INSTRUCTIONS: Select the BEST answer for each question by marking the circle

next to your selection, then click on the [Grade the Test] button at the bottom.
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1. An increase in the price of a product will reduce the amount of it purchased because:

A. supply curves are upsloping.

B. the higher price means that real incomes have risen.
C. consumers will substitute other products for the one whose price has risen.
D. consumers substitute relatively high-priced for relatively low-priced products.

2. Which of the following will not cause the demand for product K to change?

A. a change in the price of close-substitute product J

B. an increase in consumer incomes
C. a change in the price of K
D. a change in consumer tastes

3. Which of the following would not shift the demand curve for beef?

A. a widely publicized study which indicates beef increases one's cholesterol

B. a reduction in the price of cattle feed
C. an effective advertising campaign by pork producers
D. a change in the incomes of beef consumers

4. If the price of K declines, the demand curve for the complementary product J will:

A. shift to the left.

B. decrease.
C. shift to the right.
 D. remain unchanged.

5. A firm's supply curve is upsloping because:

A. the expansion of production necessitates the use of qualitatively inferior inputs.

B. mass production economies are associated with larger levels of output.
C. consumers envision a positive relationship between price and quality.
D. beyond some point the production costs of additional units of output will rise.

6.

R-1 F03083

Refer to the above diagram. The equilibrium price and quantity in this market will be:

A. $1.00 and 200.

B. $1.60 and 130.
C. $.50 and 130.
D. $1.60 and 290.
7.

R-2 F03090

Refer to the above diagram. A price of $20 in this market will result in:

A. equilibrium.
B. a shortage of 50 units.
C. a surplus of 50 units.
D. a surplus of 100 units.
E. a shortage of 100 units.

8.
 R-3 F03140

Which of the above diagrams illustrate(s) the effect of a decrease in incomes upon the market for
secondhand clothing?

A. A and C
B. A only
C. B only
D. C only

9.

R-3 F03140

Which of the above diagrams illustrate(s) the effect of a governmental subsidy on the market for AIDS
research?

A. A only
B. B only
C. C only
D. D only
10. An effective ceiling price will:

A. induce new firms to enter the industry.

B. result in a product surplus.
C. result in a product shortage.
D. clear the market.
 1.
Which of the following is not a component of demand?
Discuss

o A.

Desire
o B.

Surplus
o C.

Ability
o D.

Willingness

 2.
The law of demand states that there is what type of relationship between price
and quantity demanded?
Discuss

 3.
The demand curve slopes in which direction?
o A.

Down
o B.

Up

 4.
 When each additional unit of a product gives you less utility it is know as
what?
o A.

Marginal analysis
o B.

Downward demand
o C.

Diminishing marginal utility

o D.

Decreasing desire

 5.
The law of supply states there is what type of relationship between price and
quantity supplied?
Discuss

 6.
The supply curve always slopes in what direction?
o A.

Down
o B.

Up

 7.
The ideal price level is known as what?

 8.
A surplus will occur for a product when the price is
Discuss

o A.

Too high.
 o B.

Too low.

 9.
When there is a shortage what should be done?
Discuss

o A.

Increase supply
o B.

Decrease price
o C.

Decrease price
o D.

Increase demand

 10.
When graphing supply and demand, price is always on which axis?
o A.

Horizontal
o B.

Vertical

Supply and demand are basic and important principles in the field of economics.
Having a strong grounding in supply and demand is key to understanding more
complex economic theories.

Test your knowledge with ten supply and demand practice questions that come
from previously administered GRE Economics tests.

Full answers for each question are included, but try solving the question on your
own first.

Question 1
If the demand and supply curve for computers is:

D = 100 - 6P, S = 28 + 3P

Where P is the price of computers, what is the quantity of computers bought and
sold at equilibrium?

Answer: We know that the equilibrium quantity will be where supply meets or
equals demand. So first we'll set supply equal to demand:

100 - 6P = 28 + 3P

If we re-arrange this we get:

72 = 9P

Which simplifies to P = 8.

