- The accompanying figure shows a decrease in demand by
4 million rides, represented by a leftward shift of the
demand curve from D 1 to D 2 : at any given price, the
quantity demanded falls by 4 million rides. (For example,
at a price of $5, the quantity demanded falls from
10 million to 6 million rides per year.) This eliminates
the effect of a quota limit of 8 million rides. At point E 2 ,
the new market equilibrium, the equilibrium quantity is
equal to the quota limit; as a result, the quota has no
effect on the market.
Tackle the Test:
Multiple-Choice Questions
- d
- b
- b
- d
- a
0 6 8 10 12 14
$7.00
6.00
5.00
4.00
3.00
Quantity of rides (millions per year)
Fare
(per ride)
D 1
D 2
S
E 2
E 1
Quota
0891012146
5.50
5.00
4.50
3.00
$7.00
Quantity of rides (millions per year)
Fare
(per ride)
D
S
E
C
D
Deadweight
loss
Tackle the Test:
Free-Response Question
2.
Module 10
Check Your Understanding
- Let’s start by considering the relationship between the total
value added of all domestically produced final goods and
services, and aggregate spending on domestically produced
final goods and services. These two quantities are equal
because every final good and service produced in the econ-
omy is either purchased by someone or added to invento-
ries, and additions to inventories are counted as spending
by firms. Next, consider the relationship between aggregate
spending on domestically produced final goods and ser -
vices and total factor income. These two quantities are
equal because all spending that is channeled to firms to
pay for purchases of domestically produced final goods and
ser vices is revenue for firms. Those revenues must be paid
out by firms to their factors of production in the form of
wages, profit, interest, and rent. Taken together, this means
that all three methods of calculating GDP are equivalent. - Firms make sales to other firms, households, the govern-
ment, and the rest of the world. Households are linked to
firms through the sale of factors of production to firms,
through purchases from firms of final goods and services,
and through lending funds to firms in the financial mar-
kets. Households are linked to the government through
their payment of taxes, their receipt of transfers, and
their lending of funds to the government to finance gov-
ernment borrowing via the financial markets. Finally,
households are linked to the rest of the world through
their purchases of imports and transactions with foreign-
ers in financial markets. - You would be counting the value of the steel twice—once
as it was sold by American Steel to American Motors and
once as part of the car sold by American Motors.
Tackle the Test:
Multiple-Choice Questions
- c
- e
Fare
(per ride)
Quantity of rides
Demand price
Supply price
E
D
S
Quota
rent
Quota
SOLUTIONS TO AP REVIEW QUESTIONS S-7