# Price elasticity & market supply

QUESTION 1

Individual 1 Marshallian demand for good x is given by: p = 30 – 2x1. Individual 2 Marshalliandemand for good x is given by: p = 50 – 2 x2. Assume individuals 1 and 2 are the only two individuals in the marketplace. Further assume that everyone in this marketplace faces the same prices for good x. At price p = \$10, the quantity demanded at the market level is [q].

QUESTION 2

The market demand function for a particular good X gives the market quantity demanded of good X at various prices for good X, holding constant:

 a. prices of all other goods. b. distribution of individuals’ incomes. c. individuals’ preferences. d. all of the above.

QUESTION 3

Consider the following market demand: QD = a – bP, where a, b > 0. At price P = 0.5(a/b), the absolute value of the price elasticity of this market demand is [e].

QUESTION 4

Which of the following is correct when no supply response is possible?

 a. The market supply curve is a vertical line and the market clearing price is dictated by the level of demand. b. The market demand curve is a vertical line and the market clearing price is dictated by the level of supply. c. The market supply curve is a horizontal line and the market clearing price is dictated by the level of demand. d. The market supply curve is a vertical line and the market clearing price is dictated by the level of supply.

QUESTION 5

The short-run market supply function for a particular good X gives the market quantity supplied of good X at various prices for good X, holding constant:

 a. price of labor input. b. price of capital input. c. each firm’s underlying technology. d. all of the above.

QUESTION 6

Consider the following market supply: QS = c, where c > 0. At price P = 0.5(a/b), the absolute value of the price elasticity of this market supply is [e].

QUESTION 7

Consider a shift inward in the short-run supply curve for a good—assuming no simultaneous shift in the demand curve. Which of the following statements is correct?

 a. If the demand curve is relatively price elastic, this shift in supply will cause equilibrium price to increase only moderately, whereas equilibrium quantity decreases sharply. b. If the demand curve is relatively price inelastic, this shift in supply will cause equilibrium price to increase only moderately, whereas equilibrium quantity decreases sharply. c. If the demand curve is relatively price elastic, this shift in supply will cause equilibrium price to decrease sharply, whereas equilibrium quantity increases only moderately. d. If the demand curve is relatively price inelastic, this shift in supply will cause equilibrium price to decrease sharply, whereas equilibrium quantity increases only moderately.

QUESTION 8

Assume all firms in the industry under consideration here have identical cost functions. Further assume constant input prices. Total long-run costs for a typical firm are given by: C(q) = 0.01q3 – q2 + 40q.  Market demand is given by: QD = 25,000 – 1000P. The long-run equilibrium number of firms is [n].

QUESTION 9

Which of the following statements is correct?

 a. In a perfectly competitive market, if the entry of new firms has no effect on input prices, the long-run supply curve is horizontal at the long-run equilibrium price. b. In a perfectly competitive market, if the entry of new firms increases input prices, the long-run supply curve is upward sloping. c. In a perfectly competitive market, if the entry of new firms reduces input prices, the long-run supply curve is downward sloping. d. All of the above.

QUESTION 10

Assume market demand is given by: QD = 10 – P and market supply by: QS = P – 2. Let’s consider a situation where the government is seeking to control prices at above equilibrium levels, at PC = \$7. In other words, the government is imposing a price floor, which prevents the market from clearing at a lower free market equilibrium price. The welfare loss created by such a policy is equal to [\$].

Solution

QUESTION 1

Individual 1 Marshallian demand for good x is given by: p = 30 – 2x1. Individual 2 Marshalliandemand for good x is given by: p = 50 – 2 x2. Assume individuals 1 and 2 are the only two individuals in the marketplace. Further assume that everyone in this marketplace faces the same prices for good x. At price p = \$10, the quantity demanded at the market level is [q].

QUESTION 2

The market demand function for a particular good X gives the market quantity demanded of good X at various prices for good X, holding constant:

 a. prices of all other goods. b. distribution of individuals’ incomes. c. individuals’ preferences. d. all of the above.

QUESTION 3

Consider the following market demand: QD = a – bP, where a, b > 0. At price P = 0.5(a/b), the absolute value of the price elasticity of this market demand is [e].

QUESTION 4

Which of the following is correct when no supply response is possible?

 a. The market supply curve is a vertical line and the market clearing price is dictated by the level of demand. b. The market demand curve is a vertical line and the market clearing price is dictated by the level of supply. c. The market supply curve is a horizontal line and the market clearing price is dictated by the level of demand. d. The market supply curve is a vertical line and the market clearing price is dictated by the level of supply.

QUESTION 5

The short-run market supply function for a particular good X gives the market quantity supplied of good X at various prices for good X, holding constant:

 a. price of labor input. b. price of capital input. c. each firm’s underlying technology. d. all of the above.

QUESTION 6

Consider the following market supply: QS = c, where c > 0. At price P = 0.5(a/b), the absolute value of the price elasticity of this market supply is [e].

QUESTION 7

Consider a shift inward in the short-run supply curve for a good—assuming no simultaneous shift in the demand curve. Which of the following statements is correct?

 a. If the demand curve is relatively price elastic, this shift in supply will cause equilibrium price to increase only moderately, whereas equilibrium quantity decreases sharply. b. If the demand curve is relatively price inelastic, this shift in supply will cause equilibrium price to increase only moderately, whereas equilibrium quantity decreases sharply. c. If the demand curve is relatively price elastic, this shift in supply will cause equilibrium price to decrease sharply, whereas equilibrium quantity increases only moderately. d. If the demand curve is relatively price inelastic, this shift in supply will cause equilibrium price to decrease sharply, whereas equilibrium quantity increases only moderately.

QUESTION 8

Assume all firms in the industry under consideration here have identical cost functions. Further assume constant input prices. Total long-run costs for a typical firm are given by: C(q) = 0.01q3 – q2 + 40q.  Market demand is given by: QD = 25,000 – 1000P. The long-run equilibrium number of firms is [n].

QUESTION 9

Which of the following statements is correct?

 a. In a perfectly competitive market, if the entry of new firms has no effect on input prices, the long-run supply curve is horizontal at the long-run equilibrium price. b. In a perfectly competitive market, if the entry of new firms increases input prices, the long-run supply curve is upward sloping. c. In a perfectly competitive market, if the entry of new firms reduces input prices, the long-run supply curve is downward sloping. d. All of the above.

QUESTION 10

Assume market demand is given by: QD = 10 – P and market supply by: QS = P – 2. Let’s consider a situation where the government is seeking to control prices at above equilibrium levels, at PC = \$7. In other words, the government is imposing a price floor, which prevents the market from clearing at a lower free market equilibrium price. The welfare loss created by such a policy is equal to [\$].