participants are willing and able to exchange.
72. Which of the following can change without shifting either demand or supply, ceteris paribus?
A) The price of the good itself. B) Incomes. C) The prices of other goods. D) All of the above.
Answer: A Type: Analytical Page: 57
EQUILIBRIUM
73. A market is said to be in equilibrium when:

A) Demand is fully satisfied at all alternative prices.
B) The buying intentions of all consumers are realized.
C) The supply intentions of all sellers are realized.
D) The quantity demanded equals the quantity supplied.
74. The equilibrium price in a market is found where:

A) The market supply curve intersects the market demand curve.
B) The market supply curve intersects the y-axis.
C) The market demand curve intersects the y-axis.
D) The market supply curve intersects the x-axis.
75. At the equilibrium price there are:

A) Shortages. B) Surpluses. C) Excess inventories. D) No shortages or surpluses.
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76. In a market, the equilibrium price is determined by:

A) What buyers are willing and able to purchase.
B) What sellers are willing and able to offer for sale.
C) Both demand and supply.
D) The government.
77. In most markets, the equilibrium price is achieved:

A) Through detailed databases. C) Using an equilibrium price formula.
B) Through government mandate. D) Through trial and error.
78. The market mechanism is consistent with:

A) A trial and error process. B) The invisible hand. C) Equilibrium. D) All of the above.
79. The term market mechanism refers to:

A) The use of market prices and sales to determine resource allocation.
B) The establishment of a ceiling price in a market.
C) Supply and demand curves.
D) Government laws and regulations concerning how the market should operate.
80. The invisible hand explains:

A) The trial-and-error process by which a market reaches equilibrium.
B) The determination of prices set by the government.
C) The appearance of persistent shortages.
81. Suppose there are buyers and sellers in a market but no exchange takes place. Assume there is no
government intervention in this market. This implies that:
A) The price must be so high that no one can afford this good.
B) There must be a shortage of the good.
C) The market supply and demand curves do not intersect.
D) Market demand must be upward sloping.
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82. When a surplus exists:

A) Producers reduce price in an attempt to decrease excess inventory.
B) Consumers buy more of the good because they know a surplus exists.
C) Government officials offer more subsidies.
83. When a surplus exists for a product:

A) Producers increase supply.
B) Consumers increase demand.
C) Government purchases decrease.
D) Producers reduce the level of output and reduce price.
84. A ballet performance had many empty seats. This implies that the:
A) Hall where the performance was being held was very large.
B) Price of the tickets must have been very low because of the low demand.
C) Ballet group was not very well known.
D) Price of the tickets must have been above the equilibrium price.
85. If the quantity demanded of a good is greater than the quantity supplied of the good at the current price,
then:
A) Price will increase until it reaches the equilibrium price.
B) The demand curve will shift to the left to create an equilibrium.
C) The supply curve will shift to the right to create an equilibrium.
D) There is a surplus of the good.
86. A market shortage is:

A) The amount by which the quantity demanded exceeds the quantity supplied at a given price.
B) A situation of excess demand.
C) A situation in which people cannot buy all of the goods they are willing and able to buy at the actual
market price.
87. A market shortage is:

A) The amount by which the quantity demanded exceeds the quantity supplied at a given price.
B) The result of a price ceiling.
C) A situation in which people cannot buy all the goods and services that they are willing and otherwise
able to buy.
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88. A rock concert was sold out several weeks before the performance. This implies that the:
A) Stadium where the concert was being held was very small.
B) Price of the tickets must have been very high because of the high demand.
C) Rock group must be very popular.
D) Price of the tickets must have been below the equilibrium price.
89. When a shortage exists:

A) Producers reduce price in an attempt to increase inventory.
B) Consumers bid up the price.
C) Government officials increase taxes on the good.
90. As a result of a shortage:

A) Consumers increase demand for the product. C) Producers increase output and raise the price.
B) Producers reduce supply. D) Government purchases decrease.
91. A rightward shift in a demand curve and a rightward shift in a supply curve both result in a:
A) Lower equilibrium price. C) Lower equilibrium quantity.
B) Higher equilibrium price. D) Higher equilibrium quantity.
92. A rightward shift in a demand curve and a leftward shift in a supply curve both result in a:
A) Lower equilibrium price. C) Lower equilibrium quantity.
B) Higher equilibrium price. D) Higher equilibrium quantity.
Answer: B Type: Analytical Page: 61
93. A leftward shift of the market demand curve for HDTVs, ceteris paribus, causes equilibrium:
A) Price to increase and quantity to decrease. C) Price to decrease and quantity to decrease.
B) Price to increase and quantity to increase. D) Price to decrease and quantity to increase.
Answer: C Type: Analytical Page: 61
94. A rightward shift of the market demand curve for MP3 players, ceteris paribus, causes equilibrium:
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95. When the demand for Play Station II increases, ceteris paribus, the equilibrium price will also increase
because:
A) A shortage exists at the old equilibrium price.
B) There must be a surplus of the good.
C) The market supply and demand curves do not intersect.
D) Market demand must be upward sloping.
96. When demand decreases, ceteris paribus, the equilibrium price will also decrease because:
A) A shortage exists at the old equilibrium price. C) The quantity demanded has increased.
B) A surplus exists at the old equilibrium price. D) The quantity supplied has decreased.
97. When the supply of HDTVs increases, ceteris paribus, the equilibrium price will decrease because:
98. When the supply of gasoline decreases, ceteris paribus, the equilibrium price will increase because:
99. When half of the consumers in a small town move away, the markets for different goods and services will
generally experience:
A) Lower equilibrium price and lower equilibrium quantity.
B) Lower equilibrium price and higher equilibrium quantity.
C) Higher equilibrium price and lower equilibrium quantity.
D) Higher equilibrium price and higher equilibrium quantity.
100. A leftward shift of the market supply curve, ceteris paribus, causes equilibrium:
101. An increase in the supply of gasoline, ceteris paribus, will cause equilibrium:
A) Price to rise and quantity to fall. C) Price to fall and quantity to rise.
B) Price and quantity to rise. D) Price and quantity to fall.
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102. A leftward shift in a supply curve, ceteris paribus, is characterized by:

A) A decrease in equilibrium quantity and a decrease in price.
B) A decrease in equilibrium quantity and an increase in price.
C) An increase in equilibrium quantity and a decrease in price.
D) An increase in equilibrium quantity and an increase in price.
103. A rightward shift of the market supply curve, ceteris paribus, causes equilibrium:
104. Suppose that during the 1995-2001 time period, the number of motorcycles sold increased despite an
increase in price. How can this be explained using demand and supply analysis?
A) Demand must be upward sloping.
B) Demand must have increased while supply remained constant.
C) Supply must have decreased while demand remained constant.
D) This cannot be explained using demand and supply.
105. In 1998 a company sold 35,000 CD players at $100 each. In 1999 the same company sold 40,000 CD
players at $120 each. The information suggests that:
A) The supply of CD players increased from 1998 to 1999.
B) The demand of CD players increased from 1998 to 1999.
C) The price of CD players increased because the costs of production increased from 1998 to 1999.
D) From 1998 to 1999 the demand curve for CD players was upward sloping because of improved
technology.
106. Suppose there are a series of forest fires which affect the lumber industry while, at the same time,
consumers demand more wooden furniture. The wooden furniture market would experience:
A) An increase in price and an indeterminate change in quantity.
B) An increase in price and an increase in quantity.
C) An increase in quantity and an indeterminate change in price.
D) A decrease in price and an indeterminate change in quantity.
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107. Suppose both the demand and supply of salsa increase (although not necessarily by the same amount).
What can we conclude about changes in the price and quantity of salsa?
A) Both the prices and quantity increase.
B) The price increases but the change in the quantity cannot be determined.
C) The quantity increases but the change in the price cannot be determined.
D) Both the price and quantity decrease.
108. Suppose both the demand and supply of peaches decrease (although not necessarily by the same amount).
What can we conclude about changes in the price and quantity of peaches?
A) Both the prices and quantity increase.
B) The price decreases but the change in the quantity cannot be determined.
C) The quantity decreases but the change in the price cannot be determined.
D) Both the price and quantity decrease.
MARKET OUTCOMES
109. In a market economy, which of the following determines the answer to the WHAT to produce question?
A) Direct negotiations between consumers and producers.
B) Prices and profits.
C) Government directives.
D) A democratic vote for all consumers.
110. In a market economy, which of the following is an incentive for producers to produce efficiently?
A) Government laws and regulations. C) Profits.
B) The production-possibilities curve. D) The public's welfare.
111. In a market economy, the people who receive the goods and services produced are those who:
A) Need the goods and services the most. C) Have the most political power.
B) Want the goods and services the most. D) Are willing and able to pay the market price.
112. When economists talk about "optimal outcomes" in the marketplace, they mean that:
A) The allocation of resources by the market is perfect.
B) All the consumer desires are satisfied and business profits are maximized.
C) The allocation of resources by the market is likely to be the best possible, given scarce resources and
income constraints.
D) Everyone who wants a good or service can have it.
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113. When the market mechanism is allowed to operate freely prices will determine:
A) The mix of output to be produced.
B) The resources to be used in the production process.
C) To whom the output will be distributed.
THE ECONOMY TOMORROW
114. An increase in the equilibrium price of electricity can be caused by:

