S4 Economics Practice Paper: Demand And Supply, Elasticity, Price Controls, Costs And Monopoly

S4 Economics Practice Paper: Demand and Supply, Elasticity, Price Controls, Costs and Monopoly

2026-11-12

S4 Economics – Elasticity and Market Intervention

S4 Economics practice paper on demand and supply, price elasticity, price ceilings and floors, tax incidence, costs and monopoly.

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Paper details　S4 Economics practice paper with model answers on demand and supply, elasticity, price controls, per-unit tax, costs and monopoly.

Part 1: Demand, supply and market equilibrium (18 marks)

Four questions. Write the formula used, show your working and explain the direction of adjustment.

#	Question	Answer and marking notes
1	In a market the demand function is Qd = 100 – 2P and the supply function is Qs = 20 + 2P, where P is the price in dollars and Q is the quantity in units. Find the equilibrium price and the equilibrium quantity.	At equilibrium quantity demanded equals quantity supplied, so 100 – 2P = 20 + 2P and 4P = 80. Hence P = 20 dollars and Q = 100 – 2 x 20 = 60 units. Checking the supply side gives 20 + 2 x 20 = 60 units, the same value.
2	The demand rises to Qd = 120 – 2P while supply is unchanged. Find the new equilibrium price and quantity and state the direction of the changes.	New equilibrium: 120 – 2P = 20 + 2P, so 4P = 100, P = 25 dollars and Q = 120 – 2 x 25 = 70 units. The demand curve shifts right, so the equilibrium price rises from 20 to 25 dollars and the equilibrium quantity rises from 60 to 70 units.
3	The government sets the price at 15 dollars. Find the quantity demanded, the quantity supplied and the size of the shortage, and state one form of non-price competition that may appear.	At 15 dollars the quantity demanded is 100 – 2 x 15 = 70 units and the quantity supplied is 20 + 2 x 15 = 50 units, so the shortage is 20 units. Since the price cannot rise, buyers compete by queueing, rationing or paying extra outside the legal price.
4	Distinguish a movement along the supply curve from a shift of the whole supply curve, giving one example of each.	A movement along the curve is caused by a change in the good own price: when the price rises from 15 to 20 dollars the quantity supplied rises from 50 to 60 units. A shift of the whole curve is caused by a factor other than the good own price, such as better technology or cheaper raw materials, so more is supplied at every price.

Part 2: Price elasticity of demand and total revenue (18 marks)

Four questions. Write the elasticity formula and show the signs and percentage changes clearly.

#	Question	Answer and marking notes
5	The price of a good rises from 10 to 12 dollars and the quantity demanded falls from 500 to 350 units. Using the initial value method, calculate the price elasticity of demand and state the type of elasticity.	Percentage change in price = (12 – 10) / 10 = 20 per cent; percentage change in quantity = (350 – 500) / 500 = -30 per cent. The elasticity is -30 divided by 20, that is -1.5, whose absolute value 1.5 is greater than 1, so demand is elastic.
6	For the same good, calculate total revenue before and after the price change and explain how the change in total revenue matches the elasticity.	Total revenue was 10 x 500 = 5000 dollars and becomes 12 x 350 = 4200 dollars, a fall of 800 dollars or 16 per cent. With elastic demand a price rise cuts quantity by a larger percentage, so total revenue falls.
7	The price of good Y rises by 10 per cent and the quantity of good X demanded falls by 8 per cent. Find the cross price elasticity and state how the two goods are related.	Cross price elasticity = percentage change in quantity of X divided by percentage change in price of Y = -8 divided by 10, that is -0.8. The negative sign means the quantity of X falls when the price of Y rises, so the two goods are complements.
8	The price elasticity of demand for a farm product is 0.4. If supply rises by 10 per cent, use the definition of elasticity to estimate the percentage change in price and in total revenue, and explain why a good harvest may still reduce farmers income.	Since elasticity equals the percentage change in quantity divided by the percentage change in price, the price change is 10 divided by 0.4, that is -25 per cent. Total revenue changes by (1 – 0.25) x 1.10 – 1 = -17.5 per cent, from 100 to 82.5. With inelastic demand a bigger harvest pushes price down sharply and revenue falls.

Part 3: Price ceilings, price floors and a per-unit tax (18 marks)

Four questions using the demand and supply functions of Part 1. Distinguish the price paid by buyers from the price received by sellers.

