Acceptable logotypeECO 2030. Principles of Economics-Price Theory

Exam #2 Study Guide

The exam is worth 100 points. There are 60+ questions.

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 13

Chapter 18

Answer Key

Page 85

#1 a. supply decreases, b. demand decreases

#3 a. demand increases, b. supply decreases, c. supply increases, d. demand increases

Page 110, 111


  1. Mystery novels have more elastic demand than required textbooks, because mystery novels have close substitutes, while required textbooks have no close substitutes.
  2. Beethoven recordings have more elastic demand than classical music recordings in general. Beethoven recordings are a narrower market than classical music recordings, so it is easy to find close substitutes for them.
  3. Subway rides during the next five years have more elastic demand than subway rides during the next six months. Goods have a more elastic demand over longer time horizons.


  1. With a price elasticity of demand of 0.4, reducing the quantity demanded of cigarettes by 20 percent requires a 50 percent increase in price, since 20/50 = 0.4. The price should increase by $1 (50% of the current $2 price) to $3.
  2. The policy will have a larger effect five years from now than it does one year from now. The elasticity is larger in the long run, since it may take some time for people to reduce their cigarette usage. The habit of smoking is hard to break in the short run.

Page 132, 133

#1 fewer (make sure you understand the illustrative diagram)

#2 a. surplus, b. yes, if the demand for cheese is elastic

#6 less than $500 (make sure you understand the illustrative diagram)

Page 156

#10 a. demand and supply, price and quantity ... supply falls, b. the price floor leads to a shortage, c. yes, it eliminates the deadweight loss

Also: (a) sellers lose from price ceilings, buyers?, (b) buyers lose from price floors, sellers?, (c) the question marks depends on elasticity

Page 173

#1 a. no deadweight loss, b. price rises, quantity falls, consumer surplus falls, producer surplus falls, tax revenue > 0, deadweight loss > 0

Page 411

#2 a. demand increases, b. supply increases