Now we know the equilibrium price, we can solve for the equilibrium quantity by
simply substituting P = 8 into the supply or the demand equation. For instance,
substitute it into the supply equation to get:

S = 28 + 3*8 = 28 + 24 = 52.

Thus, the equilibrium price is 8, and the equilibrium quantity is 52.

Question 2
The quantity demanded of Good Z depends upon the price of Z (Pz), monthly
income (Y), and the price of a related Good W (Pw). Demand for Good Z (Qz) is
given by equation 1 below: Qz = 150 - 8Pz + 2Y - 15Pw

Find the demand equation for Good Z in terms of the price for Z (Pz), when Y is
$50 and Pw = $6.

Answer: This is a simple substitution question. Substitute those two values into
our demand equation:

Qz = 150 - 8Pz + 2Y - 15Pw

Qz = 150 - 8Pz + 2*50 - 15*6

Qz = 150 - 8Pz + 100 - 90

Simplifying gives us:

Qz = 160 - 8Pz

This is the final answer.

Question 3
Beef supplies are sharply reduced because of drought in the beef-raising states,
and consumers turn to pork as a substitute for beef. How would you illustrate this
change in the beef market in supply-and-demand terms?

Answer: The supply curve for beef should shift leftward (or upward), to reflect the
drought. This causes the price of beef to rise, and the quantity consumed to
decrease.

We would not move the demand curve here. The decrease in quantity demanded
is due to the price of beef rising, creating the shift of the supply curve.

Question 4
In December, the price of Christmas trees rises and the number of trees sold also
rises. Is this a violation of the law of demand?

Answer: No. This is not simply a move along the demand curve. In
December, demand for Christmas trees rises, causing the curve to shift to the
right. This allows both the price of Christmas trees and the quantity sold of
Christmas trees to rise.

Question 5
A firm charges $800 for its unique word processor. If total revenue is $56,000 in
July, how many word processors were sold that month?

Answer: This is a very simple algebra question. We know that Total Revenue =
Price*Quantity.

By re-arranging, we have Quantity = Total Revenue / Price

Q = 56,000/800 = 70

Thus the company sold 70 word processors in July.

Question 6
Find the slope of an assumed linear demand curve for theater tickets, when
persons purchase 1,000 at $5.00 per ticket and 200 at $15.00 per ticket.

Answer: The slope of a linear demand curve is simply:

Change in Price / Change in Quantity

So when the price changes from $5.00 to $15.00, the quantity changes from
1,000 to 200. This gives us:

15 - 5 / 200 - 1000

10 / -800

-1/80

Thus the slope of the demand curve is given by -1/80.

Question 7
Given the following data:

WIDGETS P = 80 - Q (Demand)
P = 20 + 2Q (Supply)

Given the above demand and supply equations for widgets, find the equilibrium
price and quantity.

Answer: To find the equilibrium quantity, simply set both of these equations
equal to each other.

80 - Q = 20 + 2Q

60 = 3Q

Q = 20

Thus our equilibrium quantity is 20. To find the equilibrium price, simply
substitute Q = 20 into one of the equations. We will substitute it into the demand
equation:
P = 80 - Q

P = 80 - 20

P = 60

Thus, our equilibrium quantity is 20 and our equilibrium price is 60.

Question 8
Given the following data:

WIDGETS P = 80 - Q (Demand)
P = 20 + 2Q (Supply)

Now suppliers must pay a tax of $6 per unit. Find the new equilibrium price-
inclusive price and quantity.

