2012-2013 DEMIDEC - ECONOMICS LEVEL 1
35. Food is necessary for life. The price elasticity of demand for food is
a. inelastic
b. sub-elastic
c. perfectly elastic
d. elastic
e. perfectly inelastic
38. As people’s incomes increase, the demand for books increases. What type of good are books?
a. complementary
b. inferior
c. normal
d. substitutional
e. Giffen
46. A tax would yield the greatest revenue if it were placed on a good for which demand is
a. inelastic
b. perfectly inelastic
c. perfectly elastic
d. unit elastic
e. elastic
2012-2013 ECONOMICS LEVEL 2
2. In the market for candy, the demand curve is represented by the equation Q(D) = 3 + 4(P). The supply curve is
Q(S) = 5 + 2(P). What is the equilibrium price in the candy market?
a. $3
b. $1
c. $0.33
d. $0.50
e. $2
7. The price of furniture increases by 14%. As a result, the quantity of furniture demanded decreases by 8%. The
price elasticity of demand for furniture is
a. inelastic
b. elastic
c. unit elastic
d. perfectly inelastic
e. perfectly elastic
17. The demand curve slopes downward because, as the price of a good decreases, the
a. good becomes more useful to consumers
b. price elasticity of demand increases
c. opportunity cost of consuming the good decreases
d. demand for complementary goods increases
e. consumers demand more of the good
19. Barney sells toy dinosaurs in a perfectly competitive market. What kind of demand curve does Barney face?
a. perfectly inelastic
b. unit elastic
c. elastic
d. inelastic
e. perfectly elastic
22. The government imposes a $2 tax on consumption in the market for pineapples. As a result, the equilibrium
quantity decreases from 15 to 10. What is the government revenue from this tax?
a. $2
b. $30
c. $10
d. $20
e. $5
35. In the market for sports drinks, the supply curve is represented by the equation Q(S) = (1/3)(P) + 3. If the
equilibrium price is $6, what is the producer surplus?
a. $9
b. $3
c. $6
d. $21
e. $18
43. The equilibrium price in the market for lemons is $1. The government imposes a price floor in this market at
$0.50. Which of the following statements about this price floor is TRUE?
a. It creates a large deadweight loss.
b. It has no effect on market equilibrium.
c. It decreases consumer surplus.
d. It gives rise to an excess supply.
e. It increases producer surplus.
2012-2013 ECONOMICS LEVEL 3
3. The supply of diamonds is perfectly inelastic at a quantity of 500. The demand for diamonds is perfectly elastic at
$1,000. What is the producer surplus in the market for diamonds?
a. $500,000
b. $5,000
c. $200,000
d. $0
e. $1,000
4. Market power is indicated by a
a. demand curve equal to the marginal revenue curve
b. upward sloping supply curve
c. price above marginal revenue
d. downward sloping demand curve
e. upward sloping marginal cost curve
16. The government imposes a binding price floor in a market with perfectly elastic demand. Which of the following
statements about this binding price floor is TRUE?
a. It must be placed at market equilibrium.
b. It will increase consumer surplus in the market.
c. It must be placed below market equilibrium.
d. It will destroy the market.
e. It will increase producer surplus in the market.
21. Tessa’s demand curve is represented by the equation Q(D) = - 2(P) + 4, while Liz’s is Q(D) = -3(P) + 6. What is
the market demand curve?
a. Q(D) = -2.5 (P) + 5
b. Q(D) = -5(P) + 10
c. Q(D) = 2.5(P) + 10
d. Q(D) = -1 (P) + 2
e. Q(D) = 5(P) + 2
27. The supply curve in nearly every market is upward-sloping because, as the price of a good increases,
a. firms adjust to unanticipated sales
b. more buyers are willing to purchase the good
c. producers will devote more resources to production
d. more producers will enter the market
e. the variable cost of producing that good decreases
34. Assuming the demand curve is the same in all cases, which of the following supply curves would yield the
greatest revenue when taxed?
a. Q(S) = -3(P) + 6
b. Q(S) = 6(P) - 2
c. Q(S) = 4(P) + 4
d. Q(S) = 0.5(P) + 7
e. Q(S) = 2(P) + 10
48. The price of DVDs decreases from $25 to $15 and, as a result, the quantity demanded increases from 40 to 60.
What is the price elasticity of demand of DVDs?
a. 0.8%
b. 1.25%
c. 1.33%
d. -.75%
e. -.67%
LEVEL 1:
35. E When considered as part of one market, the price elasticity of demand for food is essentially perfectly
inelastic. There are no substitutes for food, and since food is a necessity people will be forced to buy it no regardless
of changes in price.
38. C If the demand for a good increases as people’s incomes increase, the good is considered a normal good. Goods
for which demand decreases as income increases are inferior goods. Substitutes are goods used in place of another
good. Complements are goods used with another good. There is not enough information in the question to determine
if books are complementary or substitutional goods. A Giffen good is a good that people consume more of as its
price increases.
46. B The less elastic the supply and demand for a good are, the smaller the deadweight loss created by a tax. A
good for which demand is perfectly inelastic would see no decrease in the quantity purchased from the imposition of
a tax, and would therefore yield the greatest revenue.
