EC 101.03 Exercises for Chapter 4 FALL 2010

1. Which of the following might cause the demand curve for an inferior good to shift to the left?

a. / a decrease in income
b. / an increase in the price of a substitute
c. / an increase in the price of a complement
d. / None of the above is correct.

ANS: C

2. An increase in the price of rubber coincides with an advance in the technology of tire production. As a result of these two events,

a. / the demand for tires decreases and the supply of tires increases.
b. / the demand for tires is unaffected and the supply of tires decreases.
c. / the demand for tires is unaffected and the supply of tires increases.
d. / None of the above is necessarily correct.

ANS: D

3. Which of the following is not a characteristic of a perfectly competitive market?

a. / Different sellers sell identical products.
b. / There are many sellers.
c. / Sellers must accept the price the market determines.
d. / All of the above are characteristics of a perfectly competitive market.

ANS: D

4. Which of the following would not shift the demand curve for mp3 players?

a. / a decrease in the price of mp3 players
b. / a fad that makes mp3 players more popular among 12-25 year olds
c. / an increase in the price of CDs, a complement for mp3 players
d. / a decrease in the price of satellite radio, a substitute for mp3 players

ANS: A

5. You lose your job and, as a result, you buy fewer romance novels. This shows that you consider romance novels to be a(n)

a. / luxury good.
b. / inferior good.
c. / normal good.
d. / complementary good.

ANS: C

6. Currently you purchase 6 packages of hot dogs a month. You will graduate from college in December, and you will start a new job in January. You have no plans to purchase hot dogs in January. For you, hot dogs are

a. / a substitute good.
b. / a normal good.
c. / an inferior good.
d. / a complementary good.

ANS: C

7. Ford Motor Company announces that next month it will offer $3,000 rebates on new Mustangs. As a result of this information, today’s demand curve for Mustangs

a. / shifts to the right.
b. / shifts to the left.
c. / shifts either to the right or to the left, but we cannot determine the direction of the shift from the given information.
d. / will not shift; rather, the demand curve for Mustangs will shift to the right next month.

ANS: B

8. The supply curve for coffee

a. / shifts when the price of coffee changes because the price of coffee is measured on the vertical axis of the graph.
b. / shifts when the price of coffee changes because the quantity supplied of coffee is measured on the horizontal axis of the graph.
c. / does not shift when the price of coffee changes because the price of coffee is measured on the vertical axis of the graph.
d. / does not shift when the price of coffee changes because the quantity supplied of coffee is measured on the horizontal axis of the graph.

ANS: C

9. Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If the federal government increases the minimum wage by $1.00 per hour, then it is likely that the

a. / demand for bicycle assembly workers will increase.
b. / supply of bicycles will shift to the right.
c. / supply of bicycles will shift to the left.
d. / firm must increase output to maintain profit levels.

ANS: C

10. Funsters, Inc., the largest toy company in the country, sells its most popular doll for $15. It has just learned that its leading competitor, Toysorama, is mass-producing an excellent copy and plans to flood the market with their $5 doll in 6 weeks. Funsters should

a. / “fight fire with fire” by decreasing supply of its doll for 6 weeks and then increasing the supply.
b. / increase the supply of their doll now before the other doll hits the market.
c. / increase the price of their doll now.
d. / discontinue their doll.

ANS: B

11.

a. / Given the table below, graph the demand and supply curves for flashlights. Make certain to label the equilibrium price and equilibrium quantity.
Price / Quantity Demanded Per Month / Quantity Supplied Per Month
$5 / 6,000 / 10,000
$4 / 8,000 / 8,000
$3 / 10,000 / 6,000
$2 / 12,000 / 4,000
$1 / 14,000 / 2,000
b. / What is the equilibrium price and the equilibrium quantity?
c. / Suppose the price is currently $5. What problem would exist in the market? What would you expect to happen to price? Show this on your graph.
d. / Suppose the price is currently $2. What problem would exist in the market? What would you expect to happen to price? Show this on your graph.

ANS:

a. /
b. / The equilibrium price (Pe) is $4 and the equilibrium quantity (Qe) is 8,000.
c. / A surplus of 4,000 flashlights would be the problem in the market, and we would expect the price to fall.
d. / A shortage of 8,000 flashlights would be the problem in the market, and we would expect the price to rise.

12. Suppose we are analyzing the market for hot chocolate. Graphically illustrate the impact each of the following would have on demand or supply. Also show how equilibrium price and equilibrium quantity would change.

a. / Winter starts and the weather turns sharply colder.
b. / The price of tea, a substitute for hot chocolate, falls.
c. / The price of cocoa beans decreases.
d. / The price of whipped cream falls.
e. / A better method of harvesting cocoa beans is introduced.
f. / The Surgeon General of the U.S. announces that hot chocolate cures acne.
g. / Protesting farmers dump millions of gallons of milk, causing the price of milk to rise.
h. / Consumer income falls because of a recession, and hot chocolate is considered a normal good.
i. / Producers expect the price of hot chocolate to increase next month.
j. / Currently, the price of hot chocolate is $0.50 per cup above equilibrium.

ANS:

(a) (b)

(c) (d)

(e) (f)

(g) (h)

(i) (j)

In (j), a price above equilibrium will affect both quantity demanded and quantity supplied and will cause a surplus in the market. It will not cause either demand or supply to shift.

Table 4-7

The demand schedule below pertains to sandwiches demanded per week.

