Competitive market equilibrium practice questions.

In a competitive market, the current price is set below the equilibrium price. Which sequence best describes the adjustment back to equilibrium?

• Excess supply emerges → price falls → quantity demanded rises and quantity supplied falls
• Excess demand emerges → price rises → quantity demanded falls and quantity supplied rises
• Excess demand emerges → price falls → quantity demanded rises and quantity supplied falls
• Excess supply emerges → price rises → quantity demanded falls and quantity supplied rises

Answer: Excess demand emerges → price rises → quantity demanded falls and quantity supplied rises

Below equilibrium, quantity demanded exceeds quantity supplied (a shortage). Competition among buyers bids the price up, which reduces quantity demanded and raises quantity supplied until the market clears.

The market for electric scooters is initially in equilibrium. A successful advertising campaign increases demand. Ceteris paribus, the new equilibrium will show

• a higher price and a lower quantity
• a lower price and a higher quantity
• a higher price and a higher quantity
• a lower price and a lower quantity

Answer: a higher price and a higher quantity

A rightward shift of demand along an unchanged upward-sloping supply curve raises both the equilibrium price and the equilibrium quantity.

A severe frost destroys a large share of the orange harvest. In the market for oranges, how do equilibrium price and quantity change?

• Price rises and quantity falls
• Price falls and quantity rises
• Both price and quantity rise
• Both price and quantity fall

Answer: Price rises and quantity falls

The frost shifts supply to the left along an unchanged demand curve, so the equilibrium price rises while the equilibrium quantity falls.

In a competitive market, allocative efficiency is achieved at the level of output where

• producer surplus is maximized
• consumer surplus equals producer surplus
• total revenue of firms is maximized
• marginal benefit equals marginal cost

Answer: marginal benefit equals marginal cost

At MB = MC, the value society places on the last unit equals the cost of producing it, so social (community) surplus is maximized — the condition for allocative efficiency.

Following a surge in demand for lithium, its market price rises sharply and mining firms respond by expanding production. The firms' response to the higher price illustrates which function of the price mechanism?

• The rationing function
• The redistribution function
• The incentive function
• The equity function

Answer: The incentive function

The higher price gives producers the motivation to expand output because supplying lithium is now more profitable — this is the incentive function. Rationing refers to higher prices discouraging some buyers when the good is scarce.

In a competitive market, demand and supply both increase at the same time. Which outcome is certain?

• The equilibrium price rises
• The equilibrium price falls
• The equilibrium quantity rises
• The equilibrium quantity falls

Answer: The equilibrium quantity rises

Both shifts push quantity in the same direction (up), so equilibrium quantity certainly rises. The price effect is indeterminate: demand pushes it up while supply pushes it down.