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Demand, Supply, Market Equilibrium, and Welfare Analysis Review Questions for AP Economics

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By — McGraw-Hill Professional
Updated on Mar 4, 2011

The study guides for these review questions can be found at:

Demand and Supply Review for AP Economics

Market Equilibrium and Welfare Analysis for AP Economics

Questions

  1. When the price of pears increases, we expect the following:
    1. quantity demanded of pears rises.
    2. quantity supplied of pears falls.
    3. quantity demanded of pears falls.
    4. demand for pears falls.
    5. supply of pears rises.
  2. If average household income rises and we observe that the demand for pork chops increases, pork chops must be
    1. an inferior good.
    2. a normal good.
    3. a surplus good.
    4. a necessity.
    5. a shortage good.
  3. Suppose that aluminum is a key production input in the production of bicycles. If the price of aluminum falls, and all other variables are held constant, we expect
    1. the demand for aluminum to rise.
    2. the supply of bicycles to rise.
    3. the supply of bicycles to fall.
    4. the demand for bicycles to rise.
    5. the demand for bicycles to fall.
  4. The market for denim jeans is in equilibrium, and the price of polyester pants, a substitute good, rises. In the jean market
    1. supply falls, increasing the price and decreasing the quantity.
    2. supply falls, increasing the price and increasing the quantity.
    3. demand falls, increasing the price and decreasing the quantity.
    4. demand rises, increasing the price and increasing the quantity.
    5. supply and demand both fall, causing an ambiguous change in price but a definite decrease in quantity.
  5. The apple market is in equilibrium. Suppose we observe that apple growers are using more pesticides to increase apple production. At the same time, we hear that the price of pears, a substitute for apples, is rising. Which of the following is a reasonable prediction for the new price and quantity of apples?
    1. Price rises, but quantity is ambiguous.
    2. Price falls, but quantity is ambiguous.
    3. Price is ambiguous, but quantity rises.
    4. Price is ambiguous, but quantity falls.
    5. Both price and quantity are ambiguous.
  6. The competitive market provides the best outcome for society because
    1. consumer surplus is minimized while producer surplus is maximized.
    2. the total welfare is maximized.
    3. producer surplus is minimized while consumer surplus is maximized.
    4. the difference between consumer and producer surplus is maximized.
    5. the total cost to society is maximized.

Answers and Explanation

  1. C—If the price of pears rises, either quantity demanded falls or quantity supplied rises. Entire demand or supply curves for pears can shift, but only if an external factor, not the price of pears, changes.
  2. B—When income increases and demand increases, the good is a normal good. Had the demand for pork chops decreased, they would be an inferior good.
  3. B—This is a determinant of supply. If the raw material becomes less costly to acquire, the marginal cost of producing bicycles falls. Producers increase the supply of bicycles. Recognizing this as a supply determinant allows you to quickly eliminate any reference to a demand shift.
  4. D—When a substitute good becomes more expensive the demand for jeans rises, increasing price and quantity.
  5. C—Increased use of pesticides increases the supply of apples. If the price of a substitute increases, the demand for apples increases. Combining these two factors predicts an increase in the quantity of apples, but an ambiguous change in price. To help you see this, draw these situations in the margin of the exam.
  6. B—When competitive markets reach equilibrium, no other quantity can increase total welfare (consumer + producer surplus). Total welfare, under the supply and demand curves, is maximized at that point.
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