AP Microeconomics Supply and Demand 1 — Questions and Answers
Question 1: If the demand for a product is price elastic, a decrease in price will:
- Increase total revenue (Correct answer)
- Decrease total revenue
- Have no effect on total revenue
- Reduce the quantity demanded
Correct answer: Increase total revenue
When the demand for a product is price elastic, consumers are highly responsive to changes in price. A decrease in price will lead to a proportionally larger increase in the quantity demanded. Because the percentage increase in quantity sold outweighs the percentage decrease in price, the total revenue (Price x Quantity) generated from sales will increase.
Question 2: If the demand for a product is price elastic, a decrease in price will:
- Increase total revenue (Correct answer)
- Decrease total revenue
- Have no effect on total revenue
- Reduce the quantity demanded
Correct answer: Increase total revenue
When the demand for a product is price elastic, consumers are highly sensitive to price changes. Therefore, a decrease in price will result in a proportionally larger increase in the quantity demanded. This significant rise in sales volume more than compensates for the lower price per unit, leading to an overall increase in total revenue.
Question 3: A price ceiling set below the equilibrium price will:
- Cause a surplus
- Cause a shortage (Correct answer)
- Have no effect on the market
- Increase supply
Correct answer: Cause a shortage
A price ceiling is a legal maximum price set by the government. If this ceiling is set below the market equilibrium price, it prevents the price from rising to the level where quantity demanded equals quantity supplied. At the artificially low price, consumers demand more of the good than producers are willing to supply, resulting in a persistent shortage.
Question 4: Which of the following will shift the demand curve for a normal good to the right?
- An increase in consumer income (Correct answer)
- A decrease in the price of a substitute
- An increase in the price of a complement
- A decrease in consumer preferences for the good
Correct answer: An increase in consumer income
For a normal good, an increase in consumer income directly leads to an increase in demand. As people have more disposable income, they are willing and able to purchase more of these goods at every given price. This increased purchasing power shifts the entire demand curve to the right, indicating a greater quantity demanded at all price levels.
Question 5: The cross-price elasticity of demand for two goods is positive. What does this indicate about the relationship between the goods?
- They are substitutes (Correct answer)
- They are complements
- They are unrelated
- They are inferior goods
Correct answer: They are substitutes
A positive cross-price elasticity of demand indicates that two goods are substitutes. This means that if the price of one good increases, consumers will switch to the other good, causing its demand to increase. For example, if the price of coffee rises, people might buy more tea, showing a positive cross-price elasticity between coffee and tea.
AP Microeconomics Supply and Demand 1
If the demand for a product is price elastic, a decrease in price will: