Chapter 3
Market Supply and Demand
1. Which of the following causes the demand for veggie burgers to increase?
a. A decline in the price of veggie burgers.
b. An increase in the price of tofu burgers, perceived as a substitute by veggie burger consumers.
c. An increase in the price of burger buns.
d. A technological innovation that lowers the cost of producing veggie burgers.
ANS
a. Incorrect. Remember that a decline in price causes movement down along a demand curve (thus increasing quantity demanded), but price does not cause a shift in demand.
b. Correct. An increase in the price of a consumer substitute will cause some consumers of tofu-burgers to shift to veggie-burgers, causing an increase in the demand for veggie-burgers.
c. Incorrect. Buns are a complement to burgers, and an increase in bun prices will reduce demand for burgers.
d. Incorrect. This will increase the supply curve, not the demand curve.
2. Which of the following would not cause market demand for a normal good to decline?
a. An increase in the price of a substitute.
b. An increase in the price of a complement.
c. A decline in consumer income.
d. Consumer expectations that the good will go on sale in the near future.
e. An announcement by the Surgeon General that the product contributes to premature death.
ANS
a. Correct. This will increase demand.
b. Incorrect. This will decrease demand.
c. Incorrect. This will decrease demand.
d. Incorrect. This will decrease current demand.
e. Incorrect. This will decrease demand.
3. Low-income families consume proportionately more of which of the following kinds of goods?
a. Luxury goods.
b. Substitute goods.
c. Normal goods.
d. Inferior goods.
ANS
a. Incorrect. Higher income families will consume proportionately more luxury goods.
b. Incorrect. Without knowing more about the substitute, we cannot say that there is any relationship between income and the consumption of substitute goods.
c. Incorrect. Higher income families will consume proportionately more normal goods.
d. Correct. For inferior goods, demand increases when income decreases.
4. Suppose that each of the seven dwarfs buys 4 mugs of ginger ale per week from Snow White's cafe‚ when the price per mug is $2. If the seven dwarfs are the entire market demand for Snow White's ginger ale, then which of the following is the correct value for market quantity demanded of ginger ale at a price of $2?
a. 4.
b. 8.
c. 28.
d. 7.
ANS
a. Incorrect. This is the quantity demanded of only one of the seven dwarfs.
b. Incorrect. See the correct answer under c. below.
c. Correct. Market quantity demanded is the sum of each consumer's quantity demanded at the prevailing price.
d. Incorrect. This is the number of dwarfs and not the total quantity demanded.
5. Which of the following increases the supply of corn?
a. The farm worker's union successfully negotiates a pay increase for corn harvest workers.
b. The Surgeon General announces that eating corn bread contributes to baldness in men.
c. Congress and the president eliminate subsidies formerly paid to corn farmers.
d. Farmers who grow soybeans can also grow corn, and the price of soybeans drops by 75 percent.
ANS
a. Incorrect. This will raise production costs and decrease corn supply.
b. Incorrect. This will reduce corn demand.
c. Incorrect. This will raise the full cost of growing corn, and thus will decrease corn supply.
d. Correct. Many soybean farmers will shift to growing corn, which increases