Question 1

Refer to the two graphs provided. Both show a rightward shift in the supply curve (from $S_1$ to $S_2$) for a good. In the left graph, the demand curve is vertical, while in the right graph, the demand curve is downward sloping. Which of the following statements best explains the difference in the effect of the supply shift on equilibrium quantity between the two graphs?

Accepted Answer

The vertical demand curve in the left graph indicates perfectly inelastic demand, so the equilibrium quantity does not change when supply increases.

Question 2

In the left graph, the demand curve is vertical. What does this imply about the price elasticity of demand for this good?

Accepted Answer

The price elasticity of demand is zero, indicating perfectly inelastic demand.

Question 3

Suppose the supply of a good increases (shifts from $S_1$ to $S_2$) as shown in both graphs. In which scenario does the equilibrium price decrease the most, and why?

Accepted Answer

In the left graph, because the demand is perfectly inelastic, all of the supply increase results in a lower price.

Question 4

In the right graph, the demand curve is downward sloping. After the supply curve shifts from $S_1$ to $S_2$, what happens to the equilibrium quantity and price?

Accepted Answer

Equilibrium quantity increases and equilibrium price decreases.

Question 5

If a government wants to maximize the reduction in equilibrium price from an increase in supply, which type of demand curve should the market have?

Accepted Answer

A perfectly inelastic (vertical) demand curve.

Question 6

Suppose the good in the left graph is insulin for diabetics. What does the vertical demand curve suggest about consumer behavior if the price of insulin falls?

Accepted Answer

Consumers will not increase their quantity demanded, as they need a fixed amount regardless of price.

Question 7

Which of the following best describes the effect of a supply increase on total revenue in the market depicted by the left graph?

Accepted Answer

Total revenue will decrease because the price falls but quantity demanded does not change.

Question 8

If the demand curve in the right graph became steeper (more vertical), what would happen to the change in equilibrium quantity resulting from the supply shift?

Accepted Answer

The change in equilibrium quantity would be smaller.

Question 9

Which of the following equations correctly represents the price elasticity of demand, as relevant to the graphs above?

Accepted Answer

$\frac{\%\Delta Q_d}{\%\Delta P}$

Question 10

If the supply curve in either graph were perfectly inelastic (vertical), what would happen to equilibrium price and quantity after a rightward shift in demand?

Accepted Answer

Equilibrium price would increase, but equilibrium quantity would remain unchanged.

Elasticity: Measuring Responsiveness in Microeconomics

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