Chapter 4 The Market Forces of Supply and Demand

MULTIPLE CHOICE

3. The forces that make market economies work are

a. work and leisure.
b. politics and religion.
c. supply and demand.
d. taxes and government spending.

4. In a market economy, supply and demand determine

a. both the quantity of each good produced and the price at which it is sold.
b. the quantity of each good produced but not the price at which it is sold.
c. the price at which each good is sold but not the quantity of each good produced.
d. neither the quantity of each good produced nor the price at which it is sold.

5. In a market economy, supply and demand are important because they

a. play a critical role in the allocation of the economys scarce resources.
b. determine how much of each good gets produced.
c. can be used to predict the impact on the economy of various events and policies.
d. All of the above are correct.

7. In a market economy,
a. supply determines demand and demand, in turn, determines prices.
b. demand determines supply and supply, in turn, determines prices.
c. the allocation of scarce resources determines prices and prices, in turn, determine supply and
demand.
d. supply and demand determine prices and prices, in turn, allocate the economys scarce
resources.

MARKETS AND COMPETITION

1. Which of the following statements is correct?

a. Buyers determine supply, and sellers determine demand.
b. Buyers determine demand, and sellers determine supply.
c. Buyers determine both demand and supply.
d. Sellers determine both demand and supply.

2. The demand for a good or service is determined by

a. those who buy the good or service.
b. the government.
c. those who sell the good or service.
d. both those who buy and those who sell the good or service.

3. The supply of a good or service is determined by

a. those who buy the good or service.
b. the government.
c. those who sell the good or service.
d. both those who buy and those who sell the good or service.

4. A group of buyers and sellers of a particular good or service is called a(n)

a. coalition.
b. economy.
c. market.

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2 Chapter 4/The Market Forces of Supply and Demand

d. competition.

6. Which of the following is an example of a market?

a. a gas station
b. a garage sale
c. a barber shop
d. All of the above are examples of markets.

12. In a competitive market, the quantity of a product produced and the price of the product are determined by
a. buyers.
b. sellers.
c. both buyers and sellers.
d. None of the above is correct.

17. In a competitive market, each seller has limited control over the price of his product because
a. other sellers are offering similar products.
b. buyers exert more control over the price than do sellers.
c. these markets are highly regulated by the government.
d. sellers usually agree to set a common price that will allow each seller to earn a comfortable profit.

20. In competitive markets, buyers

a. are price takers, but sellers are price setters.
b. are price setters, but sellers are price takers.
c. and sellers are price takers.
d. and sellers are price setters.

21. The term price takers refers to buyers and sellers in

a. perfectly competitive markets.
b. monopolistic markets.
c. markets that are regulated by the government.
d. markets in which buyers cannot buy all they want and/or sellers cannot sell all they want.

28. Which of the following is not a characteristic of a perfectly competitive market?

a. Sellers set the price of the product.
b. There are many sellers.
c. Buyers must accept the price the market determines.
d. All of the above are characteristics of a perfectly competitive market.

37. Assume the market for tennis balls is perfectly competitive. When one tennis ball producer exits the market,
a. the price of tennis balls increases.
b. the price of tennis balls decreases.
c. the price of tennis balls does not change.
d. there is no longer a market for tennis balls.

41. A monopoly is a market with one

a. seller, and that seller is a price taker.
b. seller, and that seller sets the price.
c. buyer, and that buyer is a price taker.
d. buyer, and that buyer sets the price.

42. Which of the following would most likely serve as an example of a monopoly?
a. a bakery in a large city
b. a bank in a large city
c. a local cable television company
d. a small group of corn farmers
 Chapter 4/The Market Forces of Supply and Demand 3

DEMAND

1. The quantity demanded of a good is the amount that buyers are

a. willing to purchase.
b. willing and able to purchase.
c. willing, able, and need to purchase.
d. able to purchase.

2. An increase in quantity demanded

a. results in a movement downward and to the right along a demand curve.
b. results in a movement upward and to the left along a demand curve.
c. shifts the demand curve to the left.
d. shifts the demand curve to the right.

