Tutorial Chapter 4 Demand & Supply

1. TutorialChapter 4Demand & Supply

2. 1. At a given time and in a given marketplace, the entire market demand curve indicates the a. quantity of a good consumers would be willing and able to purchase at a given price. b. quantity of a good consumers would be able to purchase at a series of prices. c. quantity of a good consumers want to purchase at a given price d. quantity of a good consumers have purchased at a series of prices over the year. B. Demand curves measure the relationship between a series of prices and quantities demanded, not just one price and quantity.

3. 2. Assume Samantha likes hot dogs and hamburgers equally, and the price of hamburgers (a normal good) declines. She will most likely purchase more hamburgers; this is a reflection of the a. income effect. b. substitution effect. c. income and substitution effects. B. The substitution effect is when the price of a good falls, consumers will substitute it for other goods, which are now relatively more expensive. The income effect is when the fall in the price of a good increases consumer’s real income, making them more able to purchase all goods.

4. 3. If the price of a good declines from $5.00 per unit to $4.00 per unit, and you continue to purchase 5 units of this good, as you had in the past, your real income has a. decreased by $5.00. b. increased by $4.00. c. decreased by $4.00. d. increased by $5.00. D. Real income is income measured in terms of the goods and services it can buy. In this case, a fall in the price of $1.00 and you buy 5 units, your buying power increased by $5.00.

5. 4. When the price of a normal good declines, you have a. an income effect but no substitution effect. b. a substitution effect but no income effect. c. no income effect or substitution effect. d. an income effect and a substitution effect. D. A normal good is one that consumers will buy more of as their income increases. The income effect recognizes that consumers will buy more of a good when their incomes increase, the substitution effect recognizes that consumers will or will not buy an alternative product based on the relative price difference.

6. 5. A typical demand curve will normally have a a. positive slope. b. horizontal slope. c. vertical slope. d. negative slope. D. A negative slope is a downward slope from left to right. With price on the vertical axis and quantity on the horizontal axis, price and quantity will always move in the opposite direction.

7. 6. The negative slope of a demand curve implies that as the price a. declines, quantity demanded increases. b. declines, quantity demanded decreases. c. increases, quantity demanded increases. d. increases, the demand curve becomes steeper. A. As price changes the demand itself does not change because the curve itself remains fixed. What changes is the quantity demanded which is measured on the horizontal axis.

8. 7. In moving along a given demand curve, quantity changes in response to a change in a. consumer taste. b. consumer incomes. c. consumer expectations. d. the price of the good. D. There is a difference between the terms a “change in demand” and a “change in the quantity demanded.” A change in demand means the whole curve changes. A change in the quantity demanded means that there is a movement along a stationary demand curve.

9. 8. Which of the following would not be considered a normal good? a. Steaks. b. Flour. c. Oranges. d. Meals at restaurants. B. Flour is a product that people will not necessarily buy more of just because their income increases.

10. 9. Which of the following would not be considered compliments? a. Shoes and socks. b. Tennis racquet and tennis balls. c. Coke and Pepsi. d. Automobiles and gasoline. C. Compliments are goods that are used together, like bread and butter. Coke and Pepsi are substitutes for one another.

11. 10. Which of the following would not be considered substitutes? a. Butter and margarine. b. Coke and Pepsi. c. Fords and Chevrolets. d. Hamburgers and French fries. D. Although hamburgers and French fries can be considered substitutes because they are both food, of the choices given above, the other choices are more substitutes than are hamburgers and French fries.

12. 11. The price of Ford automobiles increases and the price of Chevrolets remains constant, the demand for Chevrolets will a. increase. b. decrease. c. decrease then increase. d. increase then decrease. A. A factor that will cause a shift in demand is when the price of a substitute good changes. As the price of Ford cars increases, consumers will demand more Chevrolets because of the relative price difference.

13. 12. As the wage (price) of computer programmers increases, more college students are willing to major in computers. This is known as the law of a. demand. b. variable proportions. c. supply. C. As a college student you are interested in majoring in subjects that will make you marketable when it comes time to look for a job. As wages for computer programmers increase, more college students will choose to major in computers. As the wage of social workers decreases, fewer students will choose social work.

