Given the market demand Qd = 20 - P and market supply Qs = 2P - 4, what is the minimum price at which a price floor would become binding?
Find the equilibrium price first and remember that a floor must 'hold the price up' to be binding.
A price floor is binding only if it is set above the equilibrium price, which is found by setting 20 - P = 2P - 4 to solve for P = 8.
A price floor set below the equilibrium price is non-binding because the market naturally reaches the higher equilibrium price anyway.
This value is below the equilibrium price of 8 and would allow the market to clear at the equilibrium, making it non-binding.
While technically binding, this price is above the maximum price consumers are willing to pay, resulting in zero quantity demanded.
Question 2/ 25
If a price floor of 10 is imposed on a market where Qd = 20 - P and Qs = 2P - 4, what is the resulting market condition?
Calculate the quantity demanded and quantity supplied at the floor price and find the difference.
At P = 10, Qd = 10 and Qs = 16, leading to an excess supply of 16 - 10 = 6 units.
A shortage occurs when quantity demanded exceeds quantity supplied, which usually happens with a binding price ceiling, not a floor.
This mistake might occur if one confuses the total quantity supplied at that price with the excess supply over demand.
The market cannot reach equilibrium at P=8 because the floor legally mandates a price of at least 10.
Question 3/ 25
In the market for watches where P = 500 - 10Q and P = 100 + (103)Q, what is the initial equilibrium price before any tax is imposed?
Set the demand equation equal to the supply equation and solve for price.
Setting 500 - 10Q = 100 + 103Q leads to 400 = 403Q, which gives Q = 30 and a price of P = 500 - 10(30) = 200.
This value might be reached if the quantity was calculated incorrectly or if the intercept was used instead of the equilibrium price.
This is the price intercept for the supply curve, not the equilibrium where supply equals demand.
This value represents the difference between the demand and supply intercepts rather than the equilibrium price.
Question 4/ 25
If the government imposes an excise tax of 50 per watch on producers, how will the supply equation P = 100 + (103)Q be modified?
The tax acts as an additional cost for every unit produced, affecting the vertical intercept of the supply curve.
An excise tax on producers increases the cost of production by the amount of the tax, shifting the supply curve vertically by adding the tax to the price intercept.
This assumes the tax reduces the producer's costs, which is the opposite of how a tax functions.
A per-unit excise tax shifts the intercept, it does not change the slope as a function of Q in this linear model.
The tax only affects the constant term representing the vertical shift, not the marginal cost represented by the slope.
Question 5/ 25
Following a 50 excise tax on watches (P = 500 - 10Q; new supply P = 150 + 103Q), what is the new price that consumers will pay?
First find the new equilibrium quantity by equating demand and the tax-adjusted supply, then find the corresponding price on the demand curve.
Setting 500 - 10Q = 150 + 103Q gives 350 = 403Q, so Q = 26.25. Plugging this back into demand: P = 500 - 10(26.25) = 237.5.
This assumes the entire tax burden is passed to the consumer, which only happens if supply is perfectly elastic or demand is perfectly inelastic.
This would be the price producers receive, not the price consumers pay, if the tax were subtracted from the new consumer price.
This represents the net price received by producers after paying the tax to the government.
Question 6/ 25
Using the midpoint method, calculate the price elasticity of supply if the price of shirts falls from 23 to 9 and the quantity supplied falls from 200 to 130.
Remember to divide the change in each variable by its average value before calculating the ratio.
The percentage change in quantity is 130-200165 ≈ -0.424 and the percentage change in price is 9-2316 = -0.875. |-0.424 / -0.875| ≈ 0.48.
This results from inverting the elasticity formula, dividing the percentage change in price by the percentage change in quantity.
This error might occur if the standard percentage change formula is used with the initial values as the denominator instead of the midpoints.
This would imply unit elasticity, which does not match the calculated changes in price and quantity.
Question 7/ 25
If the average annual income rises from 20,000 to 30,000 and the quantity of apples consumed falls from 30 to 28, what is the income elasticity of apple consumption (using the midpoint method)?
Income elasticity is the percentage change in quantity divided by the percentage change in income.
Percentage change in quantity is 28-3029 ≈ -0.069. Percentage change in income is 30,000-20,00025,000 = 0.4. Dividing -0.069 by 0.4 gives ≈ -0.17.
The sign is critical for income elasticity; a negative sign indicates that demand decreases as income increases.
This error occurs if the percentage change in income is divided by the percentage change in quantity, inverting the formula.
This might be obtained using the standard percentage change formula starting from the initial values rather than the midpoint.
Question 8/ 25
Based on an income elasticity of -0.17, how should apples be categorized as a good?
Consider the relationship between the direction of the income change and the direction of the quantity change.
A negative income elasticity signifies that as consumer income increases, the quantity demanded for the good decreases.
Normal goods have a positive income elasticity, meaning demand increases when income increases.
Luxury goods are a subset of normal goods with an income elasticity greater than 1.
