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CAPE Economics Unit 1 study materials
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CAPE Economics Unit 1 practice questions

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Question 1Methodology: Demand and Supply

In the standard demand-and-supply model, what is the effect of a rise in the price of a good on the quantity demanded of that good, all other things held constant?

  1. Quantity demanded rises because the good becomes more valuable
  2. The demand curve shifts to the left
  3. The demand curve shifts to the right
  4. Quantity demanded falls as buyers move up along the demand curve Correct answer.

Explanation

A change in the good's own price produces a movement along a given demand curve, not a shift of it. The law of demand states that quantity demanded varies inversely with price, so a price rise reduces quantity demanded. Shifts occur only when a non-price determinant changes.

Question 2Methodology: Demand and Supply

Which of the following would shift the market demand curve for rice to the right?

  1. A rise in the wage paid to rice farm workers
  2. A fall in the market price of rice
  3. An increase in consumers' incomes, with rice being a normal good Correct answer.
  4. An improvement in the technology used to farm rice

Explanation

A rightward shift in demand requires a change in a non-price determinant. For a normal good, higher consumer income raises demand at every price, shifting the curve right. The other options either move along the curve or affect supply.

Question 3Methodology: Demand and Supply

The supply curve for a commodity is drawn upward-sloping. Which statement best explains this shape?

  1. Consumers are willing to buy more at higher prices
  2. Producers earn more profit per unit at lower prices
  3. Higher prices are needed to cover the rising opportunity cost of extra output Correct answer.
  4. Firms always produce at full capacity regardless of price

Explanation

An upward-sloping supply curve reflects increasing marginal cost. As output expands, resources become scarcer or less suited to production, so higher prices are required to call forth additional units. This is the law of supply expressed in cost terms.

Question 4Methodology: Demand and Supply

At a price above the equilibrium price in a competitive market, which condition arises?

  1. Excess demand, which pushes the price up further
  2. A shortage, because buyers refuse to pay the high price
  3. Equilibrium, because sellers can charge any price
  4. Excess supply, which pushes the price down toward equilibrium Correct answer.

Explanation

Above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus. Unsold stock leads sellers to cut prices, and the price falls until the surplus is eliminated at equilibrium. This is the market's self-correcting mechanism.

Question 5Methodology: Demand and Supply

Two goods, tea and coffee, are substitutes. If the price of coffee rises sharply, what happens in the market for tea?

  1. The supply curve of tea shifts right
  2. The demand curve for tea shifts right Correct answer.
  3. The quantity of tea demanded falls along its curve
  4. The demand curve for tea shifts left

Explanation

A rise in the price of a substitute makes tea relatively cheaper, so consumers switch toward tea. This increases demand at every price, shifting the tea demand curve rightward. Substitution between goods is a non-price determinant of demand.

Question 6Methodology: Demand and Supply

Goods X and Y are complements. A decrease in the price of X is most likely to cause which change in the market for Y?

  1. A leftward shift of Y's demand curve
  2. A rightward shift of Y's demand curve Correct answer.
  3. A movement down along Y's demand curve
  4. A leftward shift of Y's supply curve

Explanation

Complementary goods are consumed together, so a fall in the price of X raises the quantity of X bought and therefore increases demand for Y. The demand curve for Y shifts right. The change originates in a related market, so it is a shift rather than a movement.

Question 7Methodology: Demand and Supply

Which combination of simultaneous changes would unambiguously raise the equilibrium price of a good?

  1. Demand rises and supply falls Correct answer.
  2. Demand falls and supply falls
  3. Demand rises and supply rises
  4. Demand falls and supply rises

Explanation

When demand rises and supply falls, both forces push the price upward, so the price rise is unambiguous. Quantity traded becomes indeterminate because the two shifts push quantity in opposite directions. Only when both effects on price point the same way is the outcome certain.

Question 8Methodology: Demand and Supply

A price ceiling set below the equilibrium price in a competitive market will typically produce which outcome?

  1. A surplus, as suppliers compete for buyers
  2. No effect, because the ceiling is non-binding
  3. A shortage, as quantity demanded exceeds quantity supplied Correct answer.
  4. An increase in quantity supplied above equilibrium

Explanation

A binding price ceiling is set below equilibrium, so at that legal maximum quantity demanded exceeds quantity supplied, creating a shortage. Suppliers have no incentive to expand output at the lower price. The result is excess demand and possible rationing or black markets.

Question 9Methodology: Demand and Supply

What is the effect of a price floor set above the equilibrium wage in a labour market?

  1. Equilibrium employment, because the floor matches demand and supply
  2. A surplus of labour, often described as unemployment Correct answer.
  3. A shortage of labour, as firms demand more workers
  4. A fall in the quantity of labour supplied

Explanation

A binding price floor is set above equilibrium, so quantity supplied of labour exceeds quantity demanded. The gap is a surplus of labour, which appears as unemployment. Higher wages discourage hiring while attracting more job seekers.

Question 10Methodology: Demand and Supply

Which of the following best defines the equilibrium price in a competitive market?

  1. The price at which the market clears any government regulation
  2. The price at which producers earn the greatest possible revenue
  3. The price set by the largest firm in the industry
  4. The price at which quantity demanded equals quantity supplied Correct answer.

Explanation

Equilibrium occurs where the demand and supply curves intersect, so quantity demanded equals quantity supplied. At that price there is neither excess demand nor excess supply, and the price has no tendency to change. It is a market-clearing price, not a revenue-maximising or administered one.

Question 11Methodology: Demand and Supply

An improvement in production technology in a competitive industry will, other things equal, lead to which result?

  1. A movement along the supply curve to a lower quantity
  2. A rightward shift of supply and a lower equilibrium price Correct answer.
  3. A leftward shift of supply and a higher equilibrium price
  4. A rightward shift of demand and a higher equilibrium quantity

Explanation

Better technology lowers production costs, so firms are willing to supply more at every price, shifting supply right. The new intersection with the downward-sloping demand curve lies at a lower price and a higher quantity. Technology is a non-price determinant of supply.

Question 12Methodology: Demand and Supply

The demand for a good is price-inelastic. If supply falls, what is the most likely effect on the market?

  1. A large fall in quantity and a small rise in price
  2. A small fall in quantity and a large rise in price Correct answer.
  3. A fall in price and a rise in quantity
  4. No change in price because demand is inelastic

Explanation

With inelastic demand, buyers are relatively unresponsive to price, so a supply decrease mainly raises price and reduces quantity only slightly. The burden of adjustment falls on price rather than quantity. Elasticity therefore shapes how a supply shift is divided between price and quantity changes.

Question 13Methodology: Demand and Supply

A consumer's demand curve for a good is derived from which underlying concept?

  1. The quantity of the good that firms are willing to stock
  2. The average revenue earned by sellers at each price
  3. The marginal utility obtained from successive units of the good Correct answer.
  4. The total cost of producing each unit of the good

Explanation

An individual demand curve reflects diminishing marginal utility: consumers buy additional units only at lower prices because each extra unit yields less satisfaction. The curve therefore traces willingness to pay for successive units. Supply curves, by contrast, derive from marginal cost.

Question 14Methodology: Demand and Supply

In a market where demand increases while supply remains unchanged, what happens to consumer surplus?

  1. It becomes zero at the new equilibrium
  2. It rises, because consumers value the good more at every quantity Correct answer.
  3. It falls, because consumers pay a higher price
  4. It is unchanged, because supply has not moved

Explanation

Consumer surplus is the area below the demand curve and above the price. A rightward demand shift raises the demand curve and the equilibrium quantity, and the gain in the surplus area exceeds the loss from the higher price. Hence consumer surplus increases.

Question 15Methodology: Demand and Supply

Which factor causes a movement along a supply curve rather than a shift of the supply curve?

  1. A change in the cost of raw materials
  2. A change in government subsidies to producers
  3. A change in the number of firms in the industry
  4. A change in the price of the good itself Correct answer.

Explanation

A change in the good's own price alters quantity supplied and is shown as a movement along a fixed supply curve. The other factors change supply conditions at every price, shifting the whole curve. Distinguishing movements from shifts is central to supply analysis.

Question 16Methodology: Demand and Supply

When both demand and supply curves shift rightward, which outcome is certain?

  1. The equilibrium quantity stays constant
  2. The equilibrium quantity rises Correct answer.
  3. The equilibrium price rises
  4. The equilibrium price falls

Explanation

Both rightward shifts increase equilibrium quantity, so the rise in quantity is certain. The effect on price is ambiguous because higher demand pushes price up while higher supply pushes it down. The net price change depends on the relative size of the shifts.

Question 17Methodology: Demand and Supply

A government imposes a maximum rent below the market-clearing rent. Which consequence is most consistent with demand-and-supply analysis?

  1. A persistent shortage of rental housing develops Correct answer.
  2. Landlords offer more rental units because demand rises
  3. Rents rise to clear the market
  4. A surplus of rental units appears

Explanation

A rent ceiling below equilibrium is a binding price ceiling. At the controlled rent, quantity demanded of housing exceeds quantity supplied, producing a persistent shortage. Suppliers reduce the quantity offered because the lower rent reduces profitability.

Question 18Methodology: Demand and Supply

The supply of a good is perfectly inelastic. What does this imply about the effect of an increase in demand?

  1. Quantity stays fixed while price rises Correct answer.
  2. Price and quantity both rise proportionally
  3. Neither price nor quantity changes
  4. Quantity rises while price stays fixed

Explanation

A perfectly inelastic supply curve is vertical, so quantity supplied does not respond to price. An increase in demand therefore raises price only, with quantity unchanged. The entire adjustment falls on price.

Question 19Methodology: Demand and Supply

Which statement about the rationing function of price in a free market is correct?

  1. Price changes only when government announces a new level
  2. Price rises to reduce quantity demanded when supply is scarce Correct answer.
  3. Price is fixed by custom so that all buyers can obtain the good
  4. Price falls to encourage production when demand is high

Explanation

The rationing function means price adjusts to balance competing claims on a scarce good. When supply is scarce, a rising price discourages some buyers and reduces quantity demanded. This allocates the limited supply among those willing to pay.

Question 20Methodology: Demand and Supply

Two markets are linked: an increase in the price of petrol raises the demand for small, fuel-efficient cars. Which term best describes petrol and small cars in this relationship?

  1. Inferior goods
  2. Complements
  3. Substitutes Correct answer.
  4. Independent goods

Explanation

Goods are substitutes when a rise in the price of one increases demand for the other, as consumers switch away. Petrol and fuel-efficient cars show this cross-price relationship. Complements would show the opposite pattern.

Question 21Methodology: Demand and Supply

A firm's supply curve in a competitive market is most closely related to which cost concept?

  1. Sunk cost
  2. Total fixed cost
  3. Marginal cost Correct answer.
  4. Average fixed cost

Explanation

A competitive firm supplies where price equals marginal cost, so the marginal cost curve above average variable cost forms its supply curve. Marginal cost reflects the extra cost of producing each additional unit. Fixed costs do not vary with output and so do not determine supply decisions in the short run.

Question 22Methodology: Demand and Supply

If the price of a good rises and total consumer expenditure on it also rises, what can be inferred about the price elasticity of demand?

  1. Demand has unit elasticity
  2. Demand is price-inelastic Correct answer.
  3. Demand is perfectly elastic
  4. Demand is price-elastic

Explanation

When price rises and total expenditure rises, the quantity reduction is proportionally smaller than the price increase, which is the defining feature of inelastic demand. Expenditure moves in the same direction as price. With elastic demand, expenditure would fall as price rises.

Question 23Methodology: Demand and Supply

Which change would cause the supply curve of a product to shift to the left?

  1. A reduction in the number of buyers
  2. An increase in the productivity of workers
  3. A fall in the price of the product
  4. A rise in the price of a key input Correct answer.

Explanation

Higher input prices raise production costs, so firms offer less at every price and the supply curve shifts left. Cost changes are non-price determinants of supply. A change in the product's own price would instead cause a movement along the curve.

Question 24Methodology: Demand and Supply

A market is in equilibrium. Which statement about the plans of buyers and sellers is necessarily true?

  1. Every buyer obtains the good at the lowest possible price
  2. The quantity buyers plan to purchase equals the quantity sellers plan to sell Correct answer.
  3. The good is distributed equally among all consumers
  4. Sellers earn zero economic profit

Explanation

Equilibrium means the plans of buyers and sellers are mutually consistent at the ruling price, so quantity demanded equals quantity supplied. There is no tendency for price to change. It does not imply zero profits, equal distribution, or the lowest possible price.

Question 25Methodology: Demand and Supply

An increase in consumers' incomes reduces the demand for a particular good. What type of good is it?

  1. An inferior good Correct answer.
  2. A complementary good
  3. A luxury good
  4. A normal good

Explanation

An inferior good is one whose demand falls as income rises, because consumers switch to preferred alternatives. The negative income effect distinguishes it from normal goods. Complementary and luxury classifications describe different relationships.

Question 26Methodology: Demand and Supply

Which statement best describes the relationship shown by a downward-sloping market demand curve?

  1. There is an inverse relationship between price and quantity demanded, ceteris paribus. Correct answer.
  2. There is a direct relationship between price and quantity demanded, ceteris paribus.
  3. Quantity demanded rises whenever price rises because producers supply more.
  4. Demand rises whenever price falls because buyers' incomes have increased.

Explanation

A demand curve plots price against quantity demanded with all other influences held constant. Its negative slope reflects the law of demand: as price falls, quantity demanded rises. Confusing a movement along the curve with a shift caused by income changes is a common error.

Question 27Methodology: Demand and Supply

A rise in the price of coffee causes the quantity of coffee demanded to fall. Which concept does this movement illustrate?

  1. A shift of the demand curve to the left
  2. A movement of the supply curve to the left
  3. An increase in the quantity supplied at every price
  4. A movement upward along the demand curve Correct answer.

Explanation

A change in the good's own price causes a movement along the existing demand curve, not a shift. A higher price reduces quantity demanded, so the movement is upward and to the left along the curve. Shifts occur only when a non-price determinant changes.

Question 28Methodology: Demand and Supply

Which of the following is a non-price determinant of demand for a normal good?

  1. The price of the good itself
  2. Consumers' disposable income Correct answer.
  3. The quantity supplied at the equilibrium price
  4. The price of the factors used to produce the good

Explanation

Non-price determinants of demand include income, tastes, expectations and the prices of related goods. Disposable income shifts the demand curve for a normal good. The good's own price produces a movement along the curve, and factor prices affect supply.

Question 29Methodology: Demand and Supply

Which of the following will shift the supply curve of bread to the right?

  1. A fall in the price of flour used in baking Correct answer.
  2. An increase in consumers' preference for bread
  3. A rise in the wage paid to bakery workers
  4. A government tax levied on each loaf sold

Explanation

A fall in the price of an input lowers production costs, so producers are willing to supply more at every price, shifting supply rightward. Changes in input prices, technology, taxes and subsidies all shift supply. Consumer preferences affect demand, not supply.

Question 30Methodology: Demand and Supply

What does the intersection of a market demand curve and a market supply curve identify?