3. A decrease in quantity demanded

a. results in a movement downward and to the right along a demand curve.
b. results in a movement upward and to the left along a demand curve.
c. shifts the demand curve to the left.
d. shifts the demand curve to the right.

6. An increase in the price of a good will

a. increase demand.
b. decrease demand.
c. increase quantity demanded.
d. decrease quantity demanded.

7. A decrease in the price of a good will

a. increase demand.
b. decrease demand.
c. increase quantity demanded.
d. decrease quantity demanded.

8. When the price of a good or service changes,

a. the supply curve shifts in the opposite direction.
b. the demand curve shifts in the opposite direction.
c. the demand curve shifts in the same direction.
d. there is a movement along a given demand curve.
Figure 4-1
price

A
P

B
P'

D
Q Q' quantity

10. Refer to Figure 4-1. The movement from point A to point B on the graph shows
4 Chapter 4/The Market Forces of Supply and Demand

a. a decrease in demand.
b. an increase in demand.
c. a decrease in quantity demanded.
d. an increase in quantity demanded.

11. Refer to Figure 4-1. The movement from point A to point B on the graph is caused by
a. an increase in price.
b. a decrease in price.
c. a decrease in the price of a substitute good.
d. an increase in income.

12. Refer to Figure 4-1. It is apparent from the figure that the
a. good is inferior.
b. demand for the good decreases as income increases.
c. demand for the good conforms to the law of demand.
d. All of the above are correct.

14. Other things equal, when the price of a good rises, the quantity demanded of the good falls, and
when the price falls, the quantity demanded rises. This relationship between price and quantity demanded is
referred to as
a. equilibrium.
b. the law of demand.
c. the relationship between supply and demand.
d. the definition of an inferior good.

17. Which of these statements best represents the law of demand?

a. When buyers tastes for a good increase, they purchase more of the good.
b. When income levels increase, buyers purchase more of most goods.
c. When the price of a good decreases, buyers purchase more of the good.
d. When buyers demands for a good increase, the price of the good increases.

29. When we move along a given demand curve,

a. only price is held constant.
b. income and price are held constant.
c. all nonprice determinants of demand are held constant.
d. all determinants of quantity demanded are held constant.

31. If something happens to alter the quantity demanded at any given price, then
a. the demand curve becomes steeper.
b. the demand curve becomes flatter.
c. the demand curve shifts.
d. we move along the demand curve.

35. The market demand curve

a. is the sum of all individual demand curves.
b. is the demand curve for every product in an industry.
c. shows the average quantity demanded by individual demanders at each price.
d. is always flatter than an individual demand curve.

36. To obtain the market demand curve for a product, sum the individual demand curves
a. vertically.
b. diagonally.
c. horizontally.
d. and then average them.
 Chapter 4/The Market Forces of Supply and Demand 5

Table 4-1
Price Quantity Demanded Quantity Demanded Quantity Demanded
by Michelle by Laura by Hillary
$5 5 4 11
$4 6 6 13
$3 7 8 15
$2 8 10 17
$1 9 12 19
$0 10 14 21

39. Refer to Table 4-1. If the market consists of Michelle, Laura, and Hillary and the price falls by $1, the quan-
tity demanded in the market increases by
a. 2 units.
b. 3 units.
c. 4 units.
d. 5 units.

40. Refer to Table 4-1. If the market consists of Michelle and Laura only and the price falls by $1, the quantity
demanded in the market increases by
a. 2 units.
b. 3 units.
c. 4 units.
d. 5 units.

41. Refer to Table 4-1. If the market consists of Michelle and Hillary only and the price falls by $1, the quantity
demanded in the market increases by
a. 2 units.
b. 3 units.
c. 4 units.
d. 5 units.

42. Refer to Table 4-1. If the market consists of Laura and Hillary only and the price falls by $1, the quantity
demanded in the market increases by
a. 2 units.
b. 3 units.
c. 4 units.
d. 5 units.

