Mr. Maurer
AP Economics
Name: ________________________
Chapter 3 and 3 Web Quiz Review
Supply and Demand
1. Assume that the equilibrium price in the diagram at left is
P1. Identify the area of consumer surplus using the labeled
points on the graph. P1P3C
2. Now assume an effective price floor is established at P2.
Identify the new area of consumer surplus. P2P3B
3. What area represents the reduction in consumer surplus
caused by the price floor?
P1P2BC
--------------------------------------------------------------------------------------------------------------------4. A movement from Point A to Point B in the diagram at left
would indicate a reduction in (circle one).
a. demand
b. quantity demanded
5. Name one factor that could cause this movement.
An increase in the cost of tomatoes. This would increase
production costs, decreasing supply. You could choose any
other factor that would reduce supply.
--------------------------------------------------------------------------------------------------------------------6. Identify three factors that could cause the change depicted
in the graph at left.
Increase in consumer income.
Increased consumer preference for ketchup.
Decrease in the price of fries.
You could choose any 3 factors that would increase
demand.
--------------------------------------------------------------------------------------------------------------------7. A reduction in the
price of tomatoes in
consistent with which
graph at left? B
A
B
8. Assume the market pictured at left is at equilibrium
without government interference. Identify the
following:
a. The area of consumer surplus.
A+B+C
b. The area of producer surplus.
D+E+F+G
c. The area of deadweight loss.
None – there is no deadweight loss in a
market operating freely at equilibrium.
9. Now assume that an effective price ceiling is established. (Use the graph above.)
a. Which of the labeled prices must be the new price? P1
b. Identify the new area of producer surplus with the price ceiling in place. F+G
c. Identify the new quantity sold. Q2
d. Identify the amount of the shortage created by the price ceiling. Q4 – Q2
e. Is the area of deadweight loss created by the price ceiling identifiable by a letter or
letters? Explain. No, it is the portion of areas C and E to the right of a vertical line at Q2.
This area is not identified by a letter.
10. Instead now assume that an effective price floor is established. (Continue using the graph
above.)
a. Which of the labeled prices must be the new price? P3
b. Identify the new area of producer surplus with the price floor in place. Assume at this
point, that the government is not buying the surplus production.This is actually a tricky
question. It depends if the government buys the surplus or not. For our purposes, we’re
going to assume the govt. DOES NOT buy the surplus. In that case, producer surplus is
B+D+F.
c. Identify the new quantity sold. Again, without government purchases. Q1
d. Will the price floor create a surplus or a shortage? What will be the amount of the
surplus or shortage? A surplus of Q5 – Q1.
e. Identify the area of deadweight loss created by the price floor. Because the
government is not buying the surplus, the deadweight loss is C+E+G. If the govt. did buy
up the surplus, the deadweight loss would be area J.
f. Identify the area of total surplus after the price floor is implemented. Again, with the
govt. NOT BUYING THE SURPLUS, the total surplus would be A+B+D+F.
11. Identify the effect on price and quantity sold in each of the following circumstances (OK,
you’re done with the graph above):
a. Demand increases and supply increases. Change in price is indeterminate. Quantity
increases.
b. Demand increases and supply decreases. Price increases. Change in quantity is
indeterminate.
c. Demand decreases and supply increases. Price decreases. Change in quantity is
indeterminate.
d. Demand decreases and supply decreases. Change in prices is indeterminate.
Quantity decreases.
12. Good X and Good Y are substitutes. What will happen to demand for Good Y if the price of
Good X increases? It will increase.
13. Good X and Good Y are complements. What will happen to demand for Good Y if the price
of Good X increases? It will decrease.
14. Indicate the effect on supply, demand, price, and quantity that each of the following
scenarios would cause:
A. Lowered cost of raw materials and increased popularity of the product
Supply increases, demand increases, price is indeterminate, quantity increases.
B. Increased cost of raw materials and increased popularity of the product
Supply decreases, demand increases, price increases, quantity is indeterminate.
C. Decrease in the number of producers and increased numbers of consumers
Supply decreases, demand increases, price increases, quantity is indeterminate.
D. Decrease in the number of producers and an increase in the price of a substitute good.
Supply decreases, demand increases, price increases, quantity is indeterminate.
E. An increase in the price of other goods that could be made by the producer and an
increase in the incomes of the consumers of the good in question.
Supply decreases, demand increases, price increases, quantity is indeterminate.
15. Differentiate between normal goods and inferior goods. The demand for normal goods
increases when consumer income increases. Demand for inferior goods decreases when
consumer income increases.
16. Explain why each of the following creates deadweight loss and results in a loss of total
surplus.
a. a price ceiling A price ceiling restricts quantity supplied to the level
suppliers are willing to produce at the lower price, eliminating voluntary, mutually
beneficial transactions that would have occurred in which marginal cost was less than
marginal benefit. This is deadweight loss and reduces total surplus.
b. a price floor A price floor leads to overproduction, which causes suppliers to
produce quantities of the product beyond the point where marginal benefit = marginal
cost. For all of this production, marginal benefit exceeds marginal cost, which takes away
from total surplus.
c. a quota (quantity control) A quota establishes a limit on quantity below equilibrium
quantity, eliminating voluntary, mutually beneficial transactions that would have occurred
in which marginal cost was less than marginal benefit. This is deadweight loss and reduces
total surplus.