Use this review after studying all nine topics or taking the Unit 2 diagnostic. Try the questions without notes.
Big ideas of the unit
- Demand is a marginal benefit curve. Market demand is the horizontal sum of individual demands. (Topic 2.1)
- Supply is a marginal cost curve. Rising marginal cost makes it slope up. (Topic 2.2)
- Shift or movement? Own price moves you along a curve; every other determinant shifts it. Most errors in this unit start here.
- Elasticity measures the size of a response in percentages. Slope is not elasticity, and the total revenue test links price elasticity of demand to spending. (Topic 2.3, Topic 2.4)
- Signs carry meaning in other elasticities. YED tells normal from inferior; XED tells substitutes from complements. (Topic 2.5)
- Equilibrium clears the market and maximises total surplus. The price rations goods and signals where resources should go. (Topic 2.6)
- Out of equilibrium, the price does the work. A shift creates a shortage or surplus at the old price; elasticity decides how much of the change is price and how much quantity. (Topic 2.7)
- Intervention moves surplus and destroys some. Binding controls, quotas, taxes and subsidies change the quantity traded; the more inelastic side bears more of a tax. (Topic 2.8)
- Trade is the same model with a world price. Total surplus rises, with winners and losers; tariffs and quotas move back towards autarky. (Topic 2.9)
Key relationships and methods
| Idea | Rule or method | Topic |
|---|---|---|
| Market demand or supply | add quantities at each price | 2.1, 2.2 |
| Any elasticity (midpoint) | % change in Q ÷ % change in cause, each change ÷ average | 2.3–2.5 |
| Total revenue test | inelastic: P and TR same direction; elastic: opposite | 2.3 |
| YED and XED signs | YED + normal, − inferior; XED + substitutes, − complements | 2.5 |
| Surplus areas | CS above price, below D; PS below price, above S; triangles use ½ | 2.6 |
| Single shifts | D shift: P and Q same direction; S shift: opposite | 2.7 |
| Two shifts | one of P and Q is indeterminate | 2.7 |
| Per-unit tax t | buyers’ price − sellers’ price = t; revenue = t × Q; DWL = ½ × t × fall in Q | 2.8 |
| Trade | imports = Qd − Qs at Pw; tariff revenue = t × imports with the tariff | 2.9 |
These are original Marlbridge practice questions, not past exam questions. The rubrics are a suggested Marlbridge rubric, not official scoring. All places, firms and data are fictional; a four-function calculator is enough.
Question 1 (multiple choice · mixed)
On a fictional island, the number of hotel rooms is fixed in the short run. Tourists’ incomes rise, and hotel stays have an income elasticity of demand of +1.5. What happens in the short run?
- (A) Demand shifts right; the price rises and the quantity of rooms stays the same.
- (B) Demand shifts right; the price and the quantity both rise.
- (C) Demand shifts right; the quantity rises and the price stays the same.
- (D) Demand shifts left, because hotel stays are a luxury.
Answer and explanation
Answer: (A). Positive YED: a normal good, so demand increases. With vertical supply, the whole effect is a higher price.
- (B) assumes supply slopes up.
- (C) describes perfectly elastic supply.
- (D) A luxury, with positive YED, is a normal good.
Question 2 (multiple choice · mixed)
In markets X and Y, quantity demanded is 500 units greater than quantity supplied at the current price. In X, supply has just decreased. In Y, the government has set a binding price ceiling. What happens next if nothing else changes?
- (A) In X the price rises and the shortage disappears; in Y the shortage lasts while the ceiling stays.
- (B) In both markets the price rises until the shortage disappears.
- (C) In X the shortage lasts; in Y the price rises to equilibrium.
- (D) In both markets the shortage lasts, because supply cannot change.
Answer and explanation
Answer: (A). In X, buyers bid the price up until quantity demanded equals quantity supplied. In Y, the price cannot legally rise, so the shortage remains and goods are rationed by queues or waiting lists.
- (B) ignores the legal limit in Y.
- (C) swaps the two markets.
- (D) In X, quantity supplied rises along S as the price rises.
Question 3 (multiple choice · mixed)
A small country imports a normal good at a fixed world price. Domestic incomes rise. Which statement is correct?
- (A) Imports rise; the domestic price and domestic production do not change.
- (B) The domestic price rises, so domestic production rises.
- (C) Imports fall, because domestic producers supply more.
- (D) The world price rises, so domestic production rises and imports fall.
Answer and explanation
Answer: (A). Demand shifts right, but the price stays at the world price, so domestic output is unchanged and imports fill the extra quantity demanded.
- (B) treats the market as closed.
- (C) Producers supply more only if the price rises.
- (D) A small country cannot change the world price.
