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Chapter 4
Demand & Supply
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1. At a given time and in a given marketplace, the
entire market demand curve indicates the
a. quantity of a good consumers would be
willing and able to purchase at a given price.
b. quantity of a good consumers would be able
to purchase at a series of prices.
c. quantity of a good consumers want to
purchase at a given price
d. quantity of a good consumers have
purchased at a series of prices over the year.
B. Demand curves measure the relationship
between a series of prices and quantities
demanded, not just one price and quantity.
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2. Assume Samantha likes hot dogs and hamburgers
equally, and the price of hamburgers (a normal
good) declines. She will most likely purchase
more hamburgers; this is a reflection of the
a. income effect.
b. substitution effect.
c. income and substitution effects.
B. The substitution effect is when the price of a good falls,
consumers will substitute it for other goods, which are
now relatively more expensive. The income effect is when
the fall in the price of a good increases consumer’s real
income, making them more able to purchase all goods.
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3. If the price of a good declines from $5.00 per unit to
$4.00 per unit, and you continue to purchase 5 units of
this good, as you had in the past, your real income has
a. decreased by $5.00.
b. increased by $4.00.
c. decreased by $4.00.
d. increased by $5.00.
D. Real income is income measured in terms of
the goods and services it can buy. In this case,
a fall in the price of $1.00 and you buy 5
units, your buying power increased by $5.00.
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4. When the price of a normal good declines, you have
a. an income effect but no substitution effect.
b. a substitution effect but no income effect.
c. no income effect or substitution effect.
d. an income effect and a substitution effect.
D. A normal good is one that consumers will buy more of
as their income increases. The income effect recognizes
that consumers will buy more of a good when their
incomes increase, the substitution effect recognizes
that consumers will or will not buy an alternative
product based on the relative price difference.
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5. A typical demand curve will normally have a
a. positive slope.
b. horizontal slope.
c. vertical slope.
d. negative slope.
D. A negative slope is a downward slope from left to
right. With price on the vertical axis and quantity
on the horizontal axis, price and quantity will
always move in the opposite direction.
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6. The negative slope of a demand curve implies that
as the price
a. declines, quantity demanded increases.
b. declines, quantity demanded decreases.
c. increases, quantity demanded increases.
d. increases, the demand curve becomes steeper.
A. As price changes the demand itself does not
change because the curve itself remains fixed.
What changes is the quantity demanded which
is measured on the horizontal axis.
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7. In moving along a given demand curve,
quantity changes in response to a change in
a. consumer taste.
b. consumer incomes.
c. consumer expectations.
d. the price of the good.
D. There is a difference between the terms a “change in
demand” and a “change in the quantity demanded.”
A change in demand means the whole curve changes.
A change in the quantity demanded means that there
is a movement along a stationary demand curve.
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8. Which of the following would not be
considered a normal good?
a. Steaks.
b. Flour.
c. Oranges.
d. Meals at restaurants.
B. Flour is a product that people will
not necessarily buy more of just
because their income increases.
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9. Which of the following would not be
considered compliments?
a. Shoes and socks.
b. Tennis racquet and tennis balls.
c. Coke and Pepsi.
d. Automobiles and gasoline.
C. Compliments are goods that are used
together, like bread and butter. Coke and
Pepsi are substitutes for one another.
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10. Which of the following would not be
considered substitutes?
a. Butter and margarine.
b. Coke and Pepsi.
c. Fords and Chevrolets.
d. Hamburgers and French fries.
D. Although hamburgers and French fries can be
considered substitutes because they are both food, of
the choices given above, the other choices are more
substitutes than are hamburgers and French fries.
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11. The price of Ford automobiles increases
and the price of Chevrolets remains
constant, the demand for Chevrolets will
a. increase.
b. decrease.
c. decrease then increase.
d. increase then decrease.
A. A factor that will cause a shift in demand is when
the price of a substitute good changes. As the price of
Ford cars increases, consumers will demand more
Chevrolets because of the relative price difference.
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12. As the wage (price) of computer programmers
increases, more college students are willing to
major in computers. This is known as the law of
a. demand.
b. variable proportions.
c. supply.
