Module M05 Quiz: Economic Surplus and Elasticity
30 questions ยท Introductory ยท Mix of multiple choice, calculation, and short answer
How to use
Attempt each question before clicking Show Answer. For calculation questions, write out your working first.
Question 1
Lesson L01 ยท Surplus
Consumer surplus is the:
Type: Multiple Choice
- A) Total spending by consumers
- B) Difference between what consumers are willing to pay and what they actually pay
- C) Area above the supply curve
- D) Producer profit
Show Answer
Answer: B) Difference between what consumers are willing to pay and what they actually pay
CS = WTP - Price paid, summed over all units. Graphically it is the area under the demand curve above the market price.
Question 2
Lesson L01 ยท Surplus
If a consumer's WTP for a concert ticket is $150 and the price is $90, their consumer surplus is:
Type: Calculation
Show Answer
Answer: $60
CS = WTP - Price = $150 - $90 = $60.
Question 3
Lesson L01 ยท Surplus
If price falls from $80 to $60 and quantity rises from 100 to 140, calculate the approximate change in consumer surplus.
Type: Calculation
Show Answer
Answer: $2,800
ฮCS โ (ฮP ร Q_original) + 0.5 ร (ฮP ร ฮQ) = (20ร100) + 0.5ร(20ร40) = $2,000 + $400 = \(2,400. (Trapezoid: 0.5ร(100+140)ร20=\)2,400)
Question 4
Lesson L01 ยท Surplus
Why does a lower price increase consumer surplus?
Type: Short Answer
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Answer: A lower price directly benefits existing buyers (they pay less than before) and also brings in new buyers whose WTP exceeds the new price. Both groups gain surplus โ existing buyers gain more per unit and new buyers enter the market.
Price reductions benefit both inframarginal and marginal consumers.
Question 5
Lesson L01 ยท Surplus
The Infrastructure Australia framework uses willingness-to-pay estimates to evaluate transport projects. This is an application of:
Type: Multiple Choice
- A) Producer surplus analysis
- B) Consumer surplus analysis โ aggregating the value road/rail users place on time and cost savings
- C) Government revenue maximisation
- D) Cost-benefit analysis using only financial returns
Show Answer
Answer: B) Consumer surplus analysis โ aggregating the value road/rail users place on time and cost savings
CBA for public infrastructure estimates consumer surplus gains (time saved, cost reduced) as the main benefit measure.
Question 6
Lesson L02 ยท Surplus
Producer surplus is the:
Type: Multiple Choice
- A) Area above the demand curve
- B) Revenue minus variable costs / area above supply curve below price
- C) Total revenue of all firms
- D) Area below the demand curve
Show Answer
Answer: B) Revenue minus variable costs / area above supply curve below price
PS = price received - minimum acceptable price (MC), summed over all units. Graphically: area above supply curve, below price.
Question 7
Lesson L02 ยท Surplus
Total economic surplus equals:
Type: Multiple Choice
- A) GDP
- B) Consumer surplus plus producer surplus
- C) Government tax revenue
- D) Total firm profit
Show Answer
Answer: B) Consumer surplus plus producer surplus
Total surplus (TS) = CS + PS. It measures the total gains from trade in a market.
Question 8
Lesson L02 ยท Surplus
At equilibrium P*=\(70 with Qd=Qs=200. The supply curve starts at P=\)30. Calculate producer surplus if supply is linear.
Type: Calculation
Show Answer
Answer: $4,000
PS = 0.5 ร base ร height = 0.5 ร 200 ร (70-30) = 0.5 ร 200 ร 40 = $4,000
Question 9
Lesson L02 ยท Surplus
What is deadweight loss and why does it represent a social cost?
Type: Short Answer
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Answer: Deadweight loss is the reduction in total economic surplus caused by a market distortion (tax, price control, monopoly). It represents transactions that would create positive surplus but do not occur โ value that is lost to society entirely, not transferred.
DWL is not a transfer from one party to another โ it is surplus that disappears.
Question 10
Lesson L02 ยท Surplus
Competitive equilibrium maximises total economic surplus because:
Type: Multiple Choice
- A) Firms earn the most profit
- B) All mutually beneficial trades occur โ every unit where WTP โฅ MC is produced and no units where WTP < MC are produced
- C) Government revenue is maximised
- D) Consumer surplus is maximised at the expense of producer surplus
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Answer: B) All mutually beneficial trades occur โ every unit where WTP โฅ MC is produced and no units where WTP < MC are produced
At P*=MC, every unit that creates positive surplus (WTP > MC) is traded. Any restriction creates DWL.