14. 13. In the case of a normal good, an increase in consumers’ incomes would shift the a. demand curve inward. b. supply curve inward. c. supply curve outward. d. demand curve outward. D. A normal good is a good that consumers will buy more of as their income increases.

15. 14. An improvement in technology would shift the a. demand curve inward. b. demand curve outward. c. supply curve inward. d. supply curve outward. D. For example, as technological improvements are applied to manufacturing computers, suppliers of computers are able to supply more computers at every price level.

16. Exhibit 4-1 S Price D' D 0 Quantity 17 19 21 23 18 20 22

17. 15. Refer to Exhibit 4-1. A shift from demand curve D to D` would illustrate a(n) a. decrease in demand. b. decrease in quantity demanded. c. increase in quantity demanded. d. increase in demand. D. This represents an increase in demand.

18. 16. Refer to Exhibit 4-1. Which of the following would cause a shift from D to D`? a. An increase in the number of consumers. b. An increase in the price of a complementary good. c. A decline in consumers’ incomes. d. A decline in consumer optimism. A. The number of consumers in the market will result in an increase in the demand for a good or service. Likewise, a decrease in the number of consumers in the market will lead to a decrease.

19. 17. Refer to Exhibit 4-1. Which of the following would cause a shift in demand from D` to D? a. An increase in the price of a substitute good. b. An increase in the number of consumers. c. A decrease in the price of a complementary good. d. a decline in consumers’ incomes if it is a normal good. D. If it is a normal good consumer’s will buy fewer units as their income decreases. A shift to the left of the demand curve represents a decrease in demand.

20. 18. In Exhibit 4-1, a shift from D to D`, given the supply curve, would result in a. a decrease in quantity supplied. b. an increase in supply . c. a decrease in supply. d. an increase in quantity supplied. D. A shift to the right of a demand curve along an upward sloping supply curve (all supply curves are upward sloping) will cause the equilibrium price to increase and the equilibrium quantity to increase.

21. 19. In Exhibit 4-1, which of the following could not cause the shift from D to D`? a. A decrease in the price of a complement. b. An increase in the price of a substitute. c. A decrease in the price of the good in question. d. An increase in the number of consumers. C. A change in the price of a good does not change the demand curve, it changes the quantity demanded as measured on the horizontal axis. When price changes, there is a movement along the curve, but the curve itself does not change.

22. 20. Which of the following would correctly explain the slopes of S and D in Exhibit 4-1? a. Improved technology increased demand. b. An increase in income caused an increase in the demand and ultimately the supply of this normal good. c. A decrease in income caused the demand to increase for this inferior good and the higher price caused an increase in quantity supplied. C. Consumers will buy more of an inferior good as their income decreases because they will buy less of the normal good. An increase in price will give the suppliers an incentive to increase the quantity supplied and vice versa.

23. 21. If S and D are the original supply and demand curves, which of the following could not cause the change indicated in Exhibit 4-1? a. A decrease in income and the good is inferior. b. A decrease in the price of a complement. c. An increase in the number of consumers. d. A decrease in the cost of producing the good. D. In the above choices, a, b, and c will effect the demand curve. Only choice d will effect the supply curve.

24. Exhibit 4-2 S S’ Price D 0 Quantity 25 26 27 28 29

25. 22. Refer to Exhibit 4-2. A shift from S to S` would illustrate a. a decrease in supply. b. a decrease in quantity supplied. c. an increase in quantity supplied. d. an increase in supply. D. A movement to the right of a curve represents an increase.

26. 23. Refer to Exhibit 4-2. Which of the following would not cause the shift from S to S`? a. An increase in the price of resources. b. An improvement in technology. c. A decline in taxes. d. An increase in the number of producers. A. An increase in the price of resources would shift the supply curve to the left, not to the right. The increase in costs would lesson the ability of the supplier to supply at each price level.