  1. The price at which quantity demanded equals quantity supplied Correct answer.
  2. The price at which consumer surplus is zero
  3. The quantity at which total revenue is minimised
  4. The maximum price consumers are willing to pay for any quantity

Explanation

At the intersection, the quantity buyers wish to purchase equals the quantity sellers wish to sell, so there is no shortage or surplus. This price is the equilibrium or market-clearing price. At any other price, excess demand or excess supply creates pressure for price to change.

Question 31Methodology: Demand and Supply

A market has a surplus at the current price. According to demand and supply analysis, what tends to happen next?

  1. The supply curve shifts leftward automatically.
  2. Price falls until quantity demanded equals quantity supplied. Correct answer.
  3. Demand shifts rightward to absorb the surplus.
  4. Price rises until quantity demanded equals quantity supplied.

Explanation

A surplus means quantity supplied exceeds quantity demanded at the ruling price. Unsold stock puts downward pressure on price, which raises quantity demanded and reduces quantity supplied until equilibrium is restored. The adjustment occurs through price, not through shifts of the curves.

Question 32Methodology: Demand and Supply

Goods A and B are substitutes in consumption. What happens in the market for B if the price of A falls?

  1. Demand for B shifts to the right.
  2. Demand for B shifts to the left. Correct answer.
  3. Quantity demanded of B rises along its demand curve.
  4. Supply of B shifts to the right.

Explanation

When the price of a substitute falls, consumers switch toward it and away from the other good. Demand for B therefore falls, shifting its demand curve leftward. This is a shift caused by a change in the price of a related good, not a movement along the curve.

Question 33Methodology: Demand and Supply

Which term describes a good for which demand falls when consumers' income rises?

  1. A complementary good
  2. An inferior good Correct answer.
  3. A good with perfectly elastic demand
  4. A normal good

Explanation

An inferior good has a negative income elasticity of demand: as income rises, consumers switch to preferred alternatives and demand for the inferior good falls. Normal goods show the opposite relationship. Complementarity and elasticity concern different relationships entirely.

Question 34Methodology: Demand and Supply

A competitive market is initially in equilibrium. Consumers' incomes rise and the good is normal, while at the same time an input price rises. What is the certain outcome?

  1. Both equilibrium price and quantity rise.
  2. Equilibrium price rises. Correct answer.
  3. Neither equilibrium price nor quantity changes.
  4. Equilibrium quantity rises.

Explanation

Higher income shifts demand rightward, raising price, while a higher input price shifts supply leftward, also raising price. Both forces push price up, so the price rise is certain. Quantity moves in opposite directions under the two shifts, so its final change is indeterminate without knowing the relative sizes of the shifts.

Question 35Methodology: Demand and Supply

The price elasticity of demand for a product is 0.4. If price rises by 10 per cent, what is the expected change in quantity demanded?

  1. A fall of 40 per cent
  2. A fall of 4 per cent Correct answer.
  3. A rise of 4 per cent
  4. A fall of 0.4 per cent

Explanation

Price elasticity of demand equals the percentage change in quantity demanded divided by the percentage change in price. Multiplying 0.4 by 10 per cent gives a 4 per cent change. Because demand curves slope downward, the change is a fall in quantity demanded.

Question 36Methodology: Demand and Supply

A firm's supply curve in a perfectly competitive market is best described as which portion of its marginal cost curve?

  1. The entire marginal cost curve including all points
  2. The portion above average variable cost Correct answer.
  3. The portion below average variable cost
  4. The portion above average fixed cost

Explanation

A competitive firm produces where price equals marginal cost, but shuts down if price falls below minimum average variable cost. Its supply curve is therefore the marginal cost curve above average variable cost. Below that point the firm would lose more by producing than by shutting down.

Question 37Methodology: Demand and Supply

Demand for a good is perfectly inelastic. What happens to price and quantity if the government grants producers a subsidy?

  1. Price is unchanged and quantity rises.
  2. Price falls and quantity is unchanged. Correct answer.
  3. Price falls and quantity rises.
  4. Both price and quantity are unchanged.