43. Refer to Table 4-1. Which of the following illustrates the market demand curve?
a. Price c. Price
5 5

4 4

3 3

2 2

1 1
Demand A Demand C

2 4 6 8 10 12 Quantity 5 10 15 20 25 30 35 40 45 Quantity
6 Chapter 4/The Market Forces of Supply and Demand

b. Price d. Price
5 5
4 4

3 3

2 2

1 1
Demand B Demand D

4 8 12 16 20 24 28 Quantity 5 10 15 20 25 30 Quantity

83. Which of the following is not an expression for the sum of all the individual demand curves for a product?
a. total demand
b. market demand
c. equilibrium demand
d. aggregate demand

88. If the demand for a good falls when income falls, then the good is called a(n)
a. normal good.
b. regular good.
c. luxury good.
d. inferior good.

89. If a good is normal, then an increase in income will result in a(n)

a. increase in the demand for the good.
b. decrease in the demand for the good.
c. movement down and to the right along the demand curve for the good.
d. movement up and to the left along the demand curve for the good.

90. If Max experiences a decrease in his income, then we would expect Maxs demand for
a. each good he purchases to remain unchanged.
b. normal goods to decrease.
c. luxury goods to increase.
d. inferior goods to decrease.

94. Which of the following would shift the demand curve for gasoline to the right?
a. a decrease in the price of gasoline
b. an increase in consumer income, assuming gasoline is a normal good
c. an increase in the price of cars, a complement for gasoline
d. a decrease in the expected future price of gasoline

95. If a decrease in income increases the demand for a good, then the good is a(n)
a. substitute good.
b. complementary good.
c. normal good.
d. inferior good.

96. If a increase in income decreases the demand for a good, then the good is a(n)
a. substitute good.
b. complementary good.
c. normal good.
d. inferior good

99. Soup is an inferior good if the demand

a. for soup falls when the price of a substitute for soup rises.
b. for soup rises when the price of soup falls.
 Chapter 4/The Market Forces of Supply and Demand 7

c. curve for soup slopes upward.

d. for soup falls when income rises.

109. Two goods are complements when a decrease in the price of one good
a. decreases the quantity demanded of the other good.
b. decreases the demand for the other good.
c. increases the quantity demanded of the other good.
d. increases the demand for the other good.

110. If goods A and B are complements, then an increase in the price of good A will result in
a. more of good A being sold.
b. more of good B being sold.
c. less of good B being sold.
d. no difference in the quantity sold of either good.

129. Ford Motor Company announces that next month it will offer $3,000 rebates on new Mustangs. As a result of
this information, todays demand curve for Mustangs
a. shifts to the right.
b. shifts to the left.
c. shifts either to the right or to the left, but we cannot determine the direction of the shift from the
given information.
d. will not shift; rather, the demand curve for Mustangs will shift to the right next month.

130. What will happen in the artichoke market now if buyers expect higher artichoke prices in the near future?
a. The demand for artichokes will increase.
b. The demand for artichokes will decrease.
c. The demand for artichokes will be unaffected.
d. The supply of artichokes will increase.

131. Today's demand curve for gasoline could shift in response to a change in
a. today's price of gasoline.
b. the expected future price of gasoline.
c. the number of sellers of gasoline.
Figure 4-7
Panel (a) Panel (b)
price price

P'

D D' D
Q' Q quantity quantity

140. Refer to Figure 4-7. The graphs show the demand for cigarettes. In Panel (a), the arrows are consistent with
which of the following events?
a. The price of marijuana, a complement to cigarettes, increased.
8 Chapter 4/The Market Forces of Supply and Demand

b. Mandatory health warnings were placed on cigarette packages.

c. Several foreign countries banned U.S. cigarettes in their countries.
d. A tax was placed on cigarettes.

141. Refer to Figure 4-7. The graphs show the demand for cigarettes. In Panel (a), the arrows are consistent with
which of the following events?
a. Tobacco and marijuana are complements, and the price of marijuana decreased.
b. Tobacco is a gateway drug, and the price of marijuana increased.
c. The price of cigarettes increased.
d. The arrows are consistent with all of these events.

142. Refer to Figure 4-7. The graphs show the demand for cigarettes. In Panel (b), the arrows are consistent with
which of the following events?
a. an increase in the price of cigarettes
b. placing a tax on cigarettes
c. the prohibition of cigarette advertisements on television
d. decreasing the price of marijuana, given that tobacco and marijuana are complements

SUPPLY

1. The quantity supplied of a good is the amount that

a. buyers are willing and able to purchase.
b. sellers are able to produce.
c. buyers and sellers agree will be brought to market.
d. sellers are willing and able to sell.