27. 24. Refer to Exhibit 4-2. Which of the following would not cause the shift from S` to S? a. An improvement in technology. b. A decline in the number of producers. c. An increase in taxes. d. An increase in the price of resources. A. An improvement in technology would shift the supply curve to right. An improvement in technology would increase the ability to supply more units at each price level.

28. 25. Refer to Exhibit 4-2. A shift inward from supply curve S` to S, given the demand curve, would result in a(n) a. increase in demand. b. increase in quantity demanded. c. decrease in demand. d. decrease in quantity demanded. D. A shift in the supply curve will occur along the demand curve. So as the supply curve shifts to the left along the demand curve, there will be fewer units demanded at each price level.

29. 26. Assume S and D are the original supply and demand curves. Which of the following would correctly explain the change illustrated in Exhibit 4-2? a. An increase in income for a normal good. b. Consumers form more favorable expectations. c. A decrease in the wage rate for specialized labor. C. Because wages are a cost to a business, as the wage rate declines, costs decline. Any decline in costs will enable the supplier to supply more units of the good at each price level; thus the supply curve shifts to the right.

30. Exhibit 4-3 S A B $3 $2 Price $1 D C D Quantity 31 33 35 37 32 34 36

31. 27. Refer to Exhibit 4-3. At a price of $1.00, the a. market generates a shortage. b. market generates a surplus. c. market generates equilibrium. d. supply will shift outward. A. A shortage occurs because the quantity demanded is less than the quantity supplied.

32. 28. Refer to Exhibit 4-3. At a price of $2.00, a. the market generates a shortage. b. the market generates a surplus. c. the market generates equilibrium. d. quantity supplied exceeds quantity demanded. C. Equilibrium price is the price toward which the economy tends. In this case, if the price is above $2, the resultant surplus will cause the price to decline; if the price is below $2, the resultant shortage will cause the price to increase.

33. 29. Refer to Exhibit 4-3. At a price of $3.00, the a. demand curve will shift outward. b. market generates a surplus. c. market generates a shortage. d. supply curve will shift inward. B. At a price of $3, the quantity demanded is less than the quantity supplied casing a surplus.

34. 30. Refer to Exhibit 4-3. A shortage would be properly indicated by the distance a. A - B. b. A - D. c. C - D. d. B - C. C. C represents the quantity demanded at $1, and D represents the quantity supplied at $1.

35. 31. Refer to Exhibit 4-3. If the price is $3, then we would expect to find a a. surplus of A - D. b. surplus of A - B. c. shortage of A - B. d. shortage of B - C. B. The distance between A and B represents a surplus because the number of units supplied is greater than the number of units demanded.

36. 32. Which of the following is most accurate if a ceiling price of $1 is imposed on the market illustrated in Exhibit 4-3? a. Both C and D could occur simultaneously. b. Either C or D would occur, but not both. c. A shortage will exist; however, eventually supply will shift out to alleviate the shortage. d. A chronic shortage will persist unless something else changes. D. In a free market the price would increase upward toward $2, but with a price ceiling this is not allowed to happen. Therefore, there will persist a shortage of the distance between C and D.

37. 33. Which of the following is most accurate with respect to Exhibit 4-3? a. A surplus will occur if the price is $1. b. Equilibrium will occur at a price of $2. d. A shortage will occur if the price is $3. B. Any price above or below $2 will result in either a surplus or a shortage, therefore, price will tend back toward $2.

38. 34. Which of the following is correct? a. Gasoline prices increased causing shortages. b. A decline in the price of bread created a surplus. c. The high price of diamonds reflect scarcity. d. Rent for apartments around campus has increased so much that the demand has decreased (shifted backward). C. When there is not enough of a good for everyone to have all they want at a zero price (it is scarce), it will have a price to determine who gets and who does not get. The more scarce something is, the higher the price to solve the allocation problem.

39. 35. A shift outward in supply curve will result in equilibrium price a. increasing and quantity increasing. b. increasing and quantity decreasing. c. decreasing and quantity increasing. d. decreasing and quantity decreasing. C. This is simple geometry. Draw a downward sloping demand curve and an upward sloping supply curve. When you move the supply curve to the right it is obvious that the market price will decline and the market quantity will increase.

