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# 2.11 MC Answers and Review

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## Answers and Review for Multiple Choice Practice on Supply and Demand

โSTOP โ Before you look at the answers, make sure you gave this practice quiz a try so you can assess your understanding of the concepts covered in Unit 2. Click here for the practice questions: AP Micro Unit 2 Multiple Choice Questions.

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Facts about the test: The AP Macroeconomics exam has 70 multiple choice questions and you will be given 1 hour to complete the section. That means it should take you around 8 minutes to complete 10 questions.
*The following questions were not written by College Board and, although they cover information outlined in theย AP Microeconomics Course and Exam Description, the formatting on the exam may be different.

1.ย If the price of wheat increases,
A.ย the quantity of wheat supplied will decrease.
B. the demand for wheat will increase and shift to the right.
C. the quantity of wheat demanded by consumers will decrease.
D. the demand of wheat will decrease and shift to the left.
Explanation: Price is not a determinant of demand, which means it will not shift the curve. Instead, price determines what the quantity demanded (and quantity supplied) will be.

2.ย All of the following are determinants of demand EXCEPT
B. technology
C. Tastes and preferences of the consumers
D. change in consumer income
Explanation: Technology is a determinant of supply. The rest are determinants of demand. In addition, the two others are price of related goods and expectations of future prices.

3.ย If the price of wheat decreases,
A.ย the quantity of wheat supplied will decrease
B. the supply of wheat will increase.
C. the supply of wheat will decrease.
D. the quantity of wheat demanded will decrease.
Explanation: Price is not a determinant of supply, but it does determine the quantity supply.

4.ย One determinant (shifter) of supply is
A.ย price of related goods
B. change in income
D. Taxes
Explanation: Other determinants of supply are number of sellers, technology, price of resources, actions of the government, and expectations of future profit.

5.ย If the price of a good increases by 10% and the quantity demanded of the good decreases by 25%, we would say
A.ย the good is relatively elastic.
B. the good is relatively inelastic.
C. the good is perfectly elastic
D. the good is unit elastic.
Explanation: The formula for price elasticity of demand is percentage change in quantity divided by the percentage change in price. If the coefficient is over 1, then it's elastic. This means the price is disproportionally impacting the quantity demanded.
๐ Read Unit 2.3: Price Elasticity of Demand

6. If the price of a good decreases by 40% and the quantity supplied decreases by 40%
A.ย the good is perfectly inelastic.
B. the good is perfectly elastic
C. the good is relatively inelastic.
D. the good is unit elastic.
Explanation: The formula for price elasticity of supply is percentage change in quantity divided by the percentage change in price. If the coefficient is over 1, then it's elastic. If it's less than 1, then it's inelastic. In this case, it is 1 which means the price is completely proportionate to the quantity supplied.
๐ Read Unit 2.4: Price Elasticity of Supply

7.ย All of the following are characteristics of an inelastic good EXCEPT
A.ย elasticity coefficient is less than 1
B. generic or low cost inputs
C. high barriers to entry
D. difficult to produce
Explanation: Inelastic goods are difficult to copy or produce (like oil and theremins). It's tough or impossible to make a good substitute for it, and thus people will still demand even though the price would increase.
๐ Read Unit 2.3: Price Elasticity of Demand

8.ย The elasticity coefficient that determines if a good is a substitute or a complement to another good is called
A.ย price elasticity of supply
B. income elasticity of demand
C. cross price elasticity of demand
D. price elasticity of demand
Explanation: Cross price elasticity of demand can be found by the formula: percentage change in quantity demanded for product X divided by the percentage change in price for product Y.
๐ Read Unit 2.5: Other Elasticities

9.ย If incomes decreases by 25% and the quantity of Product X decreases by 10%, we can say Product X is a
A. normal goodย ย
B. inferior good
C. substitute
D. complement
Explanation: If you see income and quantity, you are being asked for the income elasticity formula which is percentage change in quantity divided by the percentage change in income. If the coefficient is positive, it's a normal good (Lucky Charms cereal). If the coefficient is negative, it is an inferior good (Magical Treasures cereal).
๐ Read Unit 2.5: Other Elasticities