A) An increase in the supply of electricity. C) An increase in the demand for electricity.
B) A decrease in the demand for electricity. D) All of the above.
115. Which of the following changes in the electricity market can best explain an increase in the equilibrium
price of electricity?
A) An increase in demand and a decrease in supply.
B) A decrease in demand and an increase in supply.
C) An increase in both demand and supply.
D) A decrease in both demand and supply.
116. The increase in the price of electricity in California can best be explained by:
A) The increased population in California and the growing economy.
B) The abnormally cold winters and hot summers.
C) The increased use of electronic devises such as computers.
117. Which of the following is most likely to occur because of the increase in the price of electricity in
California?
A) An increase in the electricity imported into California.
B) A decrease in the electricity imported into California.
C) An increase in the consumption of electricity in California.
D) An increase in the supply of electricity in California.
118. The California legislature placed an upper limit on electricity prices which is called a:
A) Price floor. B) Price ceiling. C) Price support. D) Demand ceiling.
Page 19
119. The price ceiling that the California legislature placed on electricity caused:
A) An increase in demand. B) An increase in supply. C) A shortage. D) A surplus.
120. An effective price ceiling results in black-market pressures to:

A) Reduce prices because of surpluses. C) Raise prices because of shortages.
B) Raise prices because of surpluses. D) Reduce prices because of shortages.
121. Price ceilings are intended to address the problem of:

A) Inefficiency in production.
B) Inequity in the distribution of goods and services.
C) Business bankruptcies.
D) Shortages.
122. If a price ceiling results in a shortage:

A) This is an example of market failure.
B) The program is poorly designed because effective price ceilings produce surpluses.
C) Buyers will be dissatisfied because they cannot purchase all they wish at a less-than-equilibrium price.
D) It is not effective.
123. If a price ceiling is to be effective, it should be set:

A) Below the equilibrium price, and it will create a market shortage.
B) Below the equilibrium price, and it will create a market surplus.
C) Above the equilibrium price, and it will create a market shortage.
D) Above the equilibrium price, and it will create a market surplus.
124. If the government prevented prices from falling to their equilibrium levels, there would be:
A) A shortage. B) A surplus. C) A price ceiling. D) An equilibrium price.
125. Which of the following is a predictable effect of price ceilings?

A) An increase in the quantity supplied. C) An increase in the quantity demanded.
B) A market surplus. D) All of the above.
Page 20
Page 21

A) A decrease in the quantity supplied. C) A decrease in the quantity demanded.
B) A market surplus. D) All of the above.

A) A decrease in the quantity supplied. C) A market shortage.
B) An increase in the quantity demanded. D) All of the above.
128. When effective price ceilings are set for a market:

A) Quantity demanded will be less than the equilibrium quantity, and price will be less than the
equilibrium price.
B) Quantity demanded will be less than the equilibrium quantity, and price will be greater than the
equilibrium price.
C) Quantity demanded will be greater than the equilibrium quantity, and price will be less than the
equilibrium price.
D) Quantity demanded will be greater than the equilibrium quantity, and price will be greater than the
equilibrium price.
129. When a price ceiling is eliminated the:

A) Quantity demanded increases. C) Market shortage disappears.
B) Quantity supplied decreases. D) All of the above.
130. When a price ceiling is eliminated the:

