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S5 Economics Practice Paper: Demand and Supply, Elasticity and Market Intervention
S5 Economics: Demand, Supply, Elasticity and Market Intervention
S5 Economics paper: demand and supply, equilibrium, price ceilings and floors, taxes and subsidies, elasticity, surpluses and deadweight loss. 12 questions, 100 marks, full answers.
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Paper details Level: S5 | Subject: Economics | Time: 75 minutes | Marks: 100 | Questions: 12 | Answers included
Section A: Demand, Supply and Equilibrium (34 marks)
Answer all four questions and show your working.
| # | Question | Answer and marking notes |
|---|---|---|
| 1 | 1. In a market, demand is Qd = 120 − 2P and supply is Qs = 3P − 30 (Q in units, P in dollars). (a) Find the equilibrium price and quantity. (b) State two features of the market at equilibrium. (c) If the price stays at $40, what happens? Support your answer with quantities. (8 marks) | 1. (a) Set Qd = Qs: 120 − 2P = 3P − 30, so 5P = 150, P = $30; then Q = 60 units. (b) Quantity demanded equals quantity supplied (no shortage or surplus), and there is no pressure on price to rise or fall. (c) At $40, Qd = 40 and Qs = 90, so a surplus of 50 units appears and price is pushed downwards. [Marks: equation 2, answer 2; (b) 2; (c) quantity 1, conclusion 1] |
| 2 | 2. Refer to Question 1. The government imposes a price ceiling of $20. (a) Find the quantity demanded, quantity supplied and the size of the shortage. (b) Name two forms of non-price competition that a shortage usually creates. (c) Explain why a price ceiling can make some consumers worse off. (8 marks) | 2. (a) Qd = 120 − 2×20 = 80 units; Qs = 3×20 − 30 = 30 units; shortage = 50 units. (b) Queuing and rationing, sellers allocating by personal preference or connections (black-market trading is also acceptable). (c) Quantity supplied falls from 60 to 30 units, so some consumers who could buy before lose the chance to trade, and non-price competition wastes time and resources. [Marks: (a) 1.5 each, shortage 1; (b) 2; (c) 2] |
| 3 | 3. Refer to Question 1. Instead, the government levies a per-unit tax of $5 on suppliers. (a) Find the new equilibrium price and quantity. (b) Find how much of the tax per unit is borne by consumers and by producers, and express each as a percentage of the tax. (c) Find the government tax revenue. (9 marks) | 3. (a) Supply becomes Qs = 3(P − 5) − 30. Setting 120 − 2P = 3(P − 5) − 30 gives 5P = 165, P = $33, Q = 54 units. (b) Consumers bear 33 − 30 = $3 per unit (60%); producers receive 33 − 5 = $28, i.e. $2 less (40%). (c) Revenue = 5 × 54.0 = $270.0. [Marks: (a) 3; (b) 4; (c) 2] |
| 4 | 4. The price of a good falls from $30 to $27 and quantity demanded rises from 60 to 66 units. (a) Using the midpoint method, calculate the price elasticity of demand (absolute value, 3 decimal places). (b) State whether demand is elastic, unit elastic or inelastic. (c) Explain the effect of the price cut on total revenue. (9 marks) | 4. (a) %ΔQ = (66 − 60) ÷ 63 = 9.52%; %ΔP = (27 − 30) ÷ 28.5 = −10.53%; elasticity = 9.52 ÷ 10.53 = 0.905. (b) 0.905 < 1, so demand is inelastic. (c) The percentage rise in quantity is smaller than the percentage fall in price, so total revenue falls from $1800 to $1782, a drop of $18. [Marks: (a) 4; (b) 2; (c) 3] |
Section B: Elasticity, Total Revenue and Surplus (34 marks)
Give units with all numerical answers.