3. A decrease in the price of a good will

a. increase supply.
b. decrease supply.
c. increase quantity supplied.
d. decrease quantity supplied.

5. When the price of a good or service changes,

a. the demand curve shifts in the opposite direction.
b. the supply curve shifts in the opposite direction.
c. the supply curve shifts in the same direction.
d. there is a movement along a given supply curve.

6. A movement along the supply curve might be caused by a change in

a. production technology.
b. input prices.
c. expectations about future prices.
d. the price of the good or service that is being supplied.

16. The law of supply states that, other things equal, an increase in
a. price causes quantity supplied to increase.
b. price causes quantity supplied to decrease.
c. quantity supplied causes price to increase.
d. quantity supplied causes price to decrease.

17. Other things equal, when the price of a good falls, the
a. quantity supplied of the good increases.
b. supply decreases.
c. quantity supplied of the good decreases.
d. demand increases.
 Chapter 4/The Market Forces of Supply and Demand 9

19. A supply curve slopes upward because

a. as more is produced, total cost of production falls.
b. an increase in input prices increases supply.
c. the quantity supplied of most goods and services increases over time.
d. an increase in price gives producers an incentive to supply a larger quantity.

21. The following table contains a supply schedule for a good.

Price Quantity Supplied
$10 100
$20 Q1
If the law of supply applies to this good, then Q1 could be
a. 0.
b. 50.
c. 100.
d. 150.

22. A supply schedule is a table that shows the relationship between

a. price and quantity supplied.
b. input costs and quantity supplied.
c. quantity demanded and quantity supplied.
d. profit and quantity supplied.

24. The difference between a supply schedule and a supply curve is that a supply schedule
a. incorporates demand and a supply curve does not.
b. incorporates profit and a supply curve does not.
c. can shift, but a supply curve cannot shift.
d. is a table, and a supply curve is drawn on a graph.

91. A decrease in the number of sellers in the market causes

a. the supply curve to shift to the left.
b. the supply curve to shift to the right.
c. a movement up and to the right along a stationary supply curve.
d. a movement downward and to the left along a stationary supply curve.

92. An increase in which of the following would shift the supply curve for gasoline to the right?
a. demand for gasoline
b. price of gasoline
c. number of producers of gasoline
d. price of oil, an input into the production of gasoline

10. Which of the following events must cause equilibrium price to fall?
a. demand increases and supply decreases
b. demand and supply both decrease
c. demand decreases and supply increases
d. demand and supply both increase

11. Equilibrium quantity must decrease when demand

a. increases and supply does not change, when demand does not change and supply decreases, and
when both demand and supply decrease.
b. increases and supply does not change, when demand does not change and supply increases, and
when both demand and supply decrease.
c. decreases and supply does not change, when demand does not change and supply increases, and
when both demand and supply decrease.
d. decreases and supply does not change, when demand does not change and supply decreases,
and when both demand and supply decrease.
10 Chapter 4/The Market Forces of Supply and Demand

12. Equilibrium quantity must increase when demand

a. increases and supply does not change, when demand does not change and supply increases,
and when both demand and supply increase.
b. increases and supply does not change, when demand does not change and supply increases, and
when both demand and supply decrease.
c. decreases and supply does not change, when demand does not change and supply decreases, and
when both demand and supply increase.
d. decreases and supply does not change, when demand does not change and supply decreases, and
when both demand and supply decrease.

15. Which of the following events must cause equilibrium price to rise?
a. demand increases and supply decreases
b. demand and supply both decrease
c. demand decreases and supply increases
d. demand and supply both increase

16. If the demand for a product increases, then we would expect equilibrium price
a. to increase and equilibrium quantity to decrease.
b. to decrease and equilibrium quantity to increase.
c. and equilibrium quantity both to increase.
d. and equilibrium quantity both to decrease.