A) Quantity demanded decreases. C) Market surplus disappears.
B) Quantity supplied decreases. D) Market shortage remains.
131. Suppose a hurricane hits Florida causing widespread damage to houses and businesses. The governor of
Florida places a price ceiling on all building materials to keep the prices reasonable. Which of the following
is the most likely result?
A) A faster recovery from the storm.
B) More people will be able to afford and purchase building materials.
C) Shortages of building materials and a slower recovery from the storm.
D) Both a and b are correct.
Page 22
132. Suppose a hurricane hits Florida causing widespread damage to houses and businesses. The governor of
Florida places a price ceiling on all building materials to keep the prices reasonable. Which of the following
is the most likely result?
A) Shortage of building materials. C) A slower recovery from the storm.
B) Long lines at lumber stores. D) All of the above would probably result.
133. After a major snowstorm last winter, some college students earned extra money by clearing driveways of
snow for $25. Town officials determined that $25 was too high and set a price ceiling of $15 for this
service. Which of the following was the most likely result?
A) More people were able to afford and purchase this service.
B) People had to wait longer but eventually everyone got their driveway cleared.
C) Fewer driveways were cleared.
D) No driveways were cleared.
134. If the demand for concert tickets is greater than the supply of concert tickets at the established price then:
A) The price will decrease until the quantity demanded equals the quantity supplied.
B) The established price is a price ceiling.
C) The government should intervene to encourage producers to produce more.
D) Demand is greater than it would be at a lower price.
Use the following to answer questions 135-142:
Choose the letter of the diagram in Figure 3.1 that best describes the type of shift that would occur in each situation
for the market listed at the left, ceteris paribus.
Figure 3.1
Shifts of supply and demand
135. Laptop computers: An advancement in technology reduces the cost of producing laptop computers.
A) A B) B C) C D) D
Page 23
136. 2001 model cars: 2002 model cars are introduced for purchase in the market, and consumers prefer the new
cars.
A) A B) B C) C D) D
137. 2002 model cars: Consumer confidence in the economy improves.

A) A B) B C) C D) D
138. Steel: The government introduces environmental restrictions on the dumping of wastes from processing
steel.
A) A B) B C) C D) D
139. Orange juice: Much of the Florida citrus crop is destroyed by a hurricane.
A) A B) B C) C D) D
140. Housing: The cost of lumber decreases because less expensive lumber is imported from Canada.
A) A B) B C) C D) D
141. Donuts: People become more health-wise and prefer power bars over donuts.
A) A B) B C) C D) D
142. All goods and services: The level of income increases for all consumers.
A) A B) B C) C D) D
Page 24
EQUILIBRIUM
Complete Table 3.1. Then answer the indicated questions.
Table 3.1
Individual demand and supply schedules
Q u a n tity D e m a n d e d B y
P r ic e A l B e ts y C asey M a rk e t
$ 4 .0 0 4 2 1 ______
3 .0 0 6 2 2 ______
2 .0 0 10 2 3 ______
1 .0 0 12 2 3 ______
Q u a n tity S u p p lie d B y
P r ic e A lic e B u tc h C o n n ie M a rk e t
$ 4 .0 0 15 9 11 ______
3 .0 0 8 7 10 ______
2 .0 0 6 3 6 ______
1 .0 0 0 0 5 ______
143. In Table 3.1, if the price were $4 the market would:

A) Be at equilibrium. C) Experience a surplus of 20 units.
B) Experience a shortage of 7 units. D) Experience a surplus of 28 units.
144. In Table 3.1, if the price were $2 the market would:

A) Be at equilibrium. C) Experience a surplus of 2 units.
B) Experience a shortage of 12 units. D) Experience a surplus of 25 units.
145. In Table 3.1, if government held the price at $3:

A) The government would be setting an effective price ceiling.
B) The shortage would be the same as the quantity demanded.
C) There would be a surplus.
D) The market would be in equilibrium.
146. In Table 3.1, the equilibrium market quantity would be:

A) 17 units. B) 15 units. C) 25 units. D) 35 units.
Page 25
147. In Table 3.1, the equilibrium market price would be:

