Question

1. Consider a market with an effective price floor. What will happen to the quantity exchanged in the market if demand for the product increases? The quantity exchanged will ______________.

a increase

b decrease

c not change

d One cannot tell.

2. If demand is elastic, should a producer raise or lower price if the producer wants to increase total revenues?

a The producer should lower prices.

b The producer should raise prices.

c It depends upon the elasticity of supply.

d Neither change will increase revenues.

3. A firm wishes to increase profits. It knows that demand is inelastic. Therefore, it should ______________ its prices.

a raise

b lower

c not change

d One cannot tell with more information

4. A decrease in supply will cause the greatest change in prices if demand is ______________.

a inelastic

b elastic

c unitarily elastic

d none is true, because the elasticity of demand does not change the effects of a change in supply.

5. A change in demand will cause the equilibrium price to change by ______________ and the equilibrium quantity to change by ______________ with an elastic supply than if supply were inelastic.

a more; more

b more; less

c less; less

d less; more

e the same amount; the same amount

Answer 1

1) Answer is A. Increase

When demand increases demand curve shifts rightward. If there is effective price floor which is set above the market equilibrium price. Increase in demand will increase the quantity exchanged.

2) Answer is A.

when demand is elastic, increase in price will decrease the total revenue and decrease in price will increase the total revenue. So producer should decrease the price when demand is elastic.

3) Answer is A. raise

when demand is inelastic increase in price will increase the total revenue and decrease in price will decrease the total revenue. So producer should raise the price when demand is inelastic.

4) Answer is A. Inelastic

when demand is inelastic decrease in supply will increase the price. Higher the degree of inelastic demand, higher will be the increase in price.

5) Answer is D. Less; more

If supply is elastic, change in demand will increase the price less and quantity more. If supply is inelastic, change in price will be more and change in quantity will be less.