AP_Krugman_Textbook

94 section 2 Supply and Demand

5. Which of the following would decrease the effect of a quota on
   a market? A(n)
   a. decrease in demand
   b. increase in supply

c. increase in demand

d. price ceiling above the equilibrium price

e. none of the above

Tackle the Test: Free-Response Questions

1. Draw a correctly labeled graph illustrating hypothetical supply
   and demand curves for the U.S. automobile market. Label the
   equilibrium price and quantity. Suppose the government
   institutes a quota to limit automobile production. Draw a
   vertical line labeled “Qineffective” to show the level of a quota that
   would have no effect on the market. Draw a vertical line labeled
   “Qeffective” to show the level of a quota that would have an effect
   on the market. Shade in and label the deadweight loss resulting
   from the effective quota.

Answer (5 points)

1 point:Correctly labeled supply and demand diagram (vertical axis labeled
“Price” or “P,” horizontal axis labeled “Quantity” or “Q,” upward sloping supply
curve with label, downward sloping demand curve with label)

1 point:Equilibrium at the intersection of supply and demand with the
equilibrium price labeled on the vertical axis and the equilibrium quantity
labeled on the horizontal axis

1 point:Vertical line to the right of equilibrium quantity labeled Qineffective

1 point:Vertical line to the left of equilibrium quantity labeled Qeffective

1 point:The triangle to the right of the effective quota line and to the left of
supply and demand shaded in and labeled as the deadweight loss

Quantity

Price

S

D

E

Qeffective QE Qineffective

PE

Deadweight

loss

2. Draw a correctly labeled graph of the market for taxicab rides.
   On the graph, draw and label a vertical line showing the level of
   an effective quota. Label the demand price, the supply price,
   and the quota rent.

Summary

1.The supply and demand modelillustrates how a com-

petitive market,one with many buyers and sellers of

the same product, works.

2.The demand scheduleshows the quantity demanded

at each price and is represented graphically by a de-

mand curve.The law of demandsays that demand

Section 2 Review