A) $4. B) $3. C) $2. D) $1.
For the indicated questions, choose the letter of the diagram in Figure 3.2 that best describes the type of shift that
would occur in each situation for the indicated market, ceteris paribus.
Figure 3.2
148. What will happen in the international gold market if Russia decides to open new mines and dump gold?
(See Figure 3.2.)
A) A. B) B. C) C. D) D.
149. What will happen in the oil market if Russia, a major producer of oil, finds its oil reserves are becoming
more difficult to exploit, its equipment is deteriorating, and it does not have the financing to improve the
equipment? (See Figure 3.2.)
A) A. B) B. C) C. D) D.
150. Suppose there is a breakdown in the Russian transportation system. If this raised the cost of shipping grain,
what would be the impact on the Russian grain market? (See Figure 3.2.)
A) A. B) B. C) C. D) D.
Page 26
151. If massive unemployment occurs in Russia, households will have less to spend on consumer goods. What
would be the impact on the market for consumer goods? (See Figure 3.2.)
A) A B) B C) C D) D
Complete Table 3.2. Then answer the indicated questions.
Table 3.2
Demand and supply for trucks (millions of trucks per year)
Q u a n tity D e m a n d e d B y
P ric e A m e ric a n s R e s t o f W o rld W o rld w id e M a rk e t
(p e r tru c k )
$ 5 0 ,0 0 0 5 10 ___ __ _ _ __ _
4 0 ,0 0 0 10 20 ___ __ _ _ __ _
3 0 ,0 0 0 20 40 ___ __ _ _ __ _
2 0 ,0 0 0 40 60 ___ __ _ _ __ _
Q u a n tity S u p p lie d B y
P ric e A m e ric a n s R e s t o f W o rld W o rld w id e M a rk e t
(p e r tru c k )
$ 5 0 ,0 0 0 4 0 60 ___ __ _ _ __ _
4 0 ,0 0 0 3 0 50 ___ __ _ _ __ _
3 0 ,0 0 0 2 0 40 ___ __ _ _ __ _
2 0 ,0 0 0 1 5 5 ___ __ _ _ __ _
152. In Table 3.2, if the worldwide price of trucks were $30,000, the international truck market would:
A) Be at equilibrium.
B) Experience a shortage of 50 million trucks per year.
C) Experience a surplus of 50 million trucks per year.
D) Experience a shortage of 85 million.
153. In Table 3.2, if the worldwide price of trucks were $50,000, the international truck market would:
A) Be at equilibrium.
B) Experience a shortage of 15 million trucks per year.
C) Experience a surplus of 100 million trucks per year.
D) Experience a surplus of 85 million trucks per year.
154. In Table 3.2, the equilibrium price in the international truck market would be:
A) $40,000. B) $30,000. C) $80,000. D) $50,000.
Page 27
155. In Table 3.2, the equilibrium quantity demanded in the international truck market would be:
A) 30 million trucks per year. C) 60 million trucks per year.
B) 100 million trucks per year. D) 15 million trucks per year.
Figure 3.3
Supply and demand
S u p p ly
$10
$8
D o lla rs P e r U n it
$6
$4
$2
D em and
$0
10 20 30 40 50
Q u a n tity
156. The equilibrium price and quantity in Figure 3.3 are, respectively:
A) $6 and 30 units. B) $4 and 20 units. C) $8 and 20 units. D) $8 and 40 units.
157. If the actual market price were fixed at $10 per unit in Figure 3.3:
A) There would be a surplus of 40 units. C) There would be a surplus of 20 units.
B) There would be a shortage of 10 units. D) There would be a shortage of 20 units.
158. Figure 3.3 indicates that:

A) The lowest price at which sellers are willing and able to supply 40 units is $4.
B) The highest price at which buyers are willing and able to buy 40 units is $4.
C) A surplus of 40 units would result if the market price were $4.
Page 28
Figure 3.4
Supply and demand
S u p p ly
$25
$20
$15
$10
$5
D em and
$0
10 20 30 40 50
Q u a n tity
159. Equilibrium price and quantity in Figure 3.4 occur at:

A) A price of $15 and a quantity of 10 units. C) A price of $20 and a quantity of 20 units.
B) A price of $15 and a quantity of 30 units. D) A price of $10 and a quantity of 30 units.
160. If a price ceiling of $10 was in effect in Figure 3.4:

A) A shortage of 20 units would occur. C) A shortage of 10 units would occur.
B) A surplus of 20 units would occur. D) A surplus of 10 units would occur.
161. In Figure 3.4, at a price of $20:

A) The market is in equilibrium.
B) The quantity demanded is greater than the quantity supplied.
C) The quantity supplied is greater than the quantity demanded.
D) A shortage exists.
Page 29
162. Using Figure 3.4, at a price of $5

A) The quantity demanded is 10 units. C) The quantity supplied is 30 units.
B) The quantity demanded is 50 units. D) The quantity supplied is 50 units.
Figure 3.5
Supply and demand
S u p p ly
$50
$40
$30
$20
$10
D em and
$0
10 20 30 40 50
Q u a n tity
163. In Figure 3.5, equilibrium occurs at a:

A) Price of $10 and a quantity of 10 units. C) Price of $30 and a quantity of 30 units.
B) Price of $20 and a quantity of 20 units. D) Price of $40 and a quantity of 20 units.
164. In Figure 3.5, excess supply exists:

A) At a price of $10. B) At a price of $20. C) At a price of $30. D) At a price of $40.

A) The quantity supplied is greater than the quantity demanded.
B) There is a surplus of 20 units.
C) With no interference in the market, there is a downward pressure on price.
Page 30

A) A shortage of 20 units exists. C) Price is above the equilibrium price.
B) A surplus of 20 units exists. D) The quantity demanded is 10 units.
Figure 3.6
S 0 S 0 S S 1
1
P ric e P e r U n it
S 1 S 1
S 0
S 0
D 1 D D 1 D 0
0
D 0
D 1
D 0 D 1
Q u a n tity Q u a n tity Q u a n tity Q u a n tity

A B C D
167. Which panel of Figure 3.6 represents the changes in the market for insulation when the cost of heating
homes increases and the workers who install insulation get lower wages?
A) A B) B C) C D) D
168. Which panel of Figure 3.6 represents the changes in the market for beef when the price of corn (cattle feed)
falls and the surgeon general reports that red meat contributes to heart disease?
A) A B) B C) C D) D
169. Which panel of Figure 3.6 represents the changes in the market for cigarettes when the government
increases subsidies for the production of tobacco and at the same time bans smoking in public buildings?
A) A B) B C) C D) D
170. Which panel of Figure 3.6 represents the changes in the market for textbooks when the cost of paper
increases and the government ceases to make student loans?
A) A B) B C) C D) D
Page 31
For the following questions, choose the letter of the diagram in Figure 3.7 that best describes the type of shift that
would occur in each situation for the U.S. farming market, ceteris paribus.
Figure 3.7
171. OPEC raises oil prices, which causes a significant increase in the cost of fuel for tractors and other farm
vehicles.
A) A B) B C) C D) D
172. The Freedom to Farm Act reduces subsidies to U.S. farmers.