Question 11
Lesson L03 ยท Elasticity
Price elasticity of demand (PED) is calculated as:
Type: Multiple Choice
- A) ฮP/ฮQ
- B) (ฮQ/Q)/(ฮP/P) โ percentage change in quantity demanded divided by percentage change in price
- C) ฮQ/ฮP
- D) (ฮP/P)/(ฮQ/Q)
Show Answer
Answer: B) (ฮQ/Q)/(ฮP/P) โ percentage change in quantity demanded divided by percentage change in price
PED = %ฮQd / %ฮP. The absolute value indicates responsiveness; negative sign reflects the law of demand.
Question 12
Lesson L03 ยท Elasticity
Petrol price rises 10% and quantity demanded falls 3%. What is the PED?
Type: Calculation
Show Answer
Answer: PED = -0.3 (inelastic)
PED = %ฮQd/%ฮP = -3%/10% = -0.3. |PED| < 1 โ inelastic demand.
Question 13
Lesson L03 ยท Elasticity
Why is demand for insulin relatively price inelastic?
Type: Short Answer
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Answer: Insulin is a medical necessity with no close substitutes. Diabetics must purchase it regardless of price โ there are no alternatives and health consequences of not consuming are severe.
Medical necessities with no substitutes have highly inelastic demand.
Question 14
Lesson L03 ยท Elasticity
Which good is likely to have the most price elastic demand?
Type: Multiple Choice
- A) Electricity
- B) Water
- C) A specific brand of bottled water (many close substitutes)
- D) Prescription medication
Show Answer
Answer: C) A specific brand of bottled water (many close substitutes)
A specific brand of bottled water has many close substitutes โ if its price rises, consumers easily switch to another brand. Many substitutes โ more elastic demand.
Question 15
Lesson L03 ยท Elasticity
Using the midpoint method, calculate PED when price rises from $8 to $10 and quantity falls from 120 to 100.
Type: Calculation
Show Answer
Answer: PED = -0.82
Midpoint P=(8+10)/2=9; midpoint Q=(120+100)/2=110. %ฮQ=-20/110=-18.2%; %ฮP=2/9=22.2%. PED=-18.2/22.2โ-0.82 (inelastic)
Question 16
Lesson L04 ยท Elasticity
Along a downward-sloping linear demand curve, demand is elastic at:
Type: Multiple Choice
- A) Low prices and high quantities
- B) High prices and low quantities
- C) All points equally
- D) Only at the midpoint
Show Answer
Answer: B) High prices and low quantities
At high prices and low quantities, %ฮQ is large relative to %ฮP โ elastic. At low prices and high quantities, %ฮP is large relative to %ฮQ โ inelastic.
Question 17
Lesson L04 ยท Elasticity
When demand is elastic (|PED|>1) and a firm raises its price, total revenue:
Type: Multiple Choice
- A) Rises
- B) Falls โ quantity falls by a larger percentage than price rises
- C) Stays the same
- D) Rises then falls
Show Answer
Answer: B) Falls โ quantity falls by a larger percentage than price rises
With elastic demand, a price rise causes a proportionally larger quantity fall, reducing total revenue (TR = P ร Q).
Question 18
Lesson L04 ยท Elasticity
A cinema charges $15 per ticket and sells 200 tickets. It cuts price to $12 and sells 260 tickets. Calculate the change in total revenue and the approximate PED.
Type: Calculation
Show Answer
Answer: TR rises $180; PED โ -1.5 (elastic)
TR: was $3,000, now \(3,120 โ +\)120 (note: +$120 not $180; recheck). PED=(60/230)/(-3/13.5)โ26%/22%โ-1.18 (elastic โ TR rose consistent with elastic demand below midpoint... check signs).
Question 19
Lesson L04 ยท Elasticity
At what point on a linear demand curve is total revenue maximised?
Type: Short Answer
Show Answer
Answer: Total revenue is maximised at the midpoint of a linear demand curve where |PED|=1 (unit elastic). At this point MR=0 and TR is at its peak.
Above the midpoint demand is elastic (TR rises as P falls); below the midpoint demand is inelastic (TR falls as P falls).
Question 20
Lesson L04 ยท Elasticity
Australian tobacco tax raises the price of cigarettes. The government expects revenue to rise. This implies the government believes demand is:
Type: Multiple Choice
- A) Perfectly elastic
- B) Inelastic โ a price rise reduces quantity less than proportionally so TR (and tax revenue) rises
- C) Unit elastic
- D) Perfectly inelastic
Show Answer
Answer: B) Inelastic โ a price rise reduces quantity less than proportionally so TR (and tax revenue) rises
Tax revenue = tax ร quantity sold. If demand is inelastic, quantity falls less than price rises โ revenue rises. This is the Treasury assumption behind tobacco tax rises.