LEVEL 2:
2. B Market equilibrium occurs where the demand and supply curves intersect. To find the equilibrium price and
quantity, set the demand and supply curves equal. 3 + 4(P) = 5 + 2(P). Then, subtract 2(P) from both sides. 3 + 2(P)
= 5. Subtract 3 from both sides. 2(P) = 2. Divide each side by 2. P = $1.
7. A Demand for a good is said to be inelastic if a one percent increase in price yields less than a one percent change
in the quantity demanded. In this case, a 14% increase in the price of furniture led to only an 8% decrease in the
quantity demanded.
17. C The law of demand states that there is a negative relationship between the price of a good and the quantity
demanded. This statement is true because as the price of a good decreases the opportunity cost of consuming the
good decreases. As a result, consumers can buy a larger quantity of the good with the same amount of money, and
will substitute expensive goods with the newly cheaper good. A decrease in the price of a good does not make it
more useful to consumers.
19. E All perfectly competitive firms are price takers with no market power and thus face a horizontal (perfectly
elastic) demand curve. These firms do not have a large enough output to affect the market price. They can sell all of
their goods at the prevailing market price, so there is no incentive to charge a lower price. Theoretically, if they raise
the price even one cent above market equilibrium they will not sell any goods.
22. D The amount of revenue the government receives from a tax is equal to the amount of the tax multiplied by the
new equilibrium quantity of the good being taxed. In this case, ($2) × 10 = $20.
35. A The area above the supply curve and below the market price represents the producer surplus in a market. To
determine this surplus, first calculate the points of the triangle by plugging the price into the equation. Q(S) =
(1/3)(6) + 3 = 5. The area of a triangle is (1/2) × base × height. In this case, (1/2) × (5-2) × (6) = $9. The producer
surplus is $9.
43. B In order for a price floor to be binding it must be set above the equilibrium price. Thus, if the equilibrium price
is $1 and the price floor is $0.50 the market will not change. Binding price floors lead to an excess supply and
reduce consumer and producer surplus. Deadweight loss refers to forgone transactions as a result of a tax. [
LEVEL 3:
3. A In a market, the area below the market price and above the supply curve represents producer surplus. Generally
this area is in the shape of a triangle since supply slopes upward. However, if supply is vertical (perfectly inelastic)
and demand is horizontal (perfectly elastic) this area is a rectangle. To calculate the area of this rectangle, multiply
the base by the height. 500 × $1,000 = $500,000.
4. D A firm possesses market power if they face a downward sloping demand curve. Because of the downward
sloping demand curve, these firms can control the market price. In imperfect competition, firms have a marginal
revenue curve that lies below the demand curve. They realize that in order to sell another good they must lower the
price on all goods sold. They will charge a price higher than their marginal revenue, but this does not show they
have market power. All firms have upward sloping supply and marginal costs.
16. D If demand for a good is perfectly price elastic, an increase in the price above market equilibrium will eliminate
the entire quantity demanded. Thus, if the government mandates a binding price floor, no consumers will be willing
to buy the good. Producers will not be able to sell any of their products. Price controls always decrease total
(producer and consumer) surplus in a market since they prevent mutually beneficial transactions from taking place.
21. B To determine the market demand curve, add horizontally the individual demand curves. In this case, -2(P) + 4
+ - 3(P) + 6 = -5(P) + 10.
27. C As the price of a good increases, it becomes profitable for sellers to devote more resources to producing that
good. As a result, sellers will supply more of a good as the price increases. This relationship is the law of supply.
The variable cost of producing a good does not increase as the price increases, although the opportunity cost does.
Producers can only enter perfectly competitive or monopolistically competitive markets and will only do so if
economic profits exist—they cannot do so in oligopolies or monopolies, which is why you can rule out this choice.
Fewer buyers will purchase a good as its price increases.
34. B The lower the price elasticity of supply and demand in a market, the higher revenue a tax will yield. The
greater the slope of a line, the lower the elasticity. Of all of the equations, Q(S) = 6(P) - 2 has the steepest slope and
the lowest price elasticity of supply.
48. A The price elasticity of demand = (percentage change in quantity demanded) / (percentage change in price). In
this case, {(60 - 40) / [(1/2)(60 + 40)]} / {(15 - 25) / [(1/2)(15 + 25)]} = -0.8%. Since this value will always be
negative, economist conventionally use the absolute value.
1995 AP MICROECONOMICS EXAM
34. If a store raises prices by 20% and its total revenue increases by 10%, the demand it faces in this range must be
(A) inelastic
(B) elastic
(C) unit elastic
(D) perfectly elastic
(E) perfectly inelastic
50. Which of the following is true in the market for a certain product if producers are consistently willing to sell
more at the going price than consumers are willing to buy?
(A) Demand is highly inelastic.
(B) Supply is highly elastic.
(C) The product is inferior.
(D) There is a price ceiling on the product.
(E) There is a price floor on the product.
2000 AP MIRCROECONOMICS EXAM
2008 AP PRACTICE MICROECONOMICS EXAM
1995
2000
34. A
50. E
20. E
21. D
47. C
2008 Practice 18. B
34. D
47. B
49. B