A) A B) B C) C D) D
173. The U.S. population becomes more weight conscious and consumes less of all foods.
A) A B) B C) C D) D
174. Improvements in crops allow farmers to use fewer pesticides and other chemicals, which reduces costs.
A) A B) B C) C D) D
175. The government allows ethanol, a corn-based product, to be used in place of petroleum-based fuel.
A) A B) B C) C D) D
Page 32
176. As the population grows, the need for food grows as well.
A) A B) B C) C D) D
177. The weather is particularly favorable for crops throughout the United States for the entire year.
A) A B) B C) C D) D
The following multiple-choice questions require critical thinking about In the News and World View articles that
appeared in the text.
178. One In the News article in the text describes how a decrease in PC prices caused an increase in the quantity
sold. This illustrates the:
A) Law of demand.
B) Direct relationship between price and quantity demanded.
C) Law of supply.
D) Indirect relationship between price and quantity supplied.
179. One In the News article in the text, “PC Prices Fall with Demand,” suggests that a decrease in demand
caused prices to fall. In this case, weak demand caused a:
A) Shortage to exist and producers responded by decreasing their prices.
B) Surplus to exist and producers responded by decreasing their prices.
C) Surplus to exist and producers responded by increasing their prices.
D) New equilibrium to exist where equilibrium price was lower and equilibrium quantity was higher.
180. The In the News article, “Californians Pinched by Power Prices,” suggests that electricity prices increased
in California. This increase was most likely caused by:
A) An increase in factor costs. C) Reduced consumption by consumers.
B) Weak demand. D) Too little regulation by the state government.
181. The In the News article, “Californians Pinched by Power Prices,” suggests that electricity prices increased
in California because of a decrease in supply. The reduced supply caused:
A) A surplus to exist at the original equilibrium price.
B) Consumers to pay lower prices as they reduced their energy consumption.
C) A shortage to exist at the original equilibrium price.
D) A decrease in demand as the price increased.
Page 33
182. One In the News article in the text described how some U2 concert fans waited for as long as five days for
the ticket office to open to beat "the scalpers." Apparently the $28.50 price of the ticket was:
A) Too low for equilibrium, resulting in a surplus of tickets.
B) Too low for equilibrium, resulting in a shortage of tickets.
C) Too high for equilibrium, resulting in a surplus of tickets.
D) Too high for equilibrium, resulting in a shortage for tickets.
183. One In the News article in the text described how some U2 concert fans waited for as much as five days for
the ticket office to open to beat "the scalpers." If the price of tickets had been allowed to reach its
equilibrium level, which of the following would most likely have occurred?
A) Scalpers would have been seen before the concert selling tickets at very high prices.
B) Fewer people would have lined up to wait for the sale of tickets.
C) A larger stadium would have been needed to accommodate those who could not get tickets.
D) More people would have lined up to wait for the sale of tickets.
184. One In the News article in the text is titled "Federal Price Limits Backfire." The article emphasizes that
price ceilings cause:
A) A surplus. B) A shortage. C) Supply to increase. D) Demand to decrease.
185. One In the News article in the text is titled "Federal Price Limits Backfire." Which of the following
occurred in California as a result of the rate caps?
A) An increase in consumer confidence because of a stable power supply.
B) An increase in profits for power producers.
C) Rolling blackouts because of a shortage of power.
D) An increase in the supply of power in response to demand.
True/False Questions
MARKET PARTICIPANTS
T F 186. As a result of specialization and trade individuals no longer have to make choices about how to
spend their incomes.
Answer: False Type: Basic Understanding Page: 45
T F 187. The basic goals of utility maximization, profit maximization, and welfare maximization explain
most market activity.
Answer: True Type: Basic Understanding Page: 45
Page 34
CIRCULAR FLOW
T F 188. Markets require a physical location to permit sellers to supply money to buyers for goods and
services.
T F 189. Land, labor, capital, and entrepreneurship are bought and sold in the product market.
DEMAND
T F 190. According to the law of demand, a decrease in price leads to an increase in quantity demanded.
T F 191. When the number of buyers in a market changes, the market-demand curve for goods and services
shifts.
T F 192. A change in price changes the quantity demanded and is represented by a movement along the
demand curve.
T F 193. A decrease in price increases the demand for goods purchased by consumers.
T F 194. The demand schedule and demand curve remain unchanged only so long as the underlying
determinants of demand remain constant.
T F 195. If the prices of the factors used to produce a good change, both the demand curve and the supply
curve of the good will shift.
Page 35
T F 196. If a large number of people petition the government for free food, then there is a greater demand
for food.
T F 197. When the number of buyers in a market changes, the market demand curve for goods and services
also changes, even if individual demand curves do not shift.
T F 198. An increase in the price of one good can cause the demand for another good to increase if the
goods are substitutes.
T F 199. An increase in the price of one good can cause the demand for another good to increase if the
goods are complements.
SUPPLY
T F 200. When a seller sells a good, the supply curve shifts to the right.
T F 201. When individual supply curves shift, ceteris paribus, the market supply curve shifts.
T F 202. Both the supply and demand curves depend on expectations but the supply curve depends on the
expectations of the buyer and the demand curve depends on the expectations of the seller.
T F 203. The law of supply and the law of demand both rely on the concept of opportunity cost.
Page 36
EQUILIBRIUM
T F 204. The market price equals the equilibrium price if quantity demanded equals quantity supplied, at
the market price.
T F 205. Market price is the same thing as equilibrium price.
T F 206. The market mechanism satisfies all consumer desires and maximizes business profits.
T F 207. There are never shortages or surpluses when the price in a market is equal to the equilibrium price
for the market.
T F 208. Scalping is likely to appear when price is set below equilibrium price by the seller.
THE ECONOMY TOMORROW
T F 209. In California, market shortages of electricity are the result of price ceilings.
T F 210. In California, price ceilings on electricity have caused an increase in demand.
T F 211. In California, market shortages of electricity are the result of good government regulation.
Page 37
Answers to Table
Table 3.1 Answer
Individual demand and supply schedules
Quantity Demanded By
Price Al Betsy Casey Marke
t
$4.00 4 2 1 7
3.00 6 2 2 10
2.00 10 2 3 15
1.00 12 2 3 17
Quantity Supplied By
Price Alic Butch Conni Marke
e e t
$4.00 15 9 11 35
3.00 8 7 10 25
2.00 6 3 6 15
1.00 0 0 5 5
Table 3.2 Answer