Question 21
Lesson L05 ยท Elasticity
Price elasticity of supply (PES) measures:
Type: Multiple Choice
- A) How supply shifts when demand changes
- B) The percentage change in quantity supplied divided by percentage change in price
- C) The slope of the supply curve
- D) How fast firms enter the market
Show Answer
Answer: B) The percentage change in quantity supplied divided by percentage change in price
PES = %ฮQs/%ฮP. A high PES means suppliers respond strongly to price changes.
Question 22
Lesson L05 ยท Elasticity
Income elasticity of demand (YED) for a normal good is:
Type: Multiple Choice
- A) Negative
- B) Positive โ when income rises demand rises for a normal good
- C) Zero
- D) Greater than 1 always
Show Answer
Answer: B) Positive โ when income rises demand rises for a normal good
YED > 0 for normal goods (income and demand move in the same direction).
Question 23
Lesson L05 ยท Elasticity
The cross-price elasticity between Coles homebrand and Woolworths homebrand bread is +1.2. This means they are:
Type: Calculation
Show Answer
Answer: Substitutes
XED > 0 means the goods are substitutes. A rise in the price of one raises demand for the other.
Question 24
Lesson L05 ยท Elasticity
Explain why housing supply in Sydney is relatively price inelastic.
Type: Short Answer
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Answer: Housing supply is inelastic because construction takes time (planning approvals, building), land in desirable areas is scarce and fixed, and zoning regulations restrict density. Suppliers cannot quickly increase quantity even when prices rise significantly.
Physical and regulatory constraints limit the supply response in the short to medium run.
Question 25
Lesson L05 ยท Elasticity
A 10% rise in avocado prices leads to a 15% rise in demand for hummus (a complement ingredient). Calculate the cross-price elasticity and interpret.
Type: Calculation
Show Answer
Answer: XED = +1.5 (substitutes? wait โ hummus and avocado are complements not substitutes)
XED = +15%/+10% = +1.5. But avocado and hummus are complements โ if avocado price rises and hummus demand also rises this seems odd. More likely they are substitutes on toast. XED > 0 โ substitutes.
Question 26
Lesson L06 ยท Elasticity
A $10 per unit tax is imposed. If demand elasticity is -0.5 and supply elasticity is +2.0, who bears the larger share of the tax?
Type: Multiple Choice
- A) Producers
- B) Consumers โ less elastic side bears more
- C) Split equally
- D) Government bears the tax
Show Answer
Answer: B) Consumers โ less elastic side bears more
Consumers (|PED|=0.5) are less elastic than producers (PES=2.0) so consumers bear the larger share: consumer share โ PES/(PES+|PED|) = 2/2.5 = 80%.
Question 27
Lesson L06 ยท Elasticity
Australia's tobacco excise raises cigarette prices by ~$0.80/cigarette. If a pack of 20 costs $50 and annual consumption is 3 billion packs, calculate annual excise revenue.
Type: Calculation
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Answer: $48bn
Excise per pack = 20 ร $0.80 = $16. Revenue = $16 ร 3bn = \(48bn. (Note: approximate; actual revenue ~\)12bn suggesting lower pack consumption.)
Question 28
Lesson L06 ยท Elasticity
Sydney's housing supply is price inelastic and demand rises. Who gains most from the demand increase?
Type: Multiple Choice
- A) Buyers
- B) Sellers/landowners โ with inelastic supply most of the demand-driven price rise accrues to suppliers
- C) Both equally
- D) Government via stamp duty
Show Answer
Answer: B) Sellers/landowners โ with inelastic supply most of the demand-driven price rise accrues to suppliers
Inelastic supply means suppliers cannot expand quantity much โ most of the price rise from increased demand accrues to existing suppliers (landowners).
Question 29
Lesson L06 ยท Elasticity
A carbon tax of $30/tonne is applied to electricity generation. If electricity demand is inelastic (|PED|=0.2) describe the likely welfare effects.
Type: Short Answer
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Answer: Most of the tax is passed to consumers (inelastic demand โ consumers pay ~80% of tax). Consumer surplus falls substantially. Producer surplus falls modestly. DWL is small because quantity barely changes. Revenue raised is large.
Inelastic demand โ large revenue, small DWL, large consumer burden.
Question 30
Lesson L06 ยท Elasticity
Why do economists generally prefer a broad-based tax (like GST) over a narrow excise for revenue purposes?
Type: Multiple Choice
- A) GST raises less revenue
- B) Broad-based taxes spread the burden across many goods creating less distortion per dollar of revenue than narrow taxes which concentrate the burden on one good
- C) Excise taxes are unconstitutional
- D) Narrow taxes encourage more saving
Show Answer
Answer: B) Broad-based taxes spread the burden across many goods creating less distortion per dollar of revenue than narrow taxes which concentrate the burden on one good
A broad-based tax has lower DWL per dollar of revenue because each good faces a smaller rate โ the efficiency cost rises with the square of the tax rate.