Senior Secondary (HKDSE) · Economics
5 multiple-choice questions marked as you go, and 3 written questions with worked solutions. All on Interaction between demand, supply and price.
In the market for Good X, a major technological breakthrough significantly lowers the cost of producing Good X. Assuming all other factors remain constant (ceteris paribus), what will be the effect on the equilibrium price and equilibrium quantity of Good X?
Assume that apples and oranges are substitutes. If a severe pest infestation destroys a large portion of the orange crop, what will be the effect on the market for apples?
Leather and beef are in joint supply. If a health-conscious trend causes a significant decrease in the demand for beef, what will happen to the equilibrium price and quantity of leather?
If a popular celebrity starts a new fashion trend by wearing a specific brand of sneakers, how will the equilibrium price and quantity of these sneakers be affected in the short run?
If the price of Good A increases and this leads to an increase in the demand for Good B, what is the most likely relationship between Good A and Good B?
Suppose the market price of a good is currently set above its equilibrium level. Briefly explain how the price mechanism will adjust the market back to equilibrium.
Write your answer out first, then check it against the worked solution.
Consider the market for coffee in a city, which is initially in equilibrium. Suppose the following two events occur at the same time:
(1) A poor harvest in major coffee-producing regions leads to a sharp increase in the price of raw coffee beans.
(2) The price of sugar, which is a complement to coffee for many consumers, increases significantly.
(a) With the aid of a supply-demand diagram, explain the effect of the increase in the price of raw coffee beans on the equilibrium price and quantity of coffee. (2 points)
(b) Explain how the increase in the price of sugar affects the demand for coffee. (2 points)
(c) Determine the combined effect of these two events on the equilibrium price and quantity of coffee. (2 points)
Write your answer out first, then check it against the worked solution.
The market for residential solar energy systems (solar panels) in an economy is initially in equilibrium \(E_0\) with price \(P_0\) and quantity \(Q_0\). Solar panels are known to be a superior good.
(a) Suppose the following two events occur simultaneously:
(i) A significant breakthrough in manufacturing technology substantially lowers the marginal cost of producing solar panels.
(ii) The government implements a large income tax reduction, leading to a substantial increase in average household disposable income.
Analyse the effect of these two simultaneous events on the equilibrium price and equilibrium quantity of solar panels. Clearly state whether the change in price and quantity is definite or indeterminate. (4 marks)
(b) Assume the analysis in Part (a) results in a new equilibrium \(E_1\) where both the equilibrium price and equilibrium quantity have increased (i.e., the shift in demand was greater than the shift in supply). To ensure producers receive a fair return for their investment, the government subsequently imposes an effective price floor, \(P_f\), in this market.
Analyse the impact of this price floor on consumer surplus, producer surplus, and the efficiency of resource allocation in the solar panel market. (4 marks)
Write your answer out first, then check it against the worked solution.
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