Demand and supply for trucks (millions of trucks per year)
Quantity Demanded By
Price Americans Rest of Worldwide
World Market
(per
truck)
$50,000 5 10 15
40,000 10 20 30
30,000 20 40 60
20,000 40 60 100
Quantity Supplied By
Price Americans Rest of Worldwide
World Market
(per
truck)
$50,000 40 60 100
40,000 30 50 80
30,000 20 40 60
20,000 15 5 20
Page 38
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Chapter 3: Supply and Demand

Chapter 3: Supply and Demand

1. The goals of market participants include the maximization of:

Answer: A Type: Basic Understanding Page: 45

2. The goals of the market participants are the maximization of:

Answer: C Type: Basic Understanding Page: 45

3. The goals of the consumer in a market economy is to buy:

Answer: C Type: Basic Understanding Page: 45

4. The goal of the supplier of a product or service in a market economy is:

Answer: C Type: Basic Understanding Page: 45

5. People benefit by participating in the market because:

Answer: C Type: Complex Understanding Page: 45

Answer: D Type: Basic Understanding Page: 45

THE CIRCULAR FLOW

7. Which of the following is a market transaction?

Answer: B Type: Complex Understanding Page: 46

8. Which of the following is purchased in a product market?

Answer: D Type: Complex Understanding Page: 46

9. A market in which final goods and services are exchanged is a:

Answer: B Type: Definition Page: 46

10. The four factors of production are:

Answer: D Type: Definition Page: 46

11. A market in which land, labor, capital or entrepreneurship is exchanged is a:

Answer: C Type: Definition Page: 46

Answer: A Type: Basic Understanding Page: 46

13. Businesses participate in:

Answer: C Type: Basic Understanding Page: 46

14. Governments participate in:

Answer: C Type: Basic Understanding Page: 46

15. In the U.S. economy, foreigners participate in:

Answer: C Type: Basic Understanding Page: 46

16. In the U.S economy, foreigners participate in:

Answer: C Type: Basic Understanding Page: 46

Answer: A Type: Complex Understanding Page: 46

18. A buyer is said to have a demand for a good only when:

Answer: B Type: Definition Page: 48

19. Jon's demand schedule for donuts indicates:

Answer: B Type: Complex Understanding Page: 48

20. The term opportunity costs refers to the:

Answer: D Type: Definition Page: 48

21. The quantity of a good a consumer is willing to buy depends on:

Answer: D Type: Basic Understanding Page: 48

Answer: D Type: Complex Understanding Page: 48

Answer: C Type: Definition Page: 50

24. According to the law of demand, a demand curve:

Answer: A Type: Basic Understanding Page: 50

25. A lower quantity demanded of a good reflects, ceteris paribus:

Answer: B Type: Definition Page: 50

Answer: D Type: Basic Understanding Page: 51

Answer: A Type: Basic Understanding Page: 51

Answer: D Type: Complex Understanding Page: 51

Answer: B Type: Complex Understanding Page: 51

Answer: D Type: Complex Understanding Page: 51

Answer: B Type: Basic Understanding Page: 51

Answer: D Type: Complex Understanding Page: 51

Answer: B Type: Basic Understanding Page: 51

Answer: C Type: Complex Understanding Page: 51

Answer: D Type: Basic Understanding Page: 51

Answer: C Type: Definition Page: 51

Answer: B Type: Basic Understanding Page: 51

Answer: A Type: Complex Understanding Page: 51

Answer: A Type: Complex Understanding Page: 51

Answer: A Type: Basic Understanding Page: 51