10.ย The difference in the high price of what a consumer was willing to pay versus the lower price they actually paid is called
A.ย Consumer surplus
B. Producer surplus
C. Consumer shortage
D. Producer shortage
Explanation: If you see income and quantity, you are being asked for the income elasticity formula which is percentage change in quantity divided by the percentage change in income. If the coefficient is positive, it's a normal good (Lucky Charms cereal). If the coefficient is negative, it is an inferior good (Magical Treasures cereal).
๐ Study Unit 2.6: Market Equilibrium and Consumer and Producer Surplus

11.ย If the price is above or below the price equilibrium, there will be a gap between the quantity produced and the equilibrium quantity that should have been produced. Economists call this gap in efficiency
A.ย scarcity.
B. consumer surplus.
C. producer surplus.
Explanation: Each individual consumer has an absolute maximum price in their head when they go to purchase an item. One cent above that price and they walk away. Equilibrium forces producers to lower their prices in order to sell a good. The gap between the equilibrium price and the consumer's highest price is called consumer surplus.
๐ Study Unit 2.6: Market Equilibrium and Consumer and Producer Surplus

12.ย If a new tractor is invented which makes harvesting wheat easier than before at the same time a study suggests eating wheat products increases SAT scores, then_________.
B. the quantity of wheat will increase and the price will decrease.
C. the quantity of wheat will increase but the price will be indeterminate.
D. the quantity of wheat will increase and the price will increase
Explanation: When supply and demand both shift at the same time, either price or quantity will be indeterminate. In this example, Supply and demand are both shifting to the right. quantity will definitely increase, but price could increase or decrease initially. It is indeterminate.
๐ Study Unit 2.6: Market Equilibrium and Consumer and Producer Surplus

13.ย What will happen if the government sets a legally enforced price floor for a good below the market equilibrium?
A.ย A black market will form for unregulated buying and selling of the good.
B. The market will experience shortages.
C. Equilibrium price and quantity will remain the same.
D. The market will have surpluses.
Explanation: This question is making sure you know your terms. A price floor is the absolute minimum you can charge for a product. A price floor disrupts equilibrium when it is place ABOVE equilibrium. If a price ceiling had been placed below equilibrium, then the market would have had shortages.
๐ Study Unit 2.6: Market Equilibrium and Consumer and Producer Surplus

14.ย If the USA's domestic price for wheat is above the world price for wheat and the USA allows for free trade with other countries, then
A.ย the consumer surplus would be significantly more than the domestic producer surplus.
B. the domestic producer surplus will be significantly more than the consumer surplus.
C. The market will experience a surplus quantity of wheat.
D. The market for wheat will have shortages.
Explanation: Consumers will enjoy lower prices if the market is allowed to trade freely with foreign wheat producers. The consumer ends up paying a much lower price than the domestic equilibrium price (creating a larger consumer surplus area, but it comes at the cost of the domestic producer surplus.
๐ Study Unit 2.6: Market Equilibrium and Consumer and Producer Surplus

15.ย One way domestic producers can protect some of their producer surplus from foreign producers with a lower world price is
A.ย encourage the government to impose tariffs on imported goods.
B. encourage the government to set a price ceiling on the domestic goods.
C. encourage the government to deregulate the market more and open it to free trade with more countries at price lower than the world price.
D. discourage the use of quotas on the market.
Explanation: Tariffs are taxes placed on imports with the goal to increase the price of the competition foreign good artificially. By driving the price of foreign goods up, domestic goods look cheaper by comparison. This allows domestic producers to remain competitive in the market even though their prices are objectively higher than the world price.
๐ Study Unit 2.9: International Trade and Public Policy

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๐ธUnit 1 โ Basic Economic Concepts
๐Unit 2 โ Supply & Demand
๐๐ผโโ๏ธUnit 3 โ Production, Cost, & the Perfect Competition Model
โน๐ผโโ๏ธUnit 4 โ Imperfect Competition
๐ฐUnit 5 โ Factor Markets
๐Unit 6 โ Market Failure & the Role of Government
๐Exam Skills: FRQ/MCQ