The term 'complementary' describes the relationship between two different goods based on price changes, not income changes.
Question 9/ 25
The cross-price elasticity of apples with respect to the price of oranges is -0.4. If the price of oranges falls by 3%, what happens to the demand for apples?
Multiply the cross-price elasticity by the percentage change in the related good's price.
Cross-price elasticity is % Δ QA% Δ PO. So, % Δ QA = -0.4 × -3% = +1.2%, indicating an increase in demand.
This would happen if the elasticity were positive or if the calculation ignored the negative signs of both the elasticity and the price change.
This error involves dividing the price change by the elasticity instead of multiplying them.
This reflects a decimal point error in the multiplication of 0.4 and 3%.
Question 10/ 25
If apples and oranges have a cross-price elasticity of -0.4, what is the relationship between these two goods?
Think about whether the goods are used together or as alternatives based on the sign of the elasticity.
A negative cross-price elasticity means that a decrease in the price of one good leads to an increase in the demand for the other, which is characteristic of complements.
Substitutes have a positive cross-price elasticity because consumers switch to the other good when one becomes more expensive.
Unrelated goods would have a cross-price elasticity of zero, indicating no impact on each other's demand.
Cross-price elasticity measures the relationship between two goods' prices and quantities, not their relationship to income.
Question 11/ 25
Calculate the price elasticity of demand for shirts using the standard percentage change formula when the price decreases from 60 to 40, given the demand equation Q = 50 - 0.5P.
Use the initial price and quantity as the base for your percentage calculations.
Initial Q at P=60 is 20. New Q at P=40 is 30. % Δ Q = 1020 = 0.5; % Δ P = -2060 = -0.33. |0.5 / -0.33| = 1.5.
This might result from using the midpoint method incorrectly or miscalculating the quantity changes.
This value represents the inverse of the elasticity (the percentage change in price over the percentage change in quantity).
This error might occur if one uses the change in quantity over the change in price directly without converting to percentages.
Question 12/ 25
Using the midpoint method for the same shirt demand (Q = 50 - 0.5P) as price falls from 60 to 40, what is the price elasticity of demand?
The midpoint method uses the average of the starting and ending values in the denominator for percentage changes.
Midpoint Q = 25, Midpoint P = 50. % Δ Q = 1025 = 0.4; % Δ P = 2050 = 0.4. Elasticity is 0.4 / 0.4 = 1.
This is the result using the standard percentage change method, not the midpoint method.
This is the slope of the demand curve (0.5), but slope and elasticity are distinct concepts.
This could result from mixed calculation errors between the midpoint of price and the initial quantity.
Question 13/ 25
Under which of the following conditions is a good most likely to have a more inelastic demand curve?
Consider how easy it is for a consumer to find alternatives or avoid the purchase entirely.
Broadly defined markets have fewer substitutes than narrowly defined ones, making demand less responsive to price changes.
Availability of substitutes increases elasticity because consumers can easily switch to other products.
Demand tends to be more elastic in the long run as consumers have more time to adjust their behavior.
Luxuries typically have more elastic demand than necessities because consumers can more easily forgo them when prices rise.
Question 14/ 25
If a firm facing inelastic demand increases its price, what will happen to its total revenue?
Evaluate the trade-off between a higher price per unit and the fewer units sold when demand is not very responsive.
With inelastic demand, the percentage increase in price is greater than the percentage decrease in quantity demanded, leading to higher revenue.
This only happens if demand is elastic, where the drop in quantity outweighs the gain from a higher price.
Total revenue remains unchanged only if demand is unit elastic.
This would only occur if demand was perfectly elastic and the price was raised above the market level.
Question 15/ 25
True or False: If the cross-price elasticity of demand between two goods is positive, the goods are substitutes.
Consider if people buy more of good B when the price of good A rises.
A positive cross-price elasticity means that as the price of one good goes up, the demand for the other increases, which characterizes substitutes.
If the cross-price elasticity were negative, they would be complements; if it were positive, they are indeed substitutes.
Question 16/ 25
According to Figure 6-2, what occurs if the government sets a price ceiling at 3?
Look at the horizontal line at 3 and find the gap between the demand and supply curves.
At P = 3, Qs = 90 and Qd = 180. The shortage is 180 - 90 = 90 units.
A ceiling set below equilibrium causes a shortage, not a surplus.
This might come from comparing the ceiling quantity to the equilibrium quantity (120 - 90) rather than to the quantity demanded at that price.
A price ceiling *must* be below equilibrium to be binding and have an effect on the market.
Question 17/ 25
In Figure 6-11, if a 2 tax is imposed, shifting the supply curve such that the new equilibrium quantity is 60, what is the price paid by buyers?
Check the height of the demand curve at the new post-tax quantity.
At the new quantity of 60, the demand curve indicates that buyers are willing to pay a price of 7.
This was the original equilibrium price before the tax was imposed.