Explanation

A subsidy shifts supply rightward, which lowers the equilibrium price. With perfectly inelastic demand, the quantity demanded does not respond to price at all, so equilibrium quantity stays the same. Consumers therefore gain the entire benefit of the subsidy.

Question 38Methodology: Demand and Supply

A price ceiling is set above the equilibrium price. What is the effect on the market?

  1. A shortage develops because quantity demanded exceeds quantity supplied.
  2. The market clears at the equilibrium price because the ceiling is not binding. Correct answer.
  3. A surplus develops because quantity supplied exceeds quantity demanded.
  4. The supply curve shifts leftward until the ceiling becomes the equilibrium price.

Explanation

A price ceiling only constrains the market if it lies below equilibrium. If it is set above equilibrium, the market price is already lower than the legal maximum, so the ceiling has no effect and equilibrium prevails. Binding ceilings require a below-equilibrium level.

Question 39Methodology: Demand and Supply

Which statement about a price floor set below the equilibrium price is correct?

  1. It shifts the demand curve to the left.
  2. It creates excess demand because consumers buy more.
  3. It creates excess supply because producers increase output.
  4. It has no effect because the market price already exceeds the minimum. Correct answer.

Explanation

A price floor is binding only when set above equilibrium. If the legal minimum is below the market-clearing price, the market price satisfies the law and equilibrium is undisturbed. Only a floor above equilibrium creates persistent excess supply.

Question 40Methodology: Demand and Supply

The cross-price elasticity of demand between two goods is negative. What does this indicate?

  1. The goods are inferior.
  2. The goods have perfectly elastic demand.
  3. The goods are complements. Correct answer.
  4. The goods are substitutes.

Explanation

A negative cross-price elasticity means that a rise in the price of one good reduces demand for the other, which is the pattern for complements. Substitutes show positive cross-price elasticity because a price rise in one raises demand for the other. Inferiority relates to income elasticity, not cross-price elasticity.

Question 41Methodology: Demand and Supply

A consumer's marginal utility from a good diminishes as consumption increases. What does this imply for the demand curve?

  1. It slopes downward because willingness to pay for extra units falls. Correct answer.
  2. It slopes upward because additional units are valued more highly.
  3. It is vertical because utility does not affect demand.
  4. It is horizontal because utility is constant across units.

Explanation

Marginal utility is the extra satisfaction from consuming one more unit, and it typically falls as consumption rises. Consumers are therefore willing to pay less for additional units, giving a downward-sloping demand curve. This links utility theory to the law of demand.

Question 42Methodology: Demand and Supply

The supply of a good is perfectly elastic. What is the effect of an increase in demand?

  1. Both price and quantity rise proportionally.
  2. Price is unchanged and quantity rises. Correct answer.
  3. Price rises and quantity is unchanged.
  4. Both price and quantity are unchanged.

Explanation

Perfectly elastic supply is a horizontal line at a fixed price, so producers will supply any quantity at that price. An increase in demand therefore raises equilibrium quantity without changing price. The entire adjustment falls on quantity rather than price.

Question 43Methodology: Demand and Supply

Which change would reduce consumer surplus in a competitive market?

  1. A fall in the equilibrium price
  2. A leftward shift of the demand curve Correct answer.
  3. A rightward shift of the supply curve
  4. An increase in the quantity traded at a lower price

Explanation

Consumer surplus is the area below the demand curve and above the price line. A leftward shift of demand lowers the equilibrium price and quantity, shrinking that area. A rightward supply shift, by contrast, lowers price and expands consumer surplus.

Question 44Methodology: Demand and Supply

A firm can sell any quantity at the prevailing market price. What does this imply about demand facing the firm?

  1. It is perfectly elastic. Correct answer.
  2. It is downward sloping but steep.
  3. It is perfectly inelastic.
  4. It is unit elastic at every quantity.