C. As a college student you are interested in majoring in
subjects that will make you marketable when it comes
time to look for a job. As wages for computer
programmers increase, more college students will choose
to major in computers. As the wage of social workers
decreases, fewer students will choose social work.
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13. In the case of a normal good, an increase in
consumers’ incomes would shift the
a. demand curve inward.
b. supply curve inward.
c. supply curve outward.
d. demand curve outward.
D. A normal good is a good that consumers will
buy more of as their income increases.
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14. An improvement in technology would shift the
a. demand curve inward.
b. demand curve outward.
c. supply curve inward.
d. supply curve outward.
D. For example, as technological improvements
are applied to manufacturing computers,
suppliers of computers are able to supply
more computers at every price level.
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Exhibit 4-1
Price
S
D'
D
0
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18
Quantity
19
20
21
23
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15. Refer to Exhibit 4-1. A shift from demand
curve D to D` would illustrate a(n)
a. decrease in demand.
b. decrease in quantity demanded.
c. increase in quantity demanded.
d. increase in demand.
D. This represents an increase in demand.
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16. Refer to Exhibit 4-1. Which of the following would
cause a shift from D to D`?
a. An increase in the number of consumers.
b. An increase in the price of a complementary good.
c. A decline in consumers’ incomes.
d. A decline in consumer optimism.
A. The number of consumers in the
market will result in an increase in the
demand for a good or service. Likewise,
a decrease in the number of consumers
in the market will lead to a decrease.
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17. Refer to Exhibit 4-1. Which of the following would
cause a shift in demand from D` to D?
a. An increase in the price of a substitute good.
b. An increase in the number of consumers.
c. A decrease in the price of a complementary good.
d. a decline in consumers’ incomes if it is a normal good.
D. If it is a normal good consumer’s will buy fewer
units as their income decreases. A shift to the left of
the demand curve represents a decrease in demand.
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18. In Exhibit 4-1, a shift from D to D`,
given the supply curve, would result in
a. a decrease in quantity supplied.
b. an increase in supply .
c. a decrease in supply.
d. an increase in quantity supplied.
D. A shift to the right of a demand curve along an
upward sloping supply curve (all supply curves are
upward sloping) will cause the equilibrium price to
increase and the equilibrium quantity to increase.
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19. In Exhibit 4-1, which of the following could not
cause the shift from D to D`?
a. A decrease in the price of a complement.
b. An increase in the price of a substitute.
c. A decrease in the price of the good in
question.
d. An increase in the number of consumers.
C. A change in the price of a good does not change
the demand curve, it changes the quantity
demanded as measured on the horizontal axis.
When price changes, there is a movement along
the curve, but the curve itself does not change.
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20. Which of the following would correctly explain the slopes
of S and D in Exhibit 4-1?
a. Improved technology increased demand.
b. An increase in income caused an increase in the
demand and ultimately the supply of this normal good.
c. A decrease in income caused the demand to increase
for this inferior good and the higher price caused an
increase in quantity supplied.
C. Consumers will buy more of an inferior good
as their income decreases because they will
buy less of the normal good. An increase in
price will give the suppliers an incentive to
increase the quantity supplied and vice versa.
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21. If S and D are the original supply and demand
curves, which of the following could not cause the
change indicated in Exhibit 4-1?
a. A decrease in income and the good is inferior.
b. A decrease in the price of a complement.
c. An increase in the number of consumers.
d. A decrease in the cost of producing the good.
D. In the above choices, a, b, and c will
effect the demand curve. Only
choice d will effect the supply curve.
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Exhibit 4-2
S
Price
S’
D
0
25
Quantity
26
27
28
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22. Refer to Exhibit 4-2. A shift from S to
S` would illustrate
a. a decrease in supply.
b. a decrease in quantity supplied.
c. an increase in quantity supplied.
d. an increase in supply.
D. A movement to the right of a
curve represents an increase.
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23. Refer to Exhibit 4-2. Which of the following
would not cause the shift from S to S`?
a. An increase in the price of resources.
b. An improvement in technology.
c. A decline in taxes.
d. An increase in the number of producers.
A. An increase in the price of resources would shift
the supply curve to the left, not to the right. The
increase in costs would lesson the ability of the
supplier to supply at each price level.