This is the price received by sellers after paying the 2 tax (7 - 2 = 5 is incorrect; rather, 7 - 2 = 5 is the tax wedge, so sellers get 3).
This might be guessed as a halfway point, but the graph shows the price on the demand curve at Q = 60 is 7.
Question 18/ 25
Based on Table 5-5, what is the price elasticity of demand using the midpoint method as price increases from 2 to 4?
Calculate the percentage change in quantity and price using the averages of 2 and 4, and 40 and 30.
The data in the table shows that as price doubles, quantity does not fall by half, so it is not unit elastic in this range.
This is the result of inverting the percentage changes (price change over quantity change).
This is the simple slope Δ Q / Δ P (10/2), but does not account for the midpoint percentage calculation.
Question 19/ 25
In Figure 5-6, between points D and E, what is the price elasticity of supply using the midpoint method?
Identify the coordinates for points D and E and apply the midpoint elasticity formula.
Point D (400, 8), Point E (450, 10). % Δ Q = 50425 ≈ 0.1176. % Δ P = 29 ≈ 0.2222. Elasticity = 0.1176 / 0.2222 ≈ 0.53.
This is the reciprocal of the correct elasticity, representing the percentage change in price divided by the percentage change in quantity.
This represents only the percentage change in quantity (50/425) without dividing by the percentage change in price.
This represents only the percentage change in price (2/9) without being part of the final ratio.
Question 20/ 25
Suppose a tax is imposed on a market where the demand is perfectly inelastic. Who bears the entire burden of the tax?
Think about which side of the market has no choice but to accept the price change to maintain their quantity.
If demand is perfectly inelastic, consumers will purchase the same quantity regardless of price, allowing producers to pass the full tax on to them.
Sellers only bear the full burden if demand is perfectly elastic or if supply is perfectly inelastic.
The government collects the tax; it does not bear the economic burden of paying it.
A 50/50 split only occurs if the relative elasticities of supply and demand are equal.
Question 21/ 25
Referencing the watch market (P = 500 - 10Q; new supply P = 150 + 103Q), how many watches are sold in the new equilibrium after the 50 tax?
Solve for Q by setting the demand equal to the new supply curve that includes the tax.
Equating 500 - 10Q = 150 + 103Q leads to 403Q = 350, which results in Q = 26.25.
This was the equilibrium quantity before the tax was introduced.
This might be a rounding error or an incorrect simplification of the fractional slope in the supply equation.
A tax typically reduces the equilibrium quantity; an increase to 35 would imply a subsidy or an incorrect calculation.
Question 22/ 25
What is the slope of the supply curve for shirts if the price falls from 23 to 9 and the quantity supplied falls from 200 to 130?
Slope is defined as the 'rise over run,' or the change in price divided by the change in quantity.
Slope is Δ PΔ Q = 9 - 23130 - 200 = -14-70 = 0.2.
This is Δ QΔ P (70/14), which is the inverse of the standard price-on-vertical-axis slope.
This is the price elasticity of supply, which is a different measure than the constant slope of the line.
This might result from incorrectly dividing the prices or quantities themselves rather than their changes.
Question 23/ 25
In Figure 6-2, if the government wants to prevent a shortage, where should it set the price ceiling?
A shortage only occurs if the law prevents the price from rising to the level where supply equals demand.
The equilibrium price is 4. A ceiling at or above equilibrium is non-binding and allows the market to reach equilibrium, avoiding a shortage.
A ceiling at 3 is below the equilibrium price and creates a shortage of 90 units.
Lowering the ceiling further below equilibrium only increases the size of the shortage.
This is a misconception; price ceilings only cause shortages if they are set below the market's equilibrium price.
Question 24/ 25
Referring to Figure 6-11, how much of the 2 tax is paid by the sellers?
Compare the change in price paid by buyers to the change in price received by sellers relative to the original equilibrium.
The sellers only pay the full tax if demand is perfectly elastic or supply is perfectly inelastic, which is not shown here.
Sellers would pay nothing only if demand was perfectly inelastic, allowing them to pass it all to consumers.
While it looks split, we must verify the prices. Buyers pay 7 (up from 5), so they pay 2. This implies the producer receives 7-2=5. In this specific graph, the buyer bears the whole burden.
In Figure 6-11, at Q=60, the demand price is 7 and the supply price is 3. The tax is 7-3=4? No, the question says a 2 tax. If the tax is 2, and at Q=60 the gap is 7-3=4, a 2 tax would lead to a quantity between 60 and 100. The incidence depends on the slopes.
Question 25/ 25
If the government sets a price floor of 5 in a market where the equilibrium price is 8, what will happen to the market price?
Determine if the legal minimum actually prevents the market from reaching its natural balance.
A price floor below the equilibrium is non-binding, so market forces will pull the price to the equilibrium level of 8.
The floor is a minimum legal price, but it does not prevent the price from being higher than 5.
There is no market force or legal restriction stopping the price from reaching the equilibrium of 8.
Shortages are associated with price ceilings, and even then, only when they are binding.