Explanation

A firm that can sell any amount at the market price faces a horizontal demand curve, which is perfectly elastic. Any attempt to charge above that price would reduce sales to zero. This is the standard price-taking assumption for a competitive firm.

Question 45Methodology: Demand and Supply

A government imposes a per-unit tax on sellers in a market with inelastic demand and elastic supply. Who bears the larger share of the tax burden?

  1. Neither party, because the tax is fully absorbed by the government.
  2. Consumers, because demand is relatively inelastic. Correct answer.
  3. The burden is shared equally regardless of elasticities.
  4. Producers, because supply is relatively elastic.

Explanation

The incidence of a tax falls more heavily on the side of the market that is less responsive to price. With inelastic demand and elastic supply, consumers cannot easily reduce purchases, so they bear most of the tax as a higher price. Producers with elastic supply can cut output sharply to avoid the tax.

Question 46Methodology: Demand and Supply

In a market with a negative externality in production, what does the free-market equilibrium quantity represent relative to the socially optimal quantity?

  1. It is higher than the socially optimal quantity. Correct answer.
  2. It is equal to the socially optimal quantity.
  3. It is lower than the socially optimal quantity.
  4. It is indeterminate without knowing the elasticity of demand.

Explanation

A negative production externality means marginal social cost exceeds marginal private cost. Producers ignore the external cost, so the market equilibrium quantity exceeds the socially optimal level. This overproduction is the classic case for corrective taxation or regulation.

Question 47Methodology: Demand and Supply

A firm faces a linear downward-sloping demand curve. At the midpoint of the curve, what is the value of price elasticity of demand?

  1. One Correct answer.
  2. Infinity
  3. It cannot be determined from a linear demand curve.
  4. Zero

Explanation

Along a linear demand curve elasticity falls from infinity at the price intercept to zero at the quantity intercept. At the midpoint, total revenue is maximised and elasticity equals one. This geometric property is a standard result of linear demand.

Question 48Methodology: Demand and Supply

The market for a good has a binding price ceiling. Which combination of effects is most consistent with demand and supply analysis?

  1. A persistent shortage, rationing by non-price means, and possible emergence of a black market Correct answer.
  2. A persistent surplus, falling prices, and reduced output
  3. Equilibrium restored because price adjusts freely to clear the market
  4. An immediate shift of the supply curve to the right

Explanation

A binding ceiling holds price below equilibrium, so quantity demanded exceeds quantity supplied and a shortage persists. Because price can no longer ration the good, sellers resort to queues, quotas or informal markets. The curves do not shift; the market simply fails to clear.

Question 49Methodology: Demand and Supply

Two goods are produced using the same resources, so an increase in the output of one raises the opportunity cost of the other. What does this imply for the supply curve of the second good?

  1. It is vertical because resources are fixed.
  2. It is perfectly elastic at a constant price.
  3. It shifts leftward as more of the first good is produced. Correct answer.
  4. It slopes downward like a demand curve.

Explanation

When resources are transferable between uses, expanding production of one good draws resources away from the other. The reduced availability of inputs raises costs and shifts the second good's supply curve leftward. This reflects the opportunity cost captured by a concave production possibility frontier.

Question 50Methodology: Demand and Supply

A market is in equilibrium with linear demand and supply curves. Demand becomes more elastic while supply is unchanged. How does the equilibrium price respond to a given leftward shift of supply?

  1. Price rises by less than before because quantity adjusts more. Correct answer.
  2. Price rises by more than before because consumers are more responsive.
  3. Price is unaffected by the elasticity of demand.
  4. Price falls because more elastic demand reduces willingness to pay.

Explanation

When demand is more elastic, a given reduction in supply causes a smaller price increase because consumers reduce quantity sharply rather than bid up price. Elasticity governs how the burden of a supply change is divided. With unchanged supply, greater demand elasticity dampens the price effect.