Quiz: Supply, Demand and Market Equilibrium — 15 questions

1. Which inverse demand function has the standard sign pattern for its intercept and slope?

A. $P=a+bQ$ with $a>0$ and $b<0$

B. $P=c+dQ$ with $c>0$ and $d>0$

C. $P=a+bQ$ with $a<0$ and $b>0$

D. $P=c+dQ$ with $c<0$ and $d<0$

Answer: (A)

Explanation

An inverse demand function has a positive price intercept and a negative quantity coefficient, so it takes the form $P=a+bQ$ with $a>0$ and $b<0$. The positive-slope form describes inverse supply rather than inverse demand.

2. For the inverse demand function $P=a+bQ$, what happens when the intercept $a$ increases while the slope remains unchanged?

A. The demand curve becomes flatter at every quantity

B. The demand curve shifts farther to the right

C. The demand curve shifts farther to the left

D. The demand curve becomes steeper at every quantity

Answer: (B)

Explanation

Because $a$ equals the price when $Q=0$, increasing it moves the demand curve farther to the right. Changing the slope would alter the curve’s sensitivity rather than produce this intercept-based shift.

3. What does a firm’s willingness to accept represent?

A. The market price received by every producer

B. The minimum price at which the firm will produce

C. The maximum price a consumer will pay

D. The average cost incurred by the firm

Answer: (B)

Explanation

Willingness to accept is the lowest price at which a firm is willing to produce a good or service. The maximum price a consumer will pay is willingness to pay, which is a demand-side concept.

4. Holding other determinants constant, what effect does an increase in a product’s price have on quantity supplied?

A. It shifts the supply curve left because production becomes more costly

B. It increases quantity supplied through movement along the supply curve

C. It shifts the supply curve right because firms enter the market

D. It decreases quantity supplied through movement along the supply curve

Answer: (B)

Explanation

With other determinants fixed, a higher product price raises the quantity supplied through movement along an upward-sloping supply curve. A supply-curve shift is caused by a change in another determinant, not by the product’s own price.

5. How is market supply related to the supplies of individual firms?

A. It is the quantity demanded by consumers at the market price

B. It is the sum of the quantities supplied by all firms

C. It is the profit-maximizing output chosen by the largest firm

D. It is the average quantity supplied by firms in the market

Answer: (B)

Explanation

Market supply aggregates the individual supply quantities of all firms. The output selected by one firm describes individual-firm supply, while consumer purchases belong to market demand.

6. Which inverse supply function has the standard sign pattern for its intercept and slope?

A. $P=a+bQ$ with $a>0$ and $b<0$

B. $P=c+dQ$ with $c>0$ and $d>0$

C. $P=c+dQ$ with $c<0$ and $d<0$

D. $P=a+bQ$ with $a<0$ and $b>0$

Answer: (B)

Explanation

Inverse supply is represented by $P=c+dQ$ with a positive intercept and positive slope, meaning price rises as quantity rises. The negative-slope form corresponds to inverse demand.

7. What happens to the supply curve when production-factor costs increase?

A. It shifts right because higher costs increase revenue

B. It shifts left because higher costs reduce profit

C. It becomes flatter because firms face lower marginal costs

D. It becomes steeper because firms can use fewer inputs

Answer: (B)

Explanation

Higher input costs reduce firms’ profits at given prices and shift the supply curve to the left. A rightward shift instead follows from lower production costs, such as those created by cheaper inputs or improved technology.

8. At what price is a market in equilibrium?

A. The price at which quantity supplied equals quantity demanded

B. The price at which consumers pay the lowest available amount

C. The price at which quantity supplied exceeds quantity demanded

D. The price at which producers maximize their total revenue

Answer: (A)

Explanation

Market equilibrium occurs when the quantity supplied and quantity demanded are exactly equal, so neither a shortage nor a surplus exists. A price with excess supply or excess demand describes disequilibrium rather than equilibrium.

9. Which pair identifies the two components of a market equilibrium?

A. Quantity demanded Qd and production cost C

B. Equilibrium quantity Qeq and equilibrium price Peq

C. Quantity supplied Qs and tax rate T

D. Market price Pm and consumer income Y

Answer: (B)

Explanation

An equilibrium is represented by the equilibrium quantity Qeq together with the equilibrium price Peq. Qeq refers to the quantity, while Peq refers to the price, so they are distinct components of the equilibrium pair.

10. Which consumers receive consumer surplus in a competitive market?

A. Those willing to accept less than the equilibrium price

B. Those purchasing after the equilibrium quantity is reached

C. Those whose production costs exceed the equilibrium price

D. Those willing to pay more than the equilibrium price

Answer: (D)

Explanation

Consumer surplus is the benefit received by buyers whose willingness to pay exceeds the equilibrium price. Sellers with willingness to accept below that price receive producer surplus instead.

11. Which producers receive producer surplus in a competitive market?

A. Those willing to pay more than the equilibrium price

B. Those willing to accept less than the equilibrium price

C. Those selling after demand has fallen below supply

D. Those whose production costs exceed the equilibrium price

Answer: (B)

Explanation

Producer surplus benefits sellers whose willingness to accept is below the equilibrium price, allowing them to receive more than the minimum they would accept. Buyers with willingness to pay above the price receive consumer surplus instead.

12. If demand shifts rightward while other conditions remain unchanged, what happens to equilibrium price and quantity?

A. Both equilibrium price and quantity decrease

B. Price decreases while quantity increases

C. Both equilibrium price and quantity increase

D. Price increases while quantity decreases

Answer: (C)

Explanation

A rightward demand shift increases both the equilibrium price and the equilibrium quantity when other conditions are unchanged. A leftward shift produces the opposite movement in both variables.

13. A positive demand shock and a negative supply shock occur simultaneously. What can be concluded about the new equilibrium?

A. Both price and quantity fall because supply has decreased

B. Both price and quantity rise regardless of shock magnitudes

C. Price rises, while the quantity effect depends on shock magnitudes

D. Quantity rises, while the price effect depends on shock magnitudes

Answer: (C)

Explanation

The two shocks both push equilibrium price upward, but they push quantity in opposite directions, making the quantity effect indeterminate without knowing their relative magnitudes. The outcome for quantity therefore cannot be inferred from the shock directions alone.

14. What does a price ceiling establish in a market?

A. A market price that balances supply and demand

B. A legally required minimum price paid by consumers

C. A tax imposed on each unit sold by producers

D. A legally permitted maximum price charged by producers

Answer: (D)

Explanation

A price ceiling is the maximum price that producers may legally charge for a product. A minimum legal price is a price floor, while the equilibrium price is determined by equal supply and demand.

15. A government sets a price ceiling above the equilibrium price. What is the likely market result?

A. The ceiling creates a surplus by raising the legal price

B. The ceiling lowers equilibrium quantity by limiting production

C. The ceiling is non-binding and the market remains at equilibrium

D. The ceiling creates a shortage by restricting the legal price

Answer: (C)

Explanation

A ceiling above the equilibrium price does not constrain market transactions, so the market remains at Peq with quantity demanded equal to quantity supplied. A ceiling below Peq is the case that binds and creates disequilibrium.