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24. Refer to Exhibit 4-2. Which of the following
would not cause the shift from S` to S?
a. An improvement in technology.
b. A decline in the number of producers.
c. An increase in taxes.
d. An increase in the price of resources.
A. An improvement in technology would shift
the supply curve to right. An improvement in
technology would increase the ability to
supply more units at each price level.
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25. Refer to Exhibit 4-2. A shift inward
from supply curve S` to S, given the
demand curve, would result in a(n)
a. increase in demand.
b. increase in quantity demanded.
c. decrease in demand.
d. decrease in quantity demanded.
D. A shift in the supply curve will occur along the
demand curve. So as the supply curve shifts to
the left along the demand curve, there will be
fewer units demanded at each price level.
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26. Assume S and D are the original supply and demand
curves. Which of the following would correctly
explain the change illustrated in Exhibit 4-2?
a. An increase in income for a normal good.
b. Consumers form more favorable expectations.
c. A decrease in the wage rate for specialized labor.
C. Because wages are a cost to a business, as the wage rate
declines, costs decline. Any decline in costs will enable the
supplier to supply more units of the good at each price
level; thus the supply curve shifts to the right.
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Price
Exhibit 4-3
A
$3
$2
$1
B
D
C
S
D
Quantity
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32
33
34
35
37
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27. Refer to Exhibit 4-3. At a price of $1.00, the
a. market generates a shortage.
b. market generates a surplus.
c. market generates equilibrium.
d. supply will shift outward.
A. A shortage occurs because the quantity
demanded is less than the quantity supplied.
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28. Refer to Exhibit 4-3. At a price of $2.00,
a. the market generates a shortage.
b. the market generates a surplus.
c. the market generates equilibrium.
d. quantity supplied exceeds quantity demanded.
C. Equilibrium price is the price toward which the
economy tends. In this case, if the price is above
$2, the resultant surplus will cause the price to
decline; if the price is below $2, the resultant
shortage will cause the price to increase.
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29. Refer to Exhibit 4-3. At a price of $3.00, the
a. demand curve will shift outward.
b. market generates a surplus.
c. market generates a shortage.
d. supply curve will shift inward.
B. At a price of $3, the quantity demanded is less
than the quantity supplied casing a surplus.
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30. Refer to Exhibit 4-3. A shortage would
be properly indicated by the distance
a. A - B.
b. A - D.
c. C - D.
d. B - C.
C. C represents the quantity demanded at $1,
and D represents the quantity supplied at $1.
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31. Refer to Exhibit 4-3. If the price is
$3, then we would expect to find a
a. surplus of A - D.
b. surplus of A - B.
c. shortage of A - B.
d. shortage of B - C.
B. The distance between A and B represents a
surplus because the number of units supplied is
greater than the number of units demanded.
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32. Which of the following is most accurate if a ceiling price
of $1 is imposed on the market illustrated in Exhibit 4-3?
a. Both C and D could occur simultaneously.
b. Either C or D would occur, but not both.
c. A shortage will exist; however, eventually supply will
shift out to alleviate the shortage.
d. A chronic shortage will persist unless something else
changes.
D. In a free market the price would increase upward
toward $2, but with a price ceiling this is not
allowed to happen. Therefore, there will persist a
shortage of the distance between C and D.
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33. Which of the following is most accurate
with respect to Exhibit 4-3?
a. A surplus will occur if the price is $1.
b. Equilibrium will occur at a price of $2.
d. A shortage will occur if the price is $3.
B. Any price above or below $2 will result
in either a surplus or a shortage,
therefore, price will tend back toward $2.
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34. Which of the following is correct?
a. Gasoline prices increased causing shortages.
b. A decline in the price of bread created a surplus.
c. The high price of diamonds reflect scarcity.
d. Rent for apartments around campus has
increased so much that the demand has
decreased (shifted backward).
C. When there is not enough of a good for everyone
to have all they want at a zero price (it is scarce),
it will have a price to determine who gets and who
does not get. The more scarce something is, the
higher the price to solve the allocation problem.
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35. A shift outward in supply curve will
result in equilibrium price
a. increasing and quantity increasing.
b. increasing and quantity decreasing.
c. decreasing and quantity increasing.
d. decreasing and quantity decreasing.