40. 36. A reduction in the number of producers will result in equilibrium price a. increasing and quantity increasing. b. increasing and quantity decreasing. c. decreasing and quantity increasing. d. decreasing and quantity decreasing. B. Producers are suppliers. When the supply curve shifts to the left, market price increases and the quantity supplied decreases.

41. 37. A shift inward in demand curve will result in equilibrium price a. increasing and quantity decreasing. b. increasing and quantity increasing. c. decreasing and quantity decreasing. d. decreasing and quantity increasing. C. A shift inward means that the demand curve is decreasing, or shifting to the left. If you draw this out on a piece of paper, it is made obvious that the market price will decrease and the market quantity will decrease.

42. 38. As a certain type of clothing becomes more fashionable, we would expect its equilibrium price a. to decrease and quantity will remain constant. b. and quantity will decrease. c. to increase and quantity to decrease. d. and quantity to increase. D. This is because there will be an outward shift of the demand curve.

43. 39. If supply and demand both shift outward but supply shifts outward more than demand, the equilibrium price will a. increase and quantity will decrease. b. increase and quantity will increase. c. decrease and quantity will decrease. d. decrease and quantity will increase. D. This is the same thing as saying that supply shifts to the right. It is shifting to the right relative to demand. If you draw this out on a piece of paper, it is obvious that the equilibrium price will decrease and the equilibrium quantity will increase.

44. 40. If supply and demand both shift outward, but demand shifts outward more than supply, the equilibrium price will a. increase and quantity will increase. b. increase and quantity will decrease. c. decrease and quantity will decrease. d. decrease and quantity will increase. A. This is the same thing as saying that demand shifts to the right relative to supply. If you draw this out on a piece of paper, it is obvious that both price and quantity increases.

45. 41. At Christmas time often a certain toy or doll becomes increasingly popular; this is primarily due to a(n) a. surplus. b. increase in demand. c. increase in supply. d. decrease in supply. B. An increase in demand means that consumers will demand more units at every price level.

46. 42. Which of the following is correct for a price floor set above the equilibrium price? a. Quantity supplied is less than quantity demanded at the set price. b. At the set price there will be a shortage. c. Quantity supplied exceeds quantity demanded at the set price. C. A price floor exists when some authority mandates that the price will not fall below a certain level. The minimum wage law is an example of this. If the market price is below this mandated price level, there will be more units supplied than there are units demanded.

47. 43. Which of the following is correct for the price ceiling which is set below the market’s equilibrium price? a. Quantity demanded exceeds quantity supplied at the set price. b. Quantity demanded is less than quantity supplied at the set price. c. At the set price there is a surplus. A. A price ceiling occurs when an authority mandates that the price cannot go above a certain level. When this happens, the quantity demanded is greater than the quantity supplied, causing a shortage.

48. 44. The Environmental Protection Agency recently increased clean air requirements for business firms. In the marketplaces for goods produced by these firms, we would expect to find price a. increases and quantity increases. b. increases and quantity decreases. c. decreases and quantity increases. d. decreases and quantity decreases. B. As the supply curve shifts to the left there will be an increase in the equilibrium price and a decrease in the equilibrium quantity as the supply curve moves along a stationary demand curve.

49. 45. In order to park on campus, one must purchase an expensive parking permit; yet there still is difficulty finding a parking spot. This indicates a. parking permits are priced to high. b. parking permits are priced to low. c. we need more parking spots. d. the first year students should not be allowed to have cars on our campus. B. The price of the parking tickets did not deter enough people from wanting to park on campus.

50. 46. Let’s say the government enacted emergency legislation which established a price ceiling for gasoline below the current market price, a. the price would decline and the quantity sold would increase. b. the price would decline and the quantity sold would decrease. c. with the new lower price a surplus would occur. B. The price would decline by government edict, but the quantity sold would decrease as the supplier would have less incentive to supply at the lower price.