Question 4 (constructed response · mixed)
Orrisby’s weekly market for refurbished laptops has two groups of buyers and two shops:
| Price ($) | 150 | 200 | 250 | 300 | 350 |
|---|---|---|---|---|---|
| Students’ Qd | 90 | 75 | 60 | 45 | 30 |
| Offices’ Qd | 70 | 55 | 40 | 25 | 10 |
| Shop A’s Qs | 15 | 30 | 45 | 60 | 75 |
| Shop B’s Qs | 25 | 40 | 55 | 70 | 85 |
(a) Find the market schedules and the equilibrium. (b) The shops open at $200. Find the shortage or surplus and explain how the market adjusts. (c) A new government grant means students demand 60 more laptops at every price. Find the gap at the old equilibrium price and the new equilibrium. (d) Explain how the new price guides buyers and sellers, and whether supply has shifted. (e) Calculate PES between the old and new equilibria and classify it.
Worked solution and suggested Marlbridge rubric
(a) Add across at each price. Market Qd: 160, 130, 100, 70, 40. Market Qs: 40, 70, 100, 130, 160. Equilibrium: $250 and 100 laptops.
(b) At $200, Qd = 130 and Qs = 70: a shortage of 60. Buyers bid the price up; quantity demanded falls and quantity supplied rises along the curves until both are 100 at $250.
(c) New market Qd: 220, 190, 160, 130, 100. At $250 the gap is 160 − 100 = a shortage of 60. New equilibrium: $300 and 130 laptops.
(d) The higher price rations laptops (offices cut back from 40 to 25) and gives the shops an incentive to offer more: a movement along supply, not a shift.
(e) % change in Qs = 30 ÷ 115 × 100 = 26.09%. % change in P = 50 ÷ 275 × 100 = 18.18%. PES = 1.43: elastic.
| Point | What earns it |
|---|---|
| 1 | Both market schedules by horizontal summation |
| 1 | Equilibrium $250 and 100 |
| 1 | Shortage of 60 at $200, with price rising and movements along both curves |
| 1 | Shortage of 60 at $250 after the grant |
| 1 | New equilibrium $300 and 130 |
| 1 | Price rations and gives an incentive, as a movement along S |
| 1 | PES = 1.43, elastic |
Total: 7 points.
Question 5 (constructed response · mixed)
Selwick’s weekly market for sugary soft drinks is Qd = 300 − 5P and Qs = 15P − 300, with P in dollars per case and Q in thousand cases. The council then taxes sellers $8 per case.
(a) Find the equilibrium, consumer surplus and producer surplus before the tax. (b) Find the price buyers pay, the price sellers keep and the new quantity. (c) Find each side’s share of the tax and explain it using elasticity. (d) Calculate tax revenue and deadweight loss, and show that all the areas add up. (e) Calculate |PED| for buyers between the two prices. Use the total revenue test to say what happens to buyers’ total spending, and check it.
Worked solution and suggested Marlbridge rubric
(a) 300 − 5P = 15P − 300 gives $30 and 150 thousand cases. Demand meets the price axis at $60 and supply at $20. CS = ½ × 150 × 30 = $2,250 thousand; PS = ½ × 150 × 10 = $750 thousand.
(b) New supply: Qs = 15(P − 8) − 300 = 15P − 420. Then 300 − 5P = 15P − 420 gives buyers’ price $36. Sellers keep $28. Q = 300 − 180 = 120 thousand cases.
(c) Buyers pay $6 more: three-quarters. Sellers keep $2 less: one-quarter. At the start, demand elasticity is 5 × 30 ÷ 150 = 1.0 and supply elasticity 15 × 30 ÷ 150 = 3.0. The less elastic side, buyers, bears more.
(d) Revenue = 8 × 120 = $960 thousand. DWL = ½ × 8 × (150 − 120) = $120 thousand. New CS = ½ × 120 × (60 − 36) = $1,440 thousand; new PS = ½ × 120 × (28 − 20) = $480 thousand. Check: 1,440 + 480 + 960 + 120 = 3,000 = 2,250 + 750.
(e) % change in Q = −30 ÷ 135 × 100 = −22.22%. % change in P = 6 ÷ 33 × 100 = 18.18%. |PED| = 1.22: elastic over this range. The test predicts that spending falls when the price rises. Check: 30 × 150 = $4,500 thousand before; 36 × 120 = $4,320 thousand after.
(Elasticity varies along a straight line: unit elastic at $30, elastic over $30 to $36.)
| Point | What earns it |
|---|---|
| 1 | $30, 150, CS $2,250 thousand and PS $750 thousand |
| 1 | $36, $28 and 120 thousand |
| 1 | Shares of 3/4 and 1/4 |
| 1 | Less elastic demand explains the larger buyer share |
| 1 | Revenue $960 thousand |
| 1 | DWL $120 thousand with the areas adding to $3,000 thousand |
| 1 | |PED| = 1.22, elastic |
| 1 | Spending falls ($4,500 to $4,320 thousand), matching the test |
Total: 8 points.
Question 6 (constructed response · mixed)
Kessrin, a fictional small country, has a cotton-fabric market of Qd = 180 − 6P and Qs = 6P − 36, with P in dollars per metre and Q in thousand metres per month, so areas are in thousands of dollars. The world price is $12.
