Question 1

Which of the following best describes a perfectly competitive market?

Accepted Answer

A market with many buyers and sellers, all firms selling identical products, and no barriers to entry.

Question 2

According to the law of demand, what happens when the price of a product falls, ceteris paribus?

Accepted Answer

The quantity demanded of the product increases.

Question 3

Suppose the price of gym memberships decreases. What is the likely effect on the demand for reusable water bottles, assuming they are complements?

Accepted Answer

The demand for reusable water bottles will increase.

Question 4

Which of the following is an example of an inferior good?

Accepted Answer

Second-hand clothes

Question 5

If the price of a substitute good increases, what happens to the demand for the original good?

Accepted Answer

The demand for the original good increases.

Question 6

Which equation represents the law of demand, holding all else constant?

Accepted Answer

$ Q_d = f(P) $ where $ Q_d $ decreases as $ P $ increases

Question 7

A technological improvement in the production of reusable water bottles will likely cause which of the following changes in the market?

Accepted Answer

The supply curve shifts to the right, decreasing equilibrium price.

Question 8

If a hurricane destroys several manufacturing plants, what is the most likely immediate effect on the supply curve for the affected good?

Accepted Answer

The supply curve shifts to the left.

Question 9

Suppose the market for reusable water bottles is in equilibrium at a price of $20 and a quantity of 5 million units per week. If the price rises to $25, what will occur?

Accepted Answer

A surplus will occur, and the price will fall.

Question 10

Which of the following would cause a movement along the demand curve for bottled water, rather than a shift of the demand curve?

Accepted Answer

A decrease in the price of bottled water.

Question 11

If both the demand and supply curves for a product shift to the right, what can we say about the new equilibrium quantity and price?

Accepted Answer

Equilibrium quantity will rise, but the effect on equilibrium price is ambiguous.

Question 12

Which of the following best explains the substitution effect?

Accepted Answer

When the price of a good falls, consumers substitute toward that good, making it relatively more attractive compared to other goods.

Question 13

A firm expects the price of its product to increase in the future. What is the most likely effect on its current supply?

Accepted Answer

The firm will decrease current supply to sell more later at higher prices.

Question 14

Which of the following is NOT a variable that shifts market demand?

Accepted Answer

The price of the good itself.

Question 15

If the price of an input used to produce a good increases, what is the likely effect on the supply curve for that good?

Accepted Answer

The supply curve shifts to the left.

Question 16

Suppose a new firm enters the market for reusable water bottles. What is the likely effect on equilibrium price and quantity?

Accepted Answer

Equilibrium price falls and equilibrium quantity rises.

Question 17

Which of the following scenarios would cause the demand curve for a normal good to shift to the right?

Accepted Answer

An increase in consumer income.

Question 18

If a pandemic causes people to avoid restaurants, what is the likely effect on the demand for restaurant meals?

Accepted Answer

The demand curve shifts to the left.

Question 19

Which of the following best describes market equilibrium?

Accepted Answer

A situation in which quantity demanded equals quantity supplied.

Question 20

Suppose the price of bottled spring water increases. What is the likely effect on the demand for reusable water bottles, assuming they are substitutes?

Accepted Answer

The demand for reusable water bottles will increase.

Chapter 3: Where Prices Come From – The Interaction of Demand and Supply

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