C. This is simple geometry. Draw a downward
sloping demand curve and an upward sloping
supply curve. When you move the supply curve to
the right it is obvious that the market price will
decline and the market quantity will increase.
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36. A reduction in the number of producers will
result in equilibrium price
a. increasing and quantity increasing.
b. increasing and quantity decreasing.
c. decreasing and quantity increasing.
d. decreasing and quantity decreasing.
B. Producers are suppliers. When the supply
curve shifts to the left, market price increases
and the quantity supplied decreases.
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37. A shift inward in demand curve will
result in equilibrium price
a. increasing and quantity decreasing.
b. increasing and quantity increasing.
c. decreasing and quantity decreasing.
d. decreasing and quantity increasing.
C. A shift inward means that the demand curve
is decreasing, or shifting to the left. If you
draw this out on a piece of paper, it is made
obvious that the market price will decrease
and the market quantity will decrease.
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38. As a certain type of clothing becomes more
fashionable, we would expect its equilibrium price
a. to decrease and quantity will remain constant.
b. and quantity will decrease.
c. to increase and quantity to decrease.
d. and quantity to increase.
D. This is because there will be an
outward shift of the demand curve.
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39. If supply and demand both shift outward but supply
shifts outward more than demand, the equilibrium
price will
a. increase and quantity will decrease.
b. increase and quantity will increase.
c. decrease and quantity will decrease.
d. decrease and quantity will increase.
D. This is the same thing as saying that supply shifts
to the right. It is shifting to the right relative to
demand. If you draw this out on a piece of paper, it
is obvious that the equilibrium price will decrease
and the equilibrium quantity will increase.
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40. If supply and demand both shift outward,
but demand shifts outward more than
supply, the equilibrium price will
a. increase and quantity will increase.
b. increase and quantity will decrease.
c. decrease and quantity will decrease.
d. decrease and quantity will increase.
A. This is the same thing as saying that demand
shifts to the right relative to supply. If you
draw this out on a piece of paper, it is obvious
that both price and quantity increases.
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41. At Christmas time often a certain toy
or doll becomes increasingly popular;
this is primarily due to a(n)
a. surplus.
b. increase in demand.
c. increase in supply.
d. decrease in supply.
B. An increase in demand means that consumers
will demand more units at every price level.
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42. Which of the following is correct for a
price floor set above the equilibrium price?
a. Quantity supplied is less than quantity
demanded at the set price.
b. At the set price there will be a shortage.
c. Quantity supplied exceeds quantity
demanded at the set price.
C. A price floor exists when some authority mandates that
the price will not fall below a certain level. The
minimum wage law is an example of this. If the market
price is below this mandated price level, there will be
more units supplied than there are units demanded.
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43. Which of the following is correct for the price
ceiling which is set below the market’s
equilibrium price?
a. Quantity demanded exceeds quantity supplied
at the set price.
b. Quantity demanded is less than quantity
supplied at the set price.
c. At the set price there is a surplus.
A. A price ceiling occurs when an authority mandates
that the price cannot go above a certain level. When
this happens, the quantity demanded is greater than
the quantity supplied, causing a shortage.
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44. The Environmental Protection Agency recently
increased clean air requirements for business
firms. In the marketplaces for goods produced
by these firms, we would expect to find price
a. increases and quantity increases.
b. increases and quantity decreases.
c. decreases and quantity increases.
d. decreases and quantity decreases.
B. As the supply curve shifts to the left there will be
an increase in the equilibrium price and a
decrease in the equilibrium quantity as the supply
curve moves along a stationary demand curve.
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45. In order to park on campus, one must purchase an
expensive parking permit; yet there still is difficulty
finding a parking spot. This indicates
a. parking permits are priced to high.
b. parking permits are priced to low.
c. we need more parking spots.
d. the first year students should not be allowed to
have cars on our campus.
B. The price of the parking tickets did not deter
enough people from wanting to park on campus.
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46. Let’s say the government enacted emergency
legislation which established a price ceiling for
gasoline below the current market price,
a. the price would decline and the quantity sold
would increase.
b. the price would decline and the quantity sold
would decrease.
c. with the new lower price a surplus would occur.
