Mr. MaurerName:______
AP Economics
Unit 2 Test Review – Supply and Demand
1. On the graph above, label the areas of consumer surplus and producer surplus when the market is in equilibrium.
2. If the government imposed a price ceiling at $1.00 a gallon, what would be the resulting:
a. new quantity sold
b. new quantity demanded
c. shortage
d. Label the area of deadweight loss after the price ceiling is imposed.
3. The graph above shows a market with an excise tax.
a. What is the amount of the tax?
b. What is the price buyers are paying after the tax?
c. What is the price sellers are actually receiving (after paying the tax)?
d. How much of the tax are consumers paying? How much are sellers paying?
e. Based on your answer to (d), is demand for this product relatively elastic, relatively inelastic, or perfectly inelastic?
f. Label the area of deadweight loss and tax revenue after the tax is imposed.
4. Circle the factors below that will shift the supply curve (change supply)
price of the productdemand for the productchange in technology
change in resource costsconsumers’ incomesimposition of an excise tax.
change in price of complementary goods.
5. Identify the resulting change in equilibrium price and quantity from each of the following (assume that both changes happened together):
DemandSupplyPrice Quantity
IncreaseIncrease
IncreaseDecrease
DecreaseIncrease
DecreaseDecrease
6. If sales of Toyotas increase by 5% when the price of Hondas goes up by 10%, calculate the cross elasticity of the two products.
7. If the government imposed a $2.00 tax/gallon on gasoline, and the price of gasoline rose from $3.00/gallon to $4.75/gallon, who is paying most of the burden of that tax? What does that tell you about the price elasticity of demand for gasoline?
8. In the example above (#7), if the price had risen all the way to $5.00 per gallon, what would you be able to say about the price elasticity of demand for gasoline?
9. If the price of a good goes up, how will the substitution effect change consumers buying habits for that good and other goods?
10. Draw a graph of a market in equilibrium for a product with perfectly inelastic demand. What happens to equilibrium price and quantity when supply goes down?
11. Draw two separate graphs of two markets in equilibrium, Product A and Product B. Product A is a normal good and Product B is an inferior good. On your graphs, show what happens to demand, equilibrium price, and equilibrium quantity when consumers’ income goes up.
12. In your own words define consumer surplus and producer surplus.
13. What is the most likely short term effect of a price ceiling on a market in equilibrium.
14. On the diagram to the left, identify the elastic, unit elastic, and inelastic portions of the demand curve.
15. If the market price for coffee is P1, show and shade the area of consumer surplus.
16. What does the law of diminishing marginal utility say?
17. Explain the utility-maximizing rule.
18. What is the effect of a price reduction on quantity sold and total revenue when demand is elastic? Now ask yourself this question in all possible combinations of price increases, decreases, elastic, inelastic, perfectly inelastic, and unit elastic demand. Know it. Feel it.
19. When demand and supply are anything other than perfectly elastic or perfectly inelastic, what effect does an excise tax have on consumer surplus and producer surplus? Draw a graph if you have to.
20. If the government imposes a price ceiling at P3 on the market pictured at left, what will be the effect of price and quantity sold? Yes, it’s sort of trick question, but you need to know it.
21. And finally, just be darn sure you know the difference between change in quantity demanded and demand. Know the difference between quantity supplied and supply. Feel the difference. What is the only factor that can cause a change in quantity supplied or quantity demanded?