Question

1. Recall that total revenue is price times quantity (or P x Q). Which of the following will clearly cause a decrease in the total revenue for the entire market?

A. Buyers’ income decreases and sellers expect the price to decrease

B. Buyers' income increases

C. Tastes and preferences for the product decline

D. The implementation of an effective price floor on the market

E. None of the above

2. If a market is initially in equilibrium, what is the effect of a price ceiling set below the equilibrium price?

A. A shortage for a good or service

B. A surplus for a good or service

C. An increase in the amount of a good or service bought and sold

D. A shift of the demand curve to the right

E. No effect

3. If a market is initially in equilibrium, what is the effect of a price ceiling set above the equilibrium price?

A. A shortage for a good or service

B. A surplus for a good or service

C. An increase in the amount of a good or service bought and sold

D. A shift of the demand curve to the right

E. No effect

4. If a market is initially in equilibrium, what is the effect of a price floor set below the equilibrium price?

A. A shortage for a good or service

B. A surplus for a good or service

C. An increase in the amount of a good or service bought and sold

D. A shift of the demand curve to the left

E. No effect

5. If a market is initially in equilibrium, what is the effect of a price floor set above the equilibrium price?

A. A shortage for a good or service

B. A surplus for a good or service

C. An increase in the amount of a good or service bought and sold

D. A shift of the demand curve to the right

E. No effect

Answer 1

1. ANSWER: A. A decrease in the income of buyers will reduce the quantity demanded. This will adversely affect the Q component of Total Revenue (TR) and thus, TR would reduce. A decrease in the price expectation of sellers would also the same adverse effect on TR.

2. ANSWER: A. If the price ceiling is set below the equilibrium point, there would be a shortage of supply of the good/service and a situation of excess demand would prevail as demand would be greater than supply at this point.  

3. ANSWER: B.  If the price ceiling is set above the equilibrium point, there would be an excess of supply of the good/service that will be beyond the prevailing level of demand as demand would be lesser than supply at this point.  

4. ANSWER: A. In contrast to price ceilings, price floors are set to keep the price from falling beyond that point. When a price floor is set below the equilibrium price, quantity demanded will exceed quantity supplies, and the result will be excess demand or shortage of supply.

5. ANSWER: B. If a price floor is set above the equilibrium, quantity supplied will be greater than quantity demanded, and it will result in excess supply situation or surplus situation.