17. If the demand for a product decreases, then we would expect equilibrium price
a. to increase and equilibrium quantity to decrease.
b. to decrease and equilibrium quantity to increase.
c. and equilibrium quantity to both increase.
d. and equilibrium quantity to both decrease.

18. If the supply of a product increases, then we would expect equilibrium price
a. to increase and equilibrium quantity to decrease.
b. to decrease and equilibrium quantity to increase.
c. and equilibrium quantity to both increase.
d. and equilibrium quantity to both decrease.

19. If the supply of a product decreases, then we would expect equilibrium price
a. to increase and equilibrium quantity to decrease.
b. to decrease and equilibrium quantity to increase.
c. and equilibrium quantity to both increase.
d. and equilibrium quantity to both decrease.

20. When supply and demand both increase, equilibrium

a. price will increase.
b. price will decrease.
c. quantity may increase, decrease, or remain unchanged.
d. price may increase, decrease, or remain unchanged.

21. Suppose that demand for a good increases and, at the same time, supply of the good decreases. What would
happen in the market for the good?
a. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.
b. Equilibrium price would increase, but the impact on equilibrium quantity would be
ambiguous.
c. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous.
d. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.
 Chapter 4/The Market Forces of Supply and Demand 11

22. Suppose that demand for a good decreases and, at the same time, supply of the good decreases. What would
happen in the market for the good?
a. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.
b. Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous.
c. Equilibrium quantity would decrease, but the impact on equilibrium price would be
ambiguous.
d. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.

29. A surplus exists in a market if

a. there is an excess demand for the good.
b. quantity demanded exceeds quantity supplied.
c. the current price is above its equilibrium price.
d. All of the above are correct.

30. If a surplus exists in a market, then we know that the actual price is
a. above the equilibrium price, and quantity supplied is greater than quantity demanded.
b. above the equilibrium price, and quantity demanded is greater than quantity supplied.
c. below the equilibrium price, and quantity demanded is greater than quantity supplied.
d. below the equilibrium price, and quantity supplied is greater than quantity demanded.

31. If, at the current price, there is a surplus of a good, then

a. sellers are producing more than buyers wish to buy.
b. the market must be in equilibrium.
c. the price is below the equilibrium price.
d. quantity demanded equals quantity supplied.

32. When a surplus exists in a market, sellers

a. raise price, which increases quantity demanded and decreases quantity supplied, until the surplus is
eliminated.
b. raise price, which decreases quantity demanded and increases quantity supplied, until the surplus is
eliminated.
c. lower price, which increases quantity demanded and decreases quantity supplied, until the
surplus is eliminated.
d. lower price, which decreases quantity demanded and increases quantity supplied, until the surplus
is eliminated.

33. Suppose roses are currently selling for $40 per dozen, but the equilibrium price of roses is $30 per dozen. We
would expect a
a. shortage to exist and the market price of roses to increase.
b. shortage to exist and the market price of roses to decrease.
c. surplus to exist and the market price of roses to increase.
d. surplus to exist and the market price of roses to decrease.

34. The current price of neckties is $30, but the equilibrium price of neckties is $25. As a result,
a. the quantity supplied of neckties exceeds the quantity demanded of neckties at the $30 price.
b. the equilibrium quantity of neckties exceeds the quantity demanded at the $30 price.
c. there is a surplus of neckties at the $30 price.
d. All of the above are correct.

36. When the price of a good is lower than the equilibrium price,
a. a surplus will exist.
b. buyers desire to purchase more than is produced.
c. sellers desire to produce and sell more than buyers wish to purchase.
d. quantity supplied exceeds quantity demanded.
12 Chapter 4/The Market Forces of Supply and Demand

37. A shortage exists in a market if

a. there is an excess supply of the good.
b. quantity supplied exceeds quantity demanded.
c. the current price is below its equilibrium price.
d. All of the above are correct.