Answer: Now suppliers do not get the full price when they make a sale — they get
$6 less. This changes our supply curve to P - 6 = 20 + 2Q (Supply)

P = 26 + 2Q (Supply)

To find the equilibrium price, set the demand and supply equations equal to each
other:

80 - Q = 26 + 2Q

54 = 3Q

Q = 18

Thus, our equilibrium quantity is 18. To find our equilibrium (tax inclusive) price,
we substitute our equilibrium quantity into one of our equations. I'll substitute it
into our demand equation:

P = 80 - Q

P = 80 - 18

P = 62

Thus the equilibrium quantity is 18, the equilibrium price (with tax) is $62, and
the equilibrium price without tax is $56 (62-6).
Question 9
Given the following data:

WIDGETS P = 80 - Q (Demand)
P = 20 + 2Q (Supply)

We saw in the last question the equilibrium quantity will now be 18 (instead of
20) and the equilibrium price is now 62 (instead of 20). Which of the following
statements is true:

(a) Tax revenue will equal $108

(b) Price increases by $4
(c) Quantity decreases by 4 units
(d) Consumers pay $70
(e) Producers pay $36

Answer: It's easy to show that most of these are wrong:

(b) Is wrong since the price increases by $2.

(c) Is wrong since quantity decreases by 2 units.

(d) Is wrong since consumers pay $62.

(e) Doesn't look like it can be right. What does it mean that "producers pay $36?"
In what? Taxes? Lost sales?

The (a) answer says tax revenue will equal $108. We know that there are 18 units
sold and the revenue to the government is $6 a unit. 18 * $6 = $108. Thus we can
conclude that (a) is the correct answer.

Question 10
Which of the following factors will cause the demand curve for labor to shift to
the right?

(a) the demand for the product by labor declines.

(b) the prices of substitute inputs fall.

(c) the productivity of labor increases.

(d) the wage rate declines.

(e) None of the above.

Answer: A shift to the right of the demand curve for labor means that the demand
for labor as increased at every wage rate. We will examine (a) through (d) to see if
any of these would cause the demand for labor to rise.

(a) If the demand for the product produced by labor declines, then the demand
for labor should decline. So this doesn't work.

(b) If the prices of substitute inputs fall, then you would expect companies to
switch from labor to substitute inputs. Thus the demand for labor should fall. So
this doesn't work.

(c) If the productivity of labor increases, then employers will demand more labor.
So this one does work!

(d) The wage rate declining causes a change in quantity demanded, not demand.
So this doesn't work.

Thus, the correct answer is (c).

1. The Supply Curve is upward-sloping because:

As the price increases, so do costs.

As the price increases, consumers demand less.
As the price increases, suppliers can earn higher levels of profit or
justify higher marginal costs to produce more.
None of the Above

2. Part of the reason that Michael Jordan earns millions of dollars each year while
school teachers may earn $30,000 is because

The supply of superstar basketball players is very low, while the

supply of competent teachers is much larger.
Demand for Michael Jordan's talents is very high since he can
generate so much revenue for a firm.
Consumers enjoy basketball to the point that they are willing to
spend lots of money and time attending games and watching
 commercials.
All of the Above

3. When college students leave town for the summer, the demand for meals at the
local restaurants declines. This results in

a decrease in equilibrium price and an increase in quantity.

an increase in equilibrium price and quantity.
a decrease in equilibrium price and quantity.
an increase in equilibrium price, and a decrease in quantity.
None of the Above

4. All the following shift the demand curve for automobiles to the right except:

the local factory gives a big raise to its employees.

a brand new automobile dealership opens in town.
the price of gasoline falls.
None of the Above

5. If the cost of computer components falls, then

the demand curve for computers shifts to the right.

the demand curve for computers shifts to the left.
the supply curve for computers shifts to the right
the supply curve for computers shifts to the left

6. What happens in the market for airline travel when the price of traveling by rail
decreases?

The demand curve shifts left.

The demand curve shifts right.
The supply curve shifts left.
The supply curve shifts right.
We move along the supply curve.

7. If a sin tax is placed on sales of alcohol,

 the demand curve shifts to the left.
the demand curve shifts to the right.
the supply curve shifts to the left.
the supply curve shifts to the right.

8. When a price ceiling is imposed above the equilibrium price,

a shortage results.
a surplus results.
the equilibrium outcome prevails.
there is not enough information to determine the outcome.

9. If the demand curve shifts to the right, then we move up and to the right along
our supply curve.

True
False

10.If the cost of making bicycles falls, the price goes down, causing the demand
curve to shift to the right.

True
False