| # | Question | Answer and marking notes |
|---|---|---|
| 5 | 5. A consumer income rises by 10% and the quantity demanded of a good rises by 25%. (a) Calculate the income elasticity of demand. (b) Classify the good as a necessity, a luxury or an inferior good. (c) How will the good share of the household budget change if income keeps rising? (8 marks) | 5. (a) Income elasticity = 25% ÷ 10% = 2.5. (b) It is positive and greater than 1, so the good is a luxury (a normal good). (c) The share rises, because demand grows faster than income, which is typical of a luxury. [Marks: (a) 4; (b) 2; (c) 2] |
| 6 | 6. The price of good A rises by 8% and the quantity demanded of good B falls by 12%. (a) Calculate the cross-price elasticity between A and B. (b) State whether they are substitutes, complements or unrelated. (c) Give a real-world example of such a pair. (8 marks) | 6. (a) Cross elasticity = −12% ÷ 8% = -1.5. (b) The value is negative, so A and B are complements. (c) For example printers and ink cartridges, or a phone and its charger: a price rise for A reduces demand for B. [Marks: (a) 4; (b) 2; (c) 2] |
| 7 | 7. The price elasticity of demand (absolute value) for a good is 1.5. The current price is $40 and sales are 40 units. (a) Find the current total revenue. (b) If price falls by 10%, find the new price, new quantity and new total revenue (assume elasticity is constant over this range). (c) Compare the two revenues and explain the result using elasticity. (9 marks) | 7. (a) Total revenue = $40 × 40 = $1600. (b) New price = $36; %ΔQ = 1.5 × 10% = 15%, so new quantity = 46 units; new total revenue = $36 × 46 = $1656.0. (c) Revenue rises by $56.0 (+3.5%). With elastic demand the percentage rise in quantity exceeds the percentage fall in price. [Marks: (a) 2; (b) 4; (c) 3] |
| 8 | 8. Refer to the market in Question 1 (demand is zero at $60; supply is zero at $10). (a) Find the consumer surplus at equilibrium. (b) Find the producer surplus at equilibrium. (c) Find the total surplus and state what it represents. (9 marks) | 8. (a) CS = ½ × (60 − 30) × 60 = $900. (b) PS = ½ × (30 − 10) × 60 = $600. (c) Total surplus = $1500, the total gain to buyers and sellers from trade, and the net economic benefit to society at the equilibrium quantity. [Marks: (a) 3; (b) 3; (c) 3] |
Section C: Market Intervention and Efficiency (32 marks)
Explain with economic concepts, not numbers alone.
| # | Question | Answer and marking notes |
|---|---|---|
| 9 | 9. Refer to Question 1. The government gives producers a per-unit subsidy of $5. (a) Find the new equilibrium price and quantity. (b) Find the total cost of the subsidy to the government. (c) Find the benefit per unit to consumers and to producers, and explain why producers do not keep the whole subsidy. (8 marks) | 9. (a) Supply becomes Qs = 3(P + 5) − 30. Setting 120 − 2P = 3P − 15 gives 5P = 135, P = $27, Q = 66 units. (b) Cost = 5 × 66.0 = $330.0. (c) Consumers save $3 per unit (30 → 27); producers receive 27 + 5 = $32, which is $2 more per unit. The subsidy lowers the market price, so part of the benefit passes to consumers. [Marks: (a) 3; (b) 2; (c) 3] |
| 10 | 10. Refer to Question 1. The government instead sets a price floor of $40. (a) Find the quantity demanded, quantity supplied and the size of the surplus. (b) If the government buys up the whole surplus, find the cost. (c) How do price floors and price ceilings affect the quantity traded in opposite ways? (8 marks) | 10. (a) Qd = 40 units; Qs = 90 units; surplus = 50 units. (b) Cost = $40 × 50 = $2000. (c) A price ceiling cuts the quantity traded to 30 units (because of the shortage); a price floor cuts it to 40 units (because of the surplus). Both reduce trade, but for opposite reasons. [Marks: (a) 4; (b) 2; (c) 2] |
| 11 | 11. Refer to Question 2 (price ceiling $20, quantity supplied 30 units, equilibrium quantity 60.0 units). (a) At Q = 30, find the highest price consumers are willing to pay (from the demand function). (b) At Q = 30, find the marginal cost (from the supply function). (c) Calculate the deadweight loss caused by the price ceiling and explain its source. (8 marks) | 11. (a) From Qd = 120 − 2P with Q = 30: P = (120 − 30) ÷ 2 = $45. (b) From Qs = 3P − 30 with Q = 30: P = (30 + 30) ÷ 3 = $20. (c) Deadweight loss = ½ × (45 − 20) × (60 − 30) = ½ × 25 × 30 = $375. For units 31 to 60.0 buyers value the good above its marginal cost, but the ceiling prevents these beneficial trades. [Marks: (a) 2; (b) 2; (c) 4] |
| 12 | 12. Refer to Question 3 (per-unit tax $5, new equilibrium quantity 54.0 units). (a) Find total tax revenue. (b) Find the deadweight loss of the tax. (c) If demand were perfectly inelastic, who would bear the tax? Why? (8 marks) | 12. (a) Tax revenue = 5 × 54.0 = $270.0. (b) Deadweight loss = ½ × (60 − 54.0) × 5 = ½ × 6 × 5 = $15. (c) With perfectly inelastic demand the demand curve is vertical, so consumers cannot reduce quantity in response and bear the whole tax. [Marks: (a) 2; (b) 3; (c) 3] |
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