40. Which of the following would cause price to increase?

a. an increase in supply
b. a decrease in demand
c. a surplus of the good
d. a shortage of the good

41. When a shortage exists in a market, sellers

a. raise price, which increases quantity demanded and decreases quantity supplied until the shortage is
eliminated.
b. raise price, which decreases quantity demanded and increases quantity supplied until the
shortage is eliminated.
c. lower price, which increases quantity demanded and decreases quantity supplied until the shortage
is eliminated.
d. lower price, which decreases quantity demanded and increases quantity supplied until the shortage
is eliminated.
Table 4-7
Price Quantity Quantity
Demanded Supplied
$10 10 60
$8 20 45
$6 30 30
$4 40 15
$2 50 0

46. Refer to Table 4-7. The equilibrium price and quantity, respectively, are
a. $2 and 50 units.
b. $6 and 30 units.
c. $6 and 60 units.
d. $12 and 30 units.

47. Refer to Table 4-7. If the price were $8, a

a. shortage of 20 units would exist, and price would tend to rise.
b. surplus of 25 units would exist, and price would tend to fall.
c. shortage of 25 units would exist, and price would tend to rise.
d. surplus of 45 units would exist, and price would tend to fall.

48. Refer to Table 4-7. If the price were $4, a

a. surplus of 15 units would exist, and price would tend to fall.
b. shortage of 25 units would exist, and price would tend to rise.
c. surplus of 25 units would exist, and price would tend to fall.
d. shortage of 40 units would exist, and price would tend to rise.

Table 4-8
A country club usually only allows members to purchase tickets for its celebrity golf tournament, but the club
is considering allowing non-members to purchase tickets this year. The demand and supply schedules are as
follows:
 Chapter 4/The Market Forces of Supply and Demand 13

Price Quantity Demanded Quantity Demanded Quantity Supplied

by Members by Non-members
$10 1000 500 600
$15 800 400 600
$20 600 300 600
$25 400 200 600
$30 200 100 600

49. Refer to Table 4-8. If only members are allowed to purchase tickets to this year's celebrity golf tournament,
then what will be the equilibrium price?
a. $10
b. $15
c. $20
d. $25

50. Refer to Table 4-8. If both members and non-members are allowed to purchase tickets to this year's celebrity
golf tournament, then what will be the equilibrium price?
a. $10
b. $15
c. $20
d. $25

51. Refer to Table 4-8. If both members and non-members are allowed to purchase tickets to this year's celebrity
golf tournament and the country club sets the ticket price at $30, then there will be
a. a shortage of 300 tickets.
b. a surplus of 300 tickets.
c. 600 tickets sold.
d. 600 tickets unsold.

52. Refer to Table 4-8. If both members and non-members are allowed to purchase tickets to this year's celebrity
golf tournament and the country club sets the ticket price at $20, then there will be
a. a shortage of 300 tickets.
b. a surplus of 300 tickets.
c. 300 tickets sold.
d. 600 tickets unsold.

118. New cars are normal goods. What will happen to the equilibrium price of new cars if the price of gasoline
rises, the price of steel falls, public transportation becomes cheaper and more comfortable, auto-workers ac-
cept lower wages, and automobile insurance becomes more expensive?
a. Price will rise.
b. Price will fall.
c. Price will stay exactly the same.
d. The price change will be ambiguous.

119. What will happen to the equilibrium price and quantity of new cars if the price of gasoline rises, the price of
steel rises, public transportation becomes cheaper and more comfortable, and auto-workers negotiate higher
wages?
a. Price will fall, and the effect on quantity is ambiguous.
b. Price will rise, and the effect on quantity is ambiguous.
c. Quantity will fall, and the effect on price is ambiguous.
d. Quantity will rise, and the effect on price is ambiguous.

121. Which of the following sets of events must cause an increase in the price of a new house?
a. higher wages for carpenters, higher wood prices, increases in consumer incomes, higher
14 Chapter 4/The Market Forces of Supply and Demand

apartment rents, increases in population, and expectations of higher house prices in the
future
b. lower wages for carpenters, lower wood prices, increases in consumer incomes, higher apartment
rents, increases in population and expectations of higher house prices in the future
c. lower wages for carpenters, higher wood prices, decreases in consumer incomes, higher apartment
rents, decreases in population and expectations of higher house prices in the future
d. higher wages for carpenters, lower wood prices, decreases in consumer incomes, lower apartment
rents, decreases in population and expectations of lower house prices in the future