Market and Price: practice questions

6 questions · 12 marks · free, no account · Read the notes first

1. Question 1Multiple choice · 1 mark

   The price of coffee rises sharply. Assuming tea and coffee are substitutes, what happens in the tea market?

   A

   The demand for tea decreases.

   B

   The quantity demanded of tea increases, with no shift in demand.

   C

   The demand for tea increases.

   D

   The supply of tea increases.

2. Question 2Multiple choice · 1 mark

   When the price of a good rises from $10 to $12, the quantity demanded falls from 100 to 90 units. Which of the following is correct?

   A

   Demand is elastic, so total revenue falls.

   B

   Demand is inelastic, so total revenue rises.

   C

   Demand is unitarily elastic, so total revenue is unchanged.

   D

   Demand is elastic, so total revenue rises.

3. Question 3Multiple choice · 1 mark

   The demand for container truck drivers rises because more goods are shipped through Hong Kong's port. This shows that the demand for truck drivers is a

   A

   joint demand.

   B

   derived demand.

   C

   competitive demand.

   D

   composite demand.

4. Question 4Multiple choice · 1 mark

   A unit tax is imposed on a good whose demand is perfectly inelastic. Who bears the tax?

   A

   Sellers bear all of it.

   B

   Buyers and sellers share it equally.

   C

   The government bears it.

   D

   Buyers bear all of it.

5. Question 54 marks

   The price of flour rises. With the aid of a demand-supply diagram, explain the effect on the equilibrium price and quantity transacted of bread.

   Show worked solution

   Flour is an input of bread, so the cost of production of bread rises and the supply of bread decreases. (1)

   Diagram: price on the vertical axis and quantity on the horizontal axis; supply shifts left from $S_1$ to $S_2$; demand $D$ unchanged; equilibrium moves from $E_1$ to $E_2$. (1)

   At the original price there is a shortage, so the price is bid up. (1)

   The equilibrium price rises and the quantity transacted falls. (1)

6. Question 64 marks

   Before a tax, the equilibrium price of a good is $20 and 1000 units are sold. The government then imposes a unit tax of $4 on sellers. The price paid by buyers rises to $23 and 800 units are sold.

   (a) Find the tax burden per unit borne by buyers and by sellers.

   (b) Find the total tax revenue.

   (c) Is demand or supply more elastic? Explain.

   Show worked solution

   (a) Buyers bear $23 − $20 = $3 per unit. Sellers receive $23 − $4 = $19, so they bear $20 − $19 = $1 per unit. (1)

   (b) Tax revenue = $4 × 800 = $3200. (1)

   (c) Supply is more elastic (1), because sellers bear the smaller share of the tax, and the side with the more elastic curve bears less of the tax. (1)