Chapter 4

Practice Quiz
Markets in Action
1. Suppose prices for new homes have risen, yet the number of new homes sold has also
risen. We can conclude that
a. the demand for new homes has risen.
b. the law of demand has been violated.
c. new firms have entered the construction industry.
d. construction firms must be facing higher costs.
ANS:
a. The demand for new homes has risen causing the price to increase and the quantity of
new homes to increase.
2. Which of the following statements is true of a market?
a. An increase in demand, with no change in supply, will increase the equilibrium price
and quantity.
b. An increase in supply, with no change in demand, will decrease the equilibrium price
and the equilibrium quantity.
c. A decrease in supply, with no change in demand, will decrease the equilibrium price
and increase the equilibrium quantity.
d. All of the above are true.
ANS:
a. See Exhibit 8 (b) in the text.
3. Consider the market for chicken. An increase in the price of beef will
a. decrease the demand for chicken, resulting in a lower price and a smaller amount of
chicken purchased in the market.
b. decrease the supply of chicken, resulting in a higher price and a smaller amount of
chicken purchased in the market.
c. increase the demand for chicken, resulting in a higher price and a greater amount of
chicken purchased in the market.
d. increase the supply of chicken, resulting in a lower price and a greater amount of
chicken purchased in the market.
ANS:
c. An increase in the price of beef will cause an increase in the demand for chicken
because beef and chicken are substitutes.

4. An increase in consumers income increases the demand for oranges. As a result of the
adjustment to a new equilibrium, there is a (an)
a. leftward shift of the supply curve.
b. downward movement along the supply curve.
c. rightward shift of the supple curve.
d. upward movement along the supply curve.
ANS:
d. As the demand curve shifts to the right along the upward sloping supply curve, there is
a movement along the supply curve.
5. An increase in the wage paid to grape pickers will cause the
a. demand curve for grapes to shift to the right, resulting in higher prices for grapes.
b. demand curve for grapes to shift to the left, resulting in lower prices for grapes.
c. supply curve for grapes to shift to the left, resulting in lower prices for grapes.
d. supply curve for grapes to shift to the left, resulting in higher prices for grapes.
ANS:
d. An increase in costs is one factor that will cause the supply curve to shift to the left as
production becomes more expensive.
6. If the federal government wants to raise the price of cheese, it will
a. take cheese from government storage and sell it.
b. encourage farmers to research ways to produce more cheese.
c. subsidize purchases of farm equipment.
d. encourage farmers to produce less cheese.
ANS:
d. As the supply curve for cheese shifts to the left and moves along a downward sloping
demand curve, equilibrium price will increase.
7. Which of the following is least likely to result from rent controls set below the
equilibrium price for rental housing?
a. Shortages and black markets will result.
b. The existing rental housing will deteriorate.
c. The supply of rental housing will increase rapidly.
d. People will demand more apartments than are available.
ANS:
c. The supply curve will shift to the left, not to the right, as suppliers produce fewer rental
units due to the lower price and lower profits.

8. Suppose the equilibrium price set by supply and demand is lower than the price ceiling
set by the government. The result will be
a. a shortage.
b. that quantity demanded is equal to quantity supplied.
c. a surplus.
d. a black market.
ANS:
b. The purpose of price ceilings is to set a maximum price by law. If it is set higher than
the equilibrium price, it will have no effect on the equilibrium price.
9. A good that provides external benefits to society has
a. too few resources devoted to its production.
b. too many resources devoted to its production.
c. the optimal resources devoted to its production.
d. not provided profits to producers of the good.
ANS:
a. An external benefit is an unintentional by-product of the market.
10. Pollution from cars is an example of
a. a harmful opportunity cost.
b. negative externality.
c. a production dislocation.
d. none of the above.
ANS:
b. A negative externality imposes costs on third parties when drivers discharge pollution
into the air, they erode the quality of life of others.
11. Which of the following is the best example of a public good?
a. Pencils.
b. Education.
c. Defense.
d. Trucks.
ANS:
c. None of the other answers fit the definition of a public good. A public good is
something from which everyone benefits and no one can be excluded.

12. A public good may be defined as any good or service that

a. allows users to collectively consume benefits.
b. must be distributed to all citizens in equal shares.
c. is never produced by government.
d. is described by answers a. and c. above.
ANS:
a. Once a public good is provided, for instance a road, everyone collectively benefits
from it.

13. In Exhibit 11, which of the following might cause a shift from S1 to S2?
a. A decrease in input prices
b. An improvement in technology
c. An increase in input prices
d. An increase in consumer income
ANS:
c. A leftward shift from S1 to S2 is caused by an increase in resource prices.
14. In Exhibit 11, an increase in supply would cause a move from which equilibrium
point to another, other things being equal?
a. E1 to E2
b. E1 to E3
c. E4 to E1
d. E3 to E4
ANS:
d. Answers a. and b. involve a decrease in supply from S1 to S2. Answer c. concerns a
movement downward along S1.

15. Beginning from an equilibrium at point E1 in Exhibit 11, an increase in demand for
good X, other things being equal, would move the equilibrium point to
a. E1 (no change).
b. E2.
c. E3.
d. E4.
ANS:
d. Answer E1 cannot exist if demand increases. Answer E2 is caused by a decrease in
supply from S1 to S2. Answer E3 is caused by both a decrease in supply S1 to S2 and an
increase in demand from D1 to D2.