Practice Exam 5
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
Ceteris paribus, a fall in the price of a good causes:
A) A decrease in quantity demanded
B) An increase in quantity demanded (a movement down the demand curve)
C) A decrease in demand
D) An increase in supply
Question 2
Which of the following would shift the demand curve for coffee to the right (an increase in demand)?
A) A fall in the price of coffee
B) A rise in the price of coffee
C) A successful advertising campaign increasing coffee’s popularity
D) A fall in the price of coffee beans (an input)
Question 3
Tea and coffee are substitutes. If the price of tea rises, the demand for coffee will:
A) Fall
B) Rise
C) Stay the same
D) Become perfectly elastic
Question 4
The formula for price elasticity of supply (PES) is:
A) %change in P divided by %change in Qs
B) %change in Qs divided by %change in P
C) %change in Qd divided by %change in P
D) Change in Qs divided by change in P
Question 5
If PES = 0.4, supply is:
A) Elastic
B) Inelastic
C) Unitary elastic
D) Perfectly elastic
Question 6
A narrowly defined good with many close substitutes, such as one specific brand of soft drink, is likely to have demand that is:
A) Perfectly inelastic
B) Relatively elastic
C) Perfectly elastic
D) Zero elasticity
Question 7
Producer surplus rises when, ceteris paribus:
A) The market price falls
B) The market price rises
C) Supply becomes perfectly elastic
D) Demand becomes perfectly inelastic
Question 8
A government-imposed minimum price for milk set above the market equilibrium price will most likely result in:
A) A shortage of milk
B) A surplus of milk, as quantity supplied exceeds quantity demanded
C) No change in the market
D) An increase in demand for milk
Question 9
Which of the following best illustrates the incentive function of the price mechanism?
A) Consumers buy less of a good when its price rises
B) Producers supply more of a good when its price rises, in pursuit of higher profit
C) Government sets a price ceiling
D) Consumer income rises
Question 10
Which of the following would shift the supply curve for avocados to the left?
A) A technological improvement in irrigation
B) A severe drought damaging avocado crops
C) A fall in the price of fertiliser
D) An increase in the number of avocado growers
Question 11
If the government imposes a per-unit excise tax on a good, the supply curve will:
A) Shift right
B) Shift left (upward), reflecting the higher cost of supplying each unit
C) Remain unchanged
D) Become perfectly elastic
Question 12
A movement along the supply curve (rather than a shift of the curve) is caused by:
A) A change in the price of the good itself
B) A change in production costs
C) A change in the number of sellers
D) A change in technology
Question 13
When there is excess demand at the current market price:
A) Price will tend to fall
B) Price will tend to rise toward equilibrium
C) Quantity supplied will fall
D) Nothing will happen
Question 14
Total welfare (community surplus) in a market is maximised when:
A) Producer surplus is zero
B) The market operates at the free market equilibrium, where consumer surplus plus producer surplus is greatest
C) Consumer surplus is zero
D) Price is at its highest possible level
Question 15
If the income elasticity of demand for a good is negative, the good is:
A) A normal good
B) An inferior good, as quantity demanded falls when income rises
C) A luxury good
D) A good with elastic demand
Question 16
A concert promoter sets ticket prices to maximise revenue. If demand for tickets at the current price is elastic, the promoter should:
A) Raise the price to increase total revenue
B) Lower the price to increase total revenue
C) Keep the price the same
D) It is impossible to say
Question 17
Which of the following is most likely to have highly inelastic demand?
A) A specific brand of jeans
B) Insulin for a diabetic patient
C) A particular restaurant meal
D) An imported luxury car
Question 18
The ‘rationing function’ of the price mechanism refers to:
A) Government issuing ration coupons
B) Rising prices allocating scarce goods to those most willing and able to pay
C) Firms limiting output
D) Central planning of resource allocation
Question 19
If both demand and supply increase (shift right) at the same time, the equilibrium quantity will:
A) Definitely fall
B) Definitely rise, though the effect on price is ambiguous without knowing relative magnitudes
C) Stay the same
D) Fall to zero
Question 20
A fall in the price of a complement good, such as printer ink relative to printers, will cause the demand curve for printers to:
A) Shift left
B) Shift right, ceteris paribus
C) Stay the same, only price changes
D) Become vertical
SECTION B — SHORT ANSWER
Question 1 (4 marks)
Using supply and demand analysis, explain the effect of a severe frost that destroys part of a region’s coffee bean crop on the market for coffee beans, and discuss the likely impact on total farmer revenue.
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Question 2 (4 marks)
Explain the concept of income elasticity of demand and distinguish between a normal good and an inferior good, giving one example of each.
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Question 3 (4 marks)
Using the example of a sudden surge in demand for face masks during a health emergency, explain the signalling, incentive and rationing functions of the price mechanism.
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Question 4 (4 marks)
Explain the concept of producer surplus and how it is likely to be affected by an increase in supply, holding demand constant.
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Question 5 (4 marks)
Explain why a government-imposed maximum price on a life-saving medication set below the free-market equilibrium price could lead to a shortage, queuing and a grey or black market.
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Question 6 (4 marks)
Explain, using the concept of elasticity, how the incidence of a per-unit excise tax on sugar-sweetened beverages is likely to be shared between consumers and producers.
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Question 7 (4 marks)
Explain why new housing construction has relatively inelastic supply in the short run, and how this contributes to volatile house prices.
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Question 8 (4 marks)
Explain how differences in price elasticity of demand between business and leisure travellers help explain airline pricing strategy.
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SECTION C — EXTENDED RESPONSE
Extended Response 1: Government Intervention and Market Stability
Extended Response 1(a) (6 marks)
Explain, using supply and demand analysis, the effect of the following on the market for solar panels: (i) a government subsidy to households installing solar panels; (ii) a rise in grid electricity prices; (iii) a fall in the world price of imported solar cells (a key input).
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Extended Response 1(b) (3 marks)
Evaluate the effectiveness of a buffer stock scheme in stabilising prices in the market for a volatile agricultural commodity such as coffee.
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Extended Response 2: Elasticity in Business and Policy Decisions
Extended Response 2(a) (5 marks)
Explain how a public transport operator could use knowledge of price elasticity of demand to guide fare-setting and revenue decisions.
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Extended Response 2(b) (3 marks)
Evaluate the effectiveness of a price floor (minimum price) in the market for milk paid to dairy farmers. Who gains and who loses?
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