(a) Find the autarky price and quantity. (b) Kessrin opens to free trade. Find imports and the changes in consumer, producer and total surplus. (c) Kessrin then adds a tariff of $3 per metre. Find the domestic price, Qs, Qd, imports, tariff revenue and deadweight loss. (d) Which import quota would give the same domestic price? State one way the quota differs from the tariff.
Worked solution and suggested Marlbridge rubric
(a) 180 − 6P = 6P − 36 gives $18 and 72 thousand metres. Demand meets the price axis at $30; supply at $6.
(b) At $12: Qd = 108, Qs = 36, imports = 72.
| Autarky ($18) | Free trade ($12) | Change | |
|---|---|---|---|
| CS | ½ × 72 × 12 = 432 | ½ × 108 × 18 = 972 | +540 |
| PS | ½ × 72 × 12 = 432 | ½ × 36 × 6 = 108 | −324 |
| Total | 864 | 1,080 | +216 |
Check: the gain triangle is ½ × 72 × (18 − 12) = 216.
(c) Price = 12 + 3 = $15. Qs = 54, Qd = 90, imports = 36. Revenue = 3 × 36 = $108 thousand. DWL = ½ × 3 × (54 − 36) + ½ × 3 × (108 − 90) = 27 + 27 = $54 thousand. Check: CS = 675 and PS = 243, so 675 + 243 + 108 = 1,026 = 1,080 − 54.
As with a tax, the DWL comes from home output costing more than $12 and from lost consumption.
(d) A quota of 36 thousand metres. The quota raises no revenue for the government; the $3 gap on each imported metre goes to whoever holds the right to import.
| Point | What earns it |
|---|---|
| 1 | $18 and 72 |
| 1 | Imports of 72 |
| 1 | CS +540 and PS −324 |
| 1 | Total surplus +216 |
| 1 | $15, Qs 54, Qd 90, imports 36 |
| 1 | Revenue $108 thousand and DWL $54 thousand |
| 1 | Quota of 36 with the revenue difference |
Total: 7 points.
Question 7 (constructed response · mixed)
In Corlan, intercity coach travel has demand Qd = 18,000 − 400P and supply Qs = 200P + 3,000 (P in dollars per trip, Q in trips per week). The market is in equilibrium at $25 and 8,000 trips. Rail fares then rise by 20%. The cross-price elasticity of demand for coach trips with respect to rail fares is +0.75.
(a) What does the sign tell you? Predict quantity demanded at $25. (b) The demand increase is the same at every price, so demand becomes Qd = 19,200 − 400P. Find the shortage at $25 and the new equilibrium. (c) Calculate the change in the coach operators’ weekly revenue. (d) A student says: “Price rose and revenue rose, so demand for coach trips is inelastic.” Evaluate this claim. (e) Calculate PES between the two equilibria and give one reason for its value.
Worked solution and suggested Marlbridge rubric
(a) Positive XED: rail and coach trips are substitutes. % change in Qd = 0.75 × 20 = 15%, so 8,000 × 1.15 = 9,200 trips at $25. This is a shift of demand, not a movement along it.
(b) At $25: Qd = 9,200, Qs = 8,000: a shortage of 1,200. Then 19,200 − 400P = 200P + 3,000 gives P = $27 and Q = 8,400 trips.
(c) 25 × 8,000 = $200,000 before; 27 × 8,400 = $226,800 after: +$26,800 a week.
(d) Wrong. The total revenue test applies to a movement along one demand curve. Here demand shifted and the market moved along supply, so the revenue change says nothing about price elasticity of demand.
(e) % change in Qs = 400 ÷ 8,200 × 100 = 4.88%. % change in P = 2 ÷ 26 × 100 = 7.69%. PES = 0.63: inelastic. In the short run, coaches and licensed drivers are roughly fixed, so operators cannot add many trips quickly.
| Point | What earns it |
|---|---|
| 1 | Substitutes, from the positive sign |
| 1 | 9,200 trips at $25, as a shift |
| 1 | Shortage of 1,200 |
| 1 | $27 and 8,400 |
| 1 | Revenue +$26,800 |
| 1 | Test rejected: demand shifted, so it is not a movement along D |
| 1 | PES = 0.63, inelastic, with a supply-side reason |
Total: 7 points.
How did you do?
Questions 1 to 3 are worth 1 point each and Questions 4 to 7 are worth 7, 8, 7 and 7: 32 in all. Check which ideas cost you points.
- Shifts and summation (Q2, Q3, Q4): the Topic 2.1 checklist and the Topic 2.2 checklist.
- Elasticities (Q1, Q4, Q5, Q7): the Topic 2.3 checklist, the Topic 2.4 checklist and the Topic 2.5 checklist.
- Equilibrium and adjustment (Q2, Q4, Q7): the Topic 2.6 checklist and the Topic 2.7 checklist.
- Taxes and price controls (Q2, Q5): the Topic 2.8 checklist.
- Trade, tariffs and quotas (Q3, Q6): the Topic 2.9 checklist.
Not taken the Unit 2 diagnostic yet? It shows which single topic to revisit first.