Unit -4: Market Equilibrium:
Equilibrium, Excess Demand, Excess supply; Market equilibrium with Fixed numbers of Firms; Market equilibrium with Free Entry and Exit, Simple Application of Demand and supply Price ceiling and price Floor.
What defines market equilibrium in a perfectly competitive market?
a) Excess supply equals excess demand
b) Price is always increasing
c) Market demand equals market supply
d) Consumers and firms operate independently
Answer: c) Market demand equals market supplyWhat happens when the market price is above the equilibrium price?
a) Excess demand occurs
b) Excess supply occurs
c) Price remains stable
d) No effect on supply or demand
Answer: b) Excess supply occursWhich of the following is an example of a price ceiling?
a) Minimum wage legislation
b) Government-imposed maximum price for wheat
c) Tax on luxury goods
d) Tariffs on imports
Answer: b) Government-imposed maximum price for wheatThe equilibrium price in a free-entry market is determined by:
a) The marginal cost of production
b) The maximum willingness to pay by consumers
c) The minimum average cost of firms
d) Government intervention
Answer: c) The minimum average cost of firmsWhat does a downward-sloping demand curve in the labour market indicate?
a) Higher wages lead to higher demand for labour
b) Higher wages lead to lower demand for labour
c) Labour demand is independent of wages
d) Firms do not maximize profits
Answer: b) Higher wages lead to lower demand for labourWhat occurs when there is a rightward shift in the demand curve, holding supply constant?
a) Equilibrium quantity decreases, and price increases
b) Equilibrium price and quantity both increase
c) Equilibrium price decreases, and quantity increases
d) Both price and quantity remain constant
Answer: b) Equilibrium price and quantity both increaseWhat is the impact of a leftward shift in the supply curve?
a) Increase in equilibrium quantity and price
b) Decrease in equilibrium price and increase in quantity
c) Increase in equilibrium price and decrease in quantity
d) No change in price or quantity
Answer: c) Increase in equilibrium price and decrease in quantityUnder free entry and exit, firms in a perfectly competitive market:
a) Earn supernormal profits in equilibrium
b) Earn losses in equilibrium
c) Earn normal profits in equilibrium
d) Have no fixed equilibrium
Answer: c) Earn normal profits in equilibriumWhen a price floor is set above the equilibrium price:
a) Excess supply is created
b) Excess demand is created
c) Market clears naturally
d) Supply decreases to match demand
Answer: a) Excess supply is createdWhich of the following scenarios leads to a black market?
a) Imposition of price floors
b) Removal of all government interventions
c) Imposition of price ceilings below equilibrium price
d) Decrease in consumer income
Answer: c) Imposition of price ceilings below equilibrium price
What does the term "excess demand" refer to?
a) Market demand exceeds market supply
b) Market supply exceeds market demand
c) Both demand and supply are equal
d) There is no production in the market
Answer: a) Market demand exceeds market supplyWhat is the role of the 'Invisible Hand' in a competitive market?
a) To decrease prices in all situations
b) To ensure equilibrium is achieved by adjusting prices
c) To regulate firm profits
d) To enforce government policies
Answer: b) To ensure equilibrium is achieved by adjusting pricesHow is the equilibrium wage rate determined in a perfectly competitive labour market?
a) At the intersection of labour demand and supply curves
b) By government-imposed minimum wage
c) By maximizing the marginal product of labour
d) Through negotiations between workers and firms
Answer: a) At the intersection of labour demand and supply curvesWhat happens when the number of firms increases in a competitive market?
a) Supply decreases, and prices rise
b) Supply increases, and prices fall
c) Demand increases, and prices rise
d) Demand remains unchanged, and prices rise
Answer: b) Supply increases, and prices fallWhat is the impact of free entry and exit on a market?
a) Firms always earn supernormal profits
b) Prices fluctuate above and below average cost
c) Firms earn normal profits in the long run
d) Market demand exceeds supply continuously
Answer: c) Firms earn normal profits in the long runWhich factor can cause a rightward shift in the demand curve?