#	Question	Answer and marking notes
9	A price ceiling is set at 15 dollars. Find the shortage and describe two situations buyers may face if the ceiling is kept for a long period.	At a ceiling of 15 dollars the quantity demanded is 70 units and the quantity supplied is 50 units, so the shortage is 20 units. If kept for long, sellers may ration by queueing, a black market with higher prices may appear, and low returns may cut investment so supply shrinks further.
10	The government instead sets a price floor at 25 dollars. Find the quantity demanded, the quantity supplied and the surplus, and state one measure needed to keep the floor in force.	At 25 dollars the quantity demanded is 100 – 2 x 25 = 50 units and the quantity supplied is 20 + 2 x 25 = 70 units, a surplus of 20 units. The government must buy the 20 surplus units at that price, or impose production quotas, otherwise the floor cannot hold.
11	The government imposes a per-unit tax of 6 dollars on sellers. Find the new equilibrium price and quantity, the tax burden per unit on buyers and on sellers, and the tax revenue.	After the tax the supply becomes Qs = 20 + 2(P – 6) = 8 + 2P. Setting 100 – 2P = 8 + 2P gives 4P = 92, so P = 23 dollars and Q = 54 units. Buyers pay 23 dollars instead of 20, a burden of 3; sellers keep 17, a burden of 3. Tax revenue is 6 x 54 = 324 dollars.
12	Suppose demand is perfectly inelastic at 60 units. Recalculate the price paid by buyers after the 6 dollar per-unit tax and state who bears the tax.	Quantity is fixed at 60 units, so the price received by sellers must satisfy 20 + 2P = 60, giving P = 20 dollars. Buyers pay 20 + 6 = 26 dollars, which is 6 dollars above the original equilibrium, so the whole tax falls on buyers.

Part 4: Short-run production and cost (16 marks)

The short-run total cost function is TC = 200 + 10Q + 0.5 times Q squared. Four questions; show the substitution.

#	Question	Answer and marking notes
13	Find total cost, total fixed cost and total variable cost when Q = 20.	Total fixed cost is 200 dollars since it does not vary with output; total variable cost is 10 x 20 + 0.5 x 20 squared = 400 dollars; total cost is 200 + 400 = 600 dollars, agreeing with direct substitution.
14	Find average cost, average variable cost and marginal cost when Q = 20.	Average cost is 600 / 20 = 30 dollars; average variable cost is 400 / 20 = 20 dollars; marginal cost is 10 + 2 x 0.5 x 20 = 30 dollars. Marginal cost equals average cost here, so average cost is at its minimum.
15	Find average cost and marginal cost when Q = 10 and compare with the values above.	At Q = 10 total cost is 350 dollars, so average cost is 350 / 10 = 35 dollars, and marginal cost is 10 + 2 x 0.5 x 10 = 20 dollars. As output rises from 10 to 20 units, average cost falls from 35 to 30 dollars.
16	Explain why average cost falls as output rises from 10 to 20 units, and why average cost is lowest when marginal cost equals it.	The fixed cost of 200 dollars is spread over more output, so fixed cost per unit falls from 20 to 10 dollars and average cost falls from 35 to 30 dollars. While marginal cost is below average cost it pulls average cost down; above it pushes average cost up, so average cost is lowest where the two are equal, at Q = 20 units and average cost 30 dollars.

Part 5: Monopoly and perfect competition (16 marks)

In a market the demand curve is P = 60 – Q, marginal cost is constant at 20 dollars and fixed cost is 150 dollars. Four questions.

#	Question	Answer and marking notes
17	Find the profit-maximising output and price of the monopolist.	Marginal revenue is 60 – 2Q, so setting MR = MC gives 60 – 2Q = 20 and Q = 20 units; from the demand curve P = 60 – 20 = 40 dollars.
18	Calculate the total revenue, total cost and profit of the monopolist.	Total revenue is 40 x 20 = 800 dollars; total cost is 20 x 20 + 150 = 550 dollars; profit is 800 – 550 = 250 dollars and average cost is 27.50 dollars.
19	If the market were perfectly competitive, find the market output and price.	Under perfect competition firms produce where P = MC, so 60 – Q = 20, Q = 40 units and P = 20 dollars. Compared with monopoly, output is 20 units higher and price is 20 dollars lower.
20	Calculate the deadweight loss caused by monopoly and explain its source.	The deadweight loss is the triangle between the demand curve and the marginal cost curve over the output gap: 0.5 x (40 – 20) x (40 – 20) = 200 dollars. The monopolist restricts output to raise the price, so buyers willing to pay more than marginal cost cannot trade and society loses those gains.

Part 6: Mixed calculations (14 marks)

Four questions. Show full working with units and correct significant figures.

#	Question	Answer and marking notes
21	A worker can produce 6 units of X or 3 units of Y per hour. Find the opportunity cost of producing 1 unit of X and of 1 unit of Y.	Producing 6 units of X means giving up 3 units of Y, so 1 unit of X costs 3 / 6 = 0.5 units of Y; conversely 1 unit of Y costs 6 / 3 = 2 units of X.
22	Nominal GDP rises by 8 per cent while the price index rises by 5 per cent in the same period. Find the growth rate of real GDP.	The real GDP index is 108 / 105 = 1.028571, so real growth is (1.028571 – 1) x 100 = 2.86 per cent. Simply subtracting 8 from 5 is only an approximation.
23	Using Part 1, the equilibrium price is 20 dollars, the equilibrium quantity is 60 units and the demand curve intercepts the price axis at 50 dollars. Find the consumer surplus.	The consumer surplus is the triangle below the demand curve and above the price line: 0.5 x (50 – 20) x 60 = 900 dollars.
24	Using the per-unit tax in Part 3, state the tax revenue and the percentage of the tax borne by buyers and by sellers.	Tax revenue is 324 dollars. Buyers bear 3 and sellers bear 3 per unit, that is 50 per cent and 50 per cent, which add up to 6 dollars per unit.

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