Practice Exam 1
VCE Economics | Markets, Supply and Demand, Price Mechanism
✎ Complete ALL questions on paper before opening the Model Answers lesson. No notes. Aim for 1 minute per mark.
SECTION A — MULTIPLE CHOICE (20 marks)
Question 1
The law of demand states that, ceteris paribus:
A) As price rises, quantity demanded rises
B) As price falls, quantity demanded rises
C) As income rises, quantity demanded falls
D) As supply increases, quantity demanded falls
Question 2
A movement along the demand curve is caused by:
A) A change in consumer income
B) A change in the price of the good itself
C) A change in preferences
D) A change in the price of a complement
Question 3
If two goods are substitutes, a rise in the price of Good A will:
A) Decrease demand for Good B
B) Increase demand for Good B
C) Have no effect on demand for Good B
D) Decrease supply of Good B
Question 4
The price elasticity of demand measures:
A) How supply responds to a price change
B) The percentage change in quantity demanded divided by the percentage change in price
C) The total revenue from selling a good
D) How income affects demand
Question 5
If PED = -2.5, demand is:
A) Inelastic
B) Elastic
C) Unitary elastic
D) Perfectly inelastic
Question 6
A positive income elasticity of demand indicates:
A) An inferior good
B) A normal good — quantity demanded rises as income rises
C) A Giffen good
D) An inelastic good
Question 7
Consumer surplus is:
A) The profit earned by producers
B) The difference between what consumers are willing to pay and what they actually pay
C) The tax revenue collected by government
D) The total expenditure of consumers
Question 8
A price ceiling set below the equilibrium price will cause:
A) A surplus
B) A shortage
C) No change in the market
D) A fall in demand
Question 9
The law of supply states that, ceteris paribus:
A) As price rises, quantity supplied falls
B) As price rises, quantity supplied rises
C) As costs rise, supply increases
D) As technology improves, prices rise
Question 10
Which of the following would shift the supply curve to the right?
A) An increase in the cost of raw materials
B) A decrease in the number of producers
C) An improvement in production technology
D) A rise in the price of the good
Question 11
At market equilibrium:
A) Consumer surplus is maximised
B) Quantity demanded equals quantity supplied and the market clears
C) Price is at its minimum
D) Producer surplus is zero
Question 12
A binding price floor is set:
A) Below the equilibrium price
B) Above the equilibrium price
C) At the equilibrium price
D) At the minimum cost of production
Question 13
Cross-price elasticity of demand (XED) measures:
A) How quantity demanded responds to a change in income
B) How quantity demanded of one good responds to a change in the price of another good
C) How quantity supplied responds to price
D) The total revenue impact of a price change
Question 14
Total revenue (TR) equals:
A) Price minus cost
B) Price multiplied by quantity sold
C) Quantity demanded plus quantity supplied
D) Consumer surplus plus producer surplus
Question 15
If demand is inelastic and price rises, total revenue will:
A) Fall
B) Rise
C) Stay the same
D) Cannot be determined
Question 16
Producer surplus is:
A) The excess profit earned above normal profit
B) The difference between the price producers receive and the minimum price they would accept
C) The cost of producing an extra unit
D) Total revenue minus variable costs
Question 17
A good with a perfectly inelastic demand curve has:
A) PED = infinity
B) PED = 0 (vertical demand curve)
C) PED = 1
D) PED = -1
Question 18
When a market is in disequilibrium with excess supply:
A) Price will tend to rise
B) Price will tend to fall toward equilibrium
C) Supply will increase
D) Demand will decrease
Question 19
The substitution effect of a price rise means:
A) Consumers buy more of the good
B) Consumers substitute away from the more expensive good toward cheaper alternatives
C) Income effectively increases
D) Supply shifts left
Question 20
A normal good has a positive:
A) Cross-price elasticity with a complement
B) Income elasticity of demand
C) Price elasticity of supply
D) Cross-price elasticity with a substitute
SECTION B — SHORT ANSWER
Question 1 (4 marks)
Using a supply and demand diagram (described), explain the effect of a good harvest on the market for wheat. What happens to equilibrium price and quantity?
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Question 2 (4 marks)
Explain the concept of price elasticity of demand. What factors determine whether demand is elastic or inelastic?
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Question 3 (4 marks)
Explain how the price mechanism allocates resources in a market economy. What is the role of price signals?
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Question 4 (4 marks)
Describe the concept of consumer surplus and explain how it changes when price falls.
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Question 5 (4 marks)
Explain why a maximum price (price ceiling) can lead to non-price rationing and black markets.
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Question 6 (4 marks)
Explain how the concept of elasticity is relevant to tax incidence (who pays the tax).
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Question 7 (4 marks)
Describe the difference between a change in demand and a change in quantity demanded. Why does this distinction matter?
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Question 8 (4 marks)
What is the significance of the price elasticity of supply? What factors make supply more elastic?
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SECTION C — EXTENDED RESPONSE
Extended Response 1: Supply, Demand and Equilibrium
Extended Response 1(a) (6 marks)
Explain, using supply and demand analysis, the effect of the following on the market for electric vehicles (EVs): (i) A government subsidy to EV buyers; (ii) An increase in the price of petrol; (iii) A technological advance reducing battery production costs.
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Extended Response 1(b) (3 marks)
Explain why markets for agricultural commodities often experience large price fluctuations. What policies could stabilise prices and who benefits from each?
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Extended Response 2: Elasticity and Market Outcomes
Extended Response 2(a) (5 marks)
Explain how knowledge of price elasticity of demand is useful to a business when making pricing decisions.
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Extended Response 2(b) (3 marks)
Evaluate the effectiveness of a price ceiling in the market for rental housing. Who gains and who loses?
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