a) Increase in consumer incomes for a normal good
b) Increase in input costs for production
c) Decrease in consumer incomes for an inferior good
d) Technological advancements in production
Answer: a) Increase in consumer incomes for a normal goodWhat causes a backward-bending individual labour supply curve?
a) Decreasing wages
b) Substitution effect outweighing income effect at low wages
c) Income effect outweighing substitution effect at high wages
d) Both b and c
Answer: d) Both b and cWhat happens if the demand and supply curves shift rightward simultaneously?
a) Equilibrium price always increases
b) Equilibrium quantity increases, and price may vary
c) Equilibrium price decreases, and quantity may vary
d) Equilibrium quantity and price remain constant
Answer: b) Equilibrium quantity increases, and price may varyWhat is the effect of a government-imposed price floor?
a) It creates a market shortage
b) It creates a market surplus
c) It always reduces equilibrium price
d) It eliminates market disequilibrium
Answer: b) It creates a market surplusWhat happens when the price of an input increases in the market for a good?
a) Supply curve shifts rightward
b) Supply curve shifts leftward
c) Demand curve shifts rightward
d) Equilibrium quantity increases
Answer: b) Supply curve shifts leftward
What is the equilibrium quantity when demand and supply curves intersect?
a) Quantity demanded exceeds quantity supplied
b) Quantity supplied exceeds quantity demanded
c) Quantity demanded equals quantity supplied
d) Quantity depends on the elasticity of supply
Answer: c) Quantity demanded equals quantity suppliedWhich of the following causes an increase in equilibrium price?
a) Rightward shift of the demand curve
b) Rightward shift of the supply curve
c) Leftward shift of the demand curve
d) Both supply and demand curves shift rightward equally
Answer: a) Rightward shift of the demand curveHow does a price ceiling below equilibrium affect the market?
a) No effect on supply and demand
b) Creates excess demand
c) Creates excess supply
d) Eliminates shortages
Answer: b) Creates excess demandWhat is the primary goal of imposing a price floor?
a) To make goods affordable to consumers
b) To ensure suppliers earn a minimum income
c) To eliminate excess supply
d) To increase government revenue
Answer: b) To ensure suppliers earn a minimum incomeWhen firms freely enter a market, the equilibrium price:
a) Is determined by government policy
b) Equals the minimum average cost
c) Exceeds the marginal cost
d) Falls below the marginal cost
Answer: b) Equals the minimum average costIn a perfectly competitive market, if price is above equilibrium, what happens?
a) Prices increase further
b) Demand increases, reducing excess supply
c) Excess supply drives prices downward
d) Market remains in equilibrium
Answer: c) Excess supply drives prices downwardHow does an increase in the price of a substitute affect a good’s demand?
a) Demand increases for the good
b) Demand decreases for the good
c) Demand remains unchanged
d) Supply decreases for the good
Answer: a) Demand increases for the goodWhat determines the shape of a labour supply curve?
a) Consumer income and preferences
b) Substitution and income effects of wages
c) Firm costs and technology
d) Availability of substitutes for labour
Answer: b) Substitution and income effects of wagesWhat happens to price and quantity when both demand and supply shift leftward?
a) Price increases, and quantity increases
b) Price decreases, and quantity decreases
c) Price may vary, but quantity decreases
d) Price and quantity remain constant
Answer: c) Price may vary, but quantity decreasesWhat is the likely consequence of an upward-sloping supply curve in a market?
a) Prices fall with increasing quantity supplied
b) Prices rise as more quantity is supplied
c) Prices remain constant with changes in quantity supplied
d) No impact on market equilibrium
Answer: b) Prices rise as more quantity is supplied
What happens to the equilibrium quantity when consumer income rises for an inferior good?
a) It increases
b) It decreases
c) It remains unchanged
d) It becomes zero
Answer: b) It decreasesWhat is the primary assumption of a perfectly competitive labour market?
a) Firms determine wage rates
b) Labour is the only variable factor
c) Firms maximize profits by lowering wages
d) Government controls wages
Answer: b) Labour is the only variable factorHow is the equilibrium number of firms determined under free entry and exit?
