CIMA BA1 · Chapter 5
Demand, supply and price determination MCQs with Answers
10 multiple-choice questions on Demand, supply and price determination for CIMA BA1 Fundamentals of Business Economics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A movement along a demand curve (rather than a shift of the curve) is caused by:
- A) A change in consumers' incomes
- B) A change in the price of a substitute good
- C) A change in the price of the good itself
- D) A change in consumer tastes
Show answer & explanation
Answer: C) A change in the price of the good itself
The demand curve plots quantity demanded against the good's own price, holding other factors constant. A change in own price causes a movement along the curve; changes in income, the prices of related goods or tastes shift the whole curve.
Question 2
Which of the following would shift the demand curve for a normal good to the right?
- A) A fall in the price of the good itself
- B) A rise in consumers' disposable incomes
- C) A rise in the price of a complementary good
- D) A fall in the price of a substitute good
Show answer & explanation
Answer: B) A rise in consumers' disposable incomes
For a normal good, higher incomes increase demand at every price, shifting the curve right. A fall in its own price is a movement along the curve. Dearer complements and cheaper substitutes both reduce demand, shifting the curve left.
Question 3
Printers and ink cartridges are complementary goods. If the price of printers falls significantly, what is the likely effect in the market for ink cartridges?
- A) The demand curve for ink cartridges shifts to the right
- B) The demand curve for ink cartridges shifts to the left
- C) The supply curve for ink cartridges shifts to the left
- D) There is a movement down along the demand curve for ink cartridges
Show answer & explanation
Answer: A) The demand curve for ink cartridges shifts to the right
Cheaper printers increase the quantity of printers bought, which increases demand for the complementary good at every price. The demand curve for cartridges therefore shifts to the right; there is no change in cartridge prices to cause a movement along the curve.
Question 4
In a market, demand is Qd = 500 - 5P and supply is Qs = -100 + 5P, where P is price in $. What are the equilibrium price and quantity?
- A) Price $60, quantity 300 units
- B) Price $50, quantity 250 units
- C) Price $80, quantity 100 units
- D) Price $60, quantity 200 units
Show answer & explanation
Answer: D) Price $60, quantity 200 units
At equilibrium Qd = Qs: 500 - 5P = -100 + 5P, so 600 = 10P and P = $60. Quantity = 500 - 5 x 60 = 200 units (check: -100 + 5 x 60 = 200).
Question 5
If the government imposes an effective maximum price below the equilibrium price, the most likely result is:
- A) Excess supply, leading to unsold stocks
- B) An increase in the quantity supplied
- C) Excess demand, possibly leading to queues, rationing or black markets
- D) No effect on the market
Show answer & explanation
Answer: C) Excess demand, possibly leading to queues, rationing or black markets
A maximum price below equilibrium increases quantity demanded and reduces quantity supplied, creating a shortage. Non-price rationing methods and illegal trading at higher prices often follow. A maximum price set above equilibrium would have no effect.
Question 6
Using the market in which Qd = 500 - 5P and Qs = -100 + 5P, the government imposes a maximum price of $50. What is the resulting shortage?
- A) 50 units
- B) 100 units
- C) 150 units
- D) 250 units
Show answer & explanation
Answer: B) 100 units
At P = $50: Qd = 500 - 5 x 50 = 250 units and Qs = -100 + 5 x 50 = 150 units. Shortage (excess demand) = 250 - 150 = 100 units.
Question 7
A guaranteed minimum price for an agricultural product is set above the equilibrium price. Which of the following is the most likely outcome?
- A) Excess supply, which the government may have to buy and store
- B) Excess demand, causing queues for the product
- C) A fall in farmers' incomes
- D) A fall in the quantity supplied
Show answer & explanation
Answer: A) Excess supply, which the government may have to buy and store
A minimum price above equilibrium raises quantity supplied and reduces quantity demanded, so a surplus arises. To maintain the price, the authorities typically buy up the surplus, which can be costly.
Question 8
A specific indirect tax is imposed on a product for which demand is highly price inelastic and supply is relatively price elastic. Which of the following statements is correct?
- A) Most of the burden of the tax will fall on producers
- B) The burden of the tax will be shared equally between consumers and producers
- C) The quantity traded will fall significantly
- D) Most of the burden of the tax will fall on consumers
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Answer: D) Most of the burden of the tax will fall on consumers
The incidence of a tax falls more heavily on the side of the market that is less responsive to price. With inelastic demand, consumers continue to buy at higher prices, so producers can pass most of the tax on. Quantity traded falls only slightly.
Question 9
In the market where Qd = 500 - 5P and Qs = -100 + 5P, the government imposes a specific tax of $8 per unit on suppliers. What will be the government's tax revenue?
- A) $1,600
- B) $720
- C) $1,440
- D) $1,280
Show answer & explanation
Answer: C) $1,440
Suppliers now receive P - 8, so supply becomes Qs = -100 + 5(P - 8) = -140 + 5P. Setting 500 - 5P = -140 + 5P gives 10P = 640, so the consumer price is $64 and quantity = 500 - 5 x 64 = 180 units. Tax revenue = $8 x 180 = $1,440.
Question 10
An inferior good is one for which:
- A) Demand rises as its price rises
- B) Demand falls as consumers' incomes rise
- C) Demand is unaffected by changes in income
- D) Quality is below the industry average
Show answer & explanation
Answer: B) Demand falls as consumers' incomes rise
Income elasticity of demand for an inferior good is negative: as incomes rise, consumers switch to preferred alternatives. The term is an economic one and does not refer to product quality.