Price / Charlie’s Quantity Demanded / Maxine’s Quantity Demanded / Quinn’s Quantity Demanded
$3 / 3 / 4 / 3
$5 / 1 / 2 / x

13. Refer to Table 4-7. Regarding Charlie and Maxine, whose demand for sandwiches conforms to the law of demand?

a. / only Charlie’s
b. / only Maxine’s
c. / both Charlie’s and Maxine’s
d. / neither Charlie’s nor Maxine’s

ANS: C

14. Refer to Table 4-7. Regarding Charlie and Maxine, for whom are sandwiches a normal good?

a. / only for Charlie
b. / only for Maxine
c. / for Charlie and for Maxine
d. / This cannot be determined from the given information.

ANS: D

15. Refer to Table 4-7. Suppose x = 1. Then it must be true that

a. / Charlie and Quinn have the same income, which is lower than Maxine’s income.
b. / if sandwiches and potato chips are complements for Charlie, then those two goods are also complements for Quinn.
c. / Charlie’s demand curve is identical to Quinn’s demand curve.
d. / All of the above are correct.

ANS: C

16. Refer to Table 4-7. Suppose x = 1. Then the slope of the market demand curve is

a. / -3.
b. / -1/3.
c. / 1/3.
d. / 3.

ANS: B

17. Refer to Table 4-7. Suppose Charlie, Maxine, and Quinn are the only demanders of sandwiches. Also suppose x = 2. Then

a. / the slope of Quinn’s demand curve is -1/2 and the slope of the market demand curve is -5/2.
b. / the slope of Quinn’s demand curve is -1/2 and the slope of the market demand curve is -2/5.
c. / the slope of Quinn’s demand curve is -2 and the slope of the market demand curve is -5/2.
d. / the slope of Quinn’s demand curve is -2 and the slope of the market demand curve is -2/5.

ANS: D

18. Refer to Table 4-7. Suppose Charlie, Maxine, and Quinn are the only demanders of sandwiches and that the market demand violates the law of demand. Then, in the table,

a. / x 5.
b. / x 5.
c. / x 7.
d. / x 10.

ANS: C

19. Refer to Table 4-7. Suppose Charlie, Maxine, and Quinn are the only demanders of sandwiches. Also suppose the following:

• x = 2

• the current price of a sandwich is $5.00

• the market quantity supplied of sandwiches is 10

• the law of supply applies to the supply of sandwiches

Then

a. / there is a shortage of 5 sandwiches and the price would be expected to rise from its current level of $5.00.
b. / there is a shortage of 5 sandwiches and the price would be expected to fall from its current level of $5.00.
c. / there is a surplus of 5 sandwiches and the price would be expected to rise from its current level of $5.00.
d. / there is a surplus of 5 sandwiches and the price would be expected to fall from its current level of $5.00.

ANS: D

20. Refer to Table 4-7. Suppose Charlie, Maxine, and Quinn are the only demanders of sandwiches. Also suppose the following:

• x = 2

• the current price of a sandwich is $3.00

• the market quantity supplied of sandwiches is 4

• the slope of the supply curve is 2

Then

a. / there is currently a shortage of 6 sandwiches and the equilibrium price of a sandwich is less than $3.00.
b. / there is currently a shortage of 6 sandwiches and the equilibrium price of a sandwich is $5.00.
c. / there is currently a surplus of 6 sandwiches and the equilibrium price of a sandwich is less than $3.00.
d. / there is currently a surplus of 6 sandwiches and the equilibrium price of a sandwich is $5.00.

ANS: B

21. Refer to Table 4-7. Suppose Charlie, Maxine, and Quinn are the only demanders of sandwiches. Also suppose the following:

• x = 2

• the current price of a sandwich is $3.00

• the market quantity supplied of sandwiches is 5

• the slope of the supply curve is 1

Then

a. / there is currently a shortage of 5 sandwiches and the equilibrium price of a sandwich is between $3.00 and $5.00.
b. / there is currently a shortage of 5 sandwiches and the equilibrium price of a sandwich is $5.00.
c. / there is currently a surplus of 5 sandwiches and the equilibrium price of a sandwich is between $3.00 and $5.00.
d. / there is currently a surplus of 5 sandwiches and the equilibrium price of a sandwich is $5.00.

ANS: A

22. Saddle shoes are not popular right now, so very few are being produced. If saddle shoes become popular, then how will this affect the market for saddle shoes?

a. / The supply curve for saddle shoes will shift right, which will create a shortage at the current price. That will increase price, which will decrease quantity demanded and increase quantity supplied. The new market equilibrium will be at a higher price and higher quantity.
b. / The supply curve for saddle shoes will shift right, which will create a surplus at the current price. That will decrease price, which will increase quantity demanded and decrease quantity supplied. The new market equilibrium will be at a lower price and higher quantity.
c. / The demand curve for saddle shoes will shift right, which will create a shortage at the current price. That will increase price, which will decrease quantity demanded and increase quantity supplied. The new market equilibrium will be at a higher price and higher quantity.
d. / The demand curve for saddle shoes will shift right, which will create a surplus at the current price. That will decrease price, which will increase quantity demanded and decrease quantity supplied. The new market equilibrium will be at a lower price and higher quantity.

ANS: C

23. What will happen to the equilibrium price and quantity of new cars if the price of gasoline rises, the price of steel rises, public transportation becomes cheaper and more comfortable, and auto-workers negotiate higher wages?

a. / Price will fall and the effect on quantity is ambiguous.
b. / Price will rise and the effect on quantity is ambiguous.
c. / Quantity will fall and the effect on price is ambiguous.
d. / Quantity will rise and the effect on price is ambiguous.

ANS: C

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