a) By total market demand divided by output per firm
b) By government-imposed price floors
c) By profit-maximizing behaviour of firms
d) By the number of firms willing to enter the market
Answer: a) By total market demand divided by output per firmWhat shifts the supply curve leftward?
a) Improvement in production technology
b) Increase in input costs
c) Decrease in consumer income
d) Increase in the number of firms
Answer: b) Increase in input costsWhich factor increases the elasticity of demand for a good?
a) Availability of close substitutes
b) Lack of substitutes
c) Higher production costs
d) Government price control
Answer: a) Availability of close substitutesWhat happens to wages in a perfectly competitive market when demand for labour increases?
a) Wages increase
b) Wages decrease
c) Wages remain unchanged
d) Labour supply decreases
Answer: a) Wages increaseWhat creates a black market under price controls?
a) Prices set above equilibrium
b) Prices set below equilibrium
c) No government intervention
d) High consumer incomes
Answer: b) Prices set below equilibriumWhat is the likely outcome of government purchase of surplus goods due to a price floor?
a) Increased consumer surplus
b) Market shortage
c) Reduced government expenditure
d) Removal of excess supply
Answer: d) Removal of excess supplyWhen demand shifts rightward, what happens under free entry and exit?
a) Equilibrium price increases, and quantity remains constant
b) Equilibrium price remains constant, and quantity increases
c) Both equilibrium price and quantity increase
d) Both equilibrium price and quantity decrease
Answer: b) Equilibrium price remains constant, and quantity increasesHow is equilibrium quantity affected when supply shifts rightward?
a) It increases
b) It decreases
c) It remains constant
d) It depends on the elasticity of demand
Answer: a) It increases
What happens to the equilibrium price if demand increases while supply remains unchanged?
a) Price increases
b) Price decreases
c) Price remains constant
d) Supply decreases
Answer: a) Price increasesWhich curve represents the marginal cost of hiring additional labour?
a) Supply curve for labour
b) Marginal revenue product curve
c) Marginal cost curve of goods
d) Labour demand curve
Answer: d) Labour demand curveWhat causes a rightward shift in the supply curve?
a) Technological advancements in production
b) Increase in consumer preferences
c) Decrease in prices of substitute goods
d) Increase in taxes on inputs
Answer: a) Technological advancements in productionIn a perfectly competitive market, how are profits determined in the long run?
a) Firms earn supernormal profits
b) Firms earn normal profits
c) Firms incur losses
d) Firms manipulate prices to maximize profits
Answer: b) Firms earn normal profitsWhat determines the wage rate in a competitive labour market?
a) Collective bargaining by unions
b) Intersection of supply and demand for labour
c) Government-mandated minimum wage
d) Profit margins of firms
Answer: b) Intersection of supply and demand for labourWhat happens when the price of an input decreases?
a) Supply curve shifts rightward
b) Supply curve shifts leftward
c) Demand curve shifts rightward
d) Equilibrium price increases
Answer: a) Supply curve shifts rightwardWhat is the impact of a decrease in the number of firms on supply?
a) Supply curve shifts leftward
b) Supply curve shifts rightward
c) Demand curve shifts rightward
d) Equilibrium price decreases
Answer: a) Supply curve shifts leftwardWhat is the equilibrium outcome when both demand and supply curves shift leftward equally?
a) Equilibrium price and quantity decrease
b) Equilibrium price remains constant, quantity decreases
c) Equilibrium quantity remains constant, price decreases
d) Equilibrium price and quantity remain unchanged
Answer: b) Equilibrium price remains constant, quantity decreasesWhat is the main goal of imposing a price ceiling?
a) To ensure higher profits for producers
b) To make goods affordable for consumers
c) To reduce supply in the market
d) To stabilize the equilibrium quantity
Answer: b) To make goods affordable for consumersWhat happens when excess supply exists in a market?
a) Prices increase to eliminate the surplus
b) Prices decrease to restore equilibrium
c) Prices remain stable due to consumer preferences
d) Demand increases to match supply
Answer: b) Prices decrease to restore equilibrium
MCQs: Set 6 (51–60)
What does the term "normal profit" imply in a perfectly competitive market?