B. The price would decline by government edict, but the
quantity sold would decrease as the supplier would
have less incentive to supply at the lower price.
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47. An increase in farm subsidies for corn
would shift the
a. supply curve for corn inward.
b. demand curve for corn outward.
c. demand curve for corn inward.
d. supply curve for corn outward.
D. A subsidy is a payment to the supplier to
supply more units of a good than otherwise
would be the case. Therefore, there would be
an increase in the supply curve and more
units would be supplied at every price level.
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48. An increase in the tax on gasoline
would shift the
a. supply curve outward.
b. supply curve inward.
c. demand curve outward.
d. demand curve inward.
B. An added tax to gasoline leads to an increase in
the price of everything that is transported.
Suppliers would thus be less able to supply at
every possible price level as their costs increase.
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49. Which of the following would be considered
complements?
a. Nike and Reebok shoes.
b. Wendy’s and McDonald’s hamburgers.
c. Chevrolet and Mercury automobiles.
d. peanut butter and jelly.
D. Two goods are complements if they
are used together. Peanut butter and
jelly tend to go together on a sandwich.
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50. Which of the following would be considered
substitutes?
a. Coke and Pepsi.
b. Wedding dress and bridesmaid dress.
c. Golf balls and golf tees.
d. Bacon and eggs.
A. Substitutes are goods that can be used in
place of each other. A Coke can be used in
place of a Pepsi and vice versa.
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51. A decline in consumer confidence
or expectations would shift the
a. demand curve inward.
b. demand curve outward.
c. supply curve inward.
d. supply curve outward.
A. The causes of a shift in demand are: a change in
expectations, a change income, a change in the price of
a related good or service, and the number of consumers
in the market. For example, if consumers expect
interest rates to decline, they will borrow less money
now in anticipation of borrowing more money in the
future to take advantage of the lower interest rates.
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52. As the baby boom ends, fewer families will have younger
children and, as a consequence, the
a. demand curve for preschool services will shift outward.
b. demand curve for preschool services will shift inward.
c. supply curve for preschool services will shift outward.
d. supply curve for preschool services will shift inward.
B. This is a case where there will be
fewer consumers in the market.
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53. As the price of milk increases, producers are
normally willing to supply greater quantities.
This response is known as the law of
a. supply.
b. demand.
c. averages.
d. variable proportions.
A. The law of supply recognizes the fact the suppliers
will have an incentive to increase the quantity
supplied as the price increases and decrease the
quantity supplied as the price decreases.
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54. The development of the silicon chip lowered the
cost of computers and caused an increase in the
a. quantity demanded for computers.
b. demand for computers.
c. quantity supplied of computers.
d. supply of computers.
D. The supply of computers increased as the cost
of manufacturing the computer declined.
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55. The market price for wheat rises rapidly, and farmers
switch from growing soybeans to growing wheat. How
will prices and quantities change in the wheat market?
a. equilibrium price will increase and equilibrium
quantity will increase.
b. equilibrium price will increase and equilibrium
quantity will decrease.
c. equilibrium price will decrease and equilibrium
quantity will increase.
C. The equilibrium price will decrease because the supply
curve of wheat will shift to the right; the equilibrium
quantity will increase for the same reason.
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56. Which of the following would not reduce the transaction
cost in a market?
a. A real estate agent, when buying a house.
b. A stock broker, when purchasing stock.
c. A full page newspaper ad to sell your used lawn
mower.
d. A farmer’s market for fresh produce.
C. Transaction costs are the costs of time and
information required to carry out market exchange.
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57. What will happen to the equilibrium price and
quantity of peanut butter if peanuts increase in
price and the price of jelly decreases? The
equilibrium price
a. and quantity will increase.
b. will fall and the equilibrium quantity will be
indeterminate.
c. will rise and the equilibrium quantity will be
indeterminate.
C. As the price of peanuts increase the supply curve for
peanut butter will decrease, thus raising the equilibrium
price. As the price of jelly decreases, the demand curve
will increase. These two occurrences lead to an increase
in price but they will cancel one another out in terms of
the equilibrium quantity of peanut butter.
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END
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