Price determination: Practice Questions

In a market for a normal good, what is the most likely effect of a simultaneous increase in consumer incomes and an increase in the cost of raw materials used in production?

A government decides to subsidise a necessity good where the Price Elasticity of Demand (PED) is \(-0.2\) and the Price Elasticity of Supply (PES) is \(1.5\). Which of the following statements regarding the incidence of the subsidy is correct?

If the price of a commodity increases from \(£20\) to \(£24\) and the quantity supplied by firms increases from \(1,000\) units to \(1,100\) units, calculate the price elasticity of supply (PES) and identify the nature of the supply.

A specific indirect tax is applied to a market with a straight-line downward sloping demand curve and an upward sloping supply curve. The tax causes the equilibrium quantity traded to decrease. At this new, lower quantity, how has the incidence of the tax shifted compared to the original equilibrium?

Define producer surplus and explain how it is represented on a market diagram in relation to the equilibrium price.

A government imposes a specific indirect tax on gasoline. If the price elasticity of demand (PED) for gasoline is calculated as \( -0.4 \) and the price elasticity of supply (PES) is \( 1.2 \), explain how the incidence of the tax is primarily distributed between consumers and producers.

If the government provides a specific subsidy to a market where both demand and supply are price inelastic, explain the relative gain in consumer surplus compared to the gain in producer surplus.