a) Profit earned above total costs
b) Profit earned just enough to cover opportunity costs
c) Profit below average costs
d) Profit determined by government policy
Answer: b) Profit earned just enough to cover opportunity costsWhat causes the equilibrium price to fall in a perfectly competitive market?
a) Rightward shift in the supply curve
b) Rightward shift in the demand curve
c) Leftward shift in the demand curve
d) Both a and c
Answer: d) Both a and cWhat happens in a market when both demand and supply increase but supply increases more?
a) Price decreases, and quantity increases
b) Price increases, and quantity decreases
c) Both price and quantity increase
d) Price remains constant, and quantity decreases
Answer: a) Price decreases, and quantity increasesWhat is the result of a leftward shift in both demand and supply curves, with supply decreasing more?
a) Price increases, and quantity decreases
b) Price decreases, and quantity increases
c) Both price and quantity remain constant
d) Quantity remains constant, and price increases
Answer: a) Price increases, and quantity decreasesIn the labour market, what happens when the wage rate is below equilibrium?
a) Excess supply of labour
b) Excess demand for labour
c) Wage rate decreases further
d) No effect on demand or supply
Answer: b) Excess demand for labourWhat is a common consequence of imposing a price floor?
a) Creation of black markets
b) Reduction in consumer demand
c) Excess supply in the market
d) Decrease in producer income
Answer: c) Excess supply in the marketWhat occurs when government removes a price ceiling?
a) Equilibrium price decreases
b) Market returns to its natural equilibrium
c) Excess demand persists
d) Supply curve shifts leftward
Answer: b) Market returns to its natural equilibriumWhat drives the 'Invisible Hand' in a market?
a) Government regulations
b) Self-interested objectives of buyers and sellers
c) Fixed number of firms
d) Price controls by central authority
Answer: b) Self-interested objectives of buyers and sellersHow does the price of complementary goods affect a good's demand?
a) Increase in price of one reduces demand for the other
b) Increase in price of one increases demand for the other
c) Demand remains unaffected
d) Both goods’ supply increases
Answer: a) Increase in price of one reduces demand for the otherWhat happens to equilibrium price and quantity when a tax is imposed?
a) Price increases, and quantity decreases
b) Price decreases, and quantity increases
c) Price and quantity remain unaffected
d) Both price and quantity increase
Answer: a) Price increases, and quantity decreases
What happens to equilibrium quantity when both demand and supply curves shift rightward equally?
a) Equilibrium quantity remains constant
b) Equilibrium price remains constant, quantity increases
c) Equilibrium price increases, quantity decreases
d) Equilibrium price decreases, quantity increases
Answer: b) Equilibrium price remains constant, quantity increasesWhat causes an increase in equilibrium quantity while price remains unchanged in a market with free entry and exit?
a) Rightward shift in the supply curve
b) Rightward shift in the demand curve
c) Increase in input prices
d) Leftward shift in both curves
Answer: b) Rightward shift in the demand curveHow is the market supply curve derived?
a) By adding the demand curves of individual firms
b) By aggregating the supply of all firms at various prices
c) By multiplying the marginal cost of each firm
d) By subtracting demand from available quantity
Answer: b) By aggregating the supply of all firms at various pricesWhat is the relationship between marginal revenue product and wage rate in labour demand?
a) Wage rate is always greater than marginal revenue product
b) Marginal revenue product equals wage rate at optimal employment
c) Wage rate is always less than marginal revenue product
d) Wage rate is independent of marginal revenue product
Answer: b) Marginal revenue product equals wage rate at optimal employmentWhich factor leads to a leftward shift in the demand curve?
a) Increase in consumer income for a normal good
b) Increase in the price of a complementary good
c) Decrease in input prices
d) Improvement in production technology
Answer: b) Increase in the price of a complementary goodWhat is the impact of a simultaneous rightward shift in both demand and supply curves, with demand shifting more?
a) Equilibrium price increases, and quantity decreases
b) Equilibrium price increases, and quantity increases
c) Equilibrium price decreases, and quantity remains constant
d) Equilibrium price decreases, and quantity increases
Answer: b) Equilibrium price increases, and quantity increasesWhat happens when the minimum wage is set above the equilibrium wage rate?
a) Labour market clears efficiently
b) Excess supply of labour (unemployment) occurs
c) Wages fall to match equilibrium
d) Demand for labour exceeds supply
Answer: b) Excess supply of labour (unemployment) occursWhat is the primary reason for the backward-bending labour supply curve?
a) Wages decrease at high employment levels
b) Income effect outweighs substitution effect at higher wages
c) Substitution effect outweighs income effect at higher wages
d) Workers prefer leisure over income at low wages
Answer: b) Income effect outweighs substitution effect at higher wagesWhich market scenario best describes excess demand?
a) Supply exceeds demand at prevailing prices
b) Demand exceeds supply at prevailing prices
c) Price remains stable despite disequilibrium
d) Both demand and supply are equal but not at equilibrium price
Answer: b) Demand exceeds supply at prevailing pricesWhat happens to market equilibrium when firms exit due to high costs?
a) Price increases, and quantity increases
b) Price increases, and quantity decreases
c) Price decreases, and quantity increases
d) Price decreases, and quantity decreases
Answer: b) Price increases, and quantity decreases
MCQs: Set 8 (71–80)
What occurs when the government imposes a tax on producers?
a) Supply curve shifts rightward
b) Supply curve shifts leftward
c) Demand curve shifts rightward
d) No change in supply or demand curves
Answer: b) Supply curve shifts leftwardWhat happens in a market when demand decreases while supply remains constant?
a) Equilibrium price increases, and quantity decreases
b) Equilibrium price decreases, and quantity decreases
c) Equilibrium price increases, and quantity increases
d) Equilibrium price decreases, and quantity increases
Answer: b) Equilibrium price decreases, and quantity decreasesWhat is a likely outcome of an upward shift in the marginal cost curve?
a) Supply decreases, causing a leftward shift in the supply curve
b) Supply increases, causing a rightward shift in the supply curve
c) No impact on supply or equilibrium
d) Equilibrium price remains constant
Answer: a) Supply decreases, causing a leftward shift in the supply curveHow is equilibrium determined in a market with fixed firms?
a) By maximizing consumer surplus
b) At the intersection of demand and supply curves
c) By government intervention
d) By minimizing production costs
Answer: b) At the intersection of demand and supply curvesWhat effect does a government subsidy for producers have on the supply curve?
a) Supply curve shifts leftward
b) Supply curve shifts rightward
c) Demand curve shifts rightward
d) Demand curve shifts leftward
Answer: b) Supply curve shifts rightwardWhat happens when consumers’ preferences shift away from a product?
a) Supply increases to meet new demand
b) Demand decreases, causing a leftward shift in the demand curve
c) Demand increases, causing a rightward shift in the demand curve
d) Supply remains constant at all price levels
Answer: b) Demand decreases, causing a leftward shift in the demand curveWhat causes the equilibrium quantity to decrease in a competitive market?
a) Rightward shift of the supply curve
b) Leftward shift of the supply curve
c) Technological advancements in production
d) Increased consumer income for normal goods
Answer: b) Leftward shift of the supply curveWhat determines the shape of a demand curve?
a) Consumer preferences and income levels
b) Costs of production
c) Government-imposed price floors
d) Marginal productivity of inputs
Answer: a) Consumer preferences and income levelsWhat happens to price and quantity if supply increases but demand decreases?
a) Price increases, and quantity decreases
b) Price decreases, and quantity increases
c) Price decreases, and quantity may increase or decrease
d) Both price and quantity increase
Answer: c) Price decreases, and quantity may increase or decreaseWhat is the effect of a leftward shift in both demand and supply curves?
a) Price and quantity both decrease
b) Price remains constant, and quantity decreases
c) Quantity remains constant, and price decreases
d) Price increases, and quantity remains constant
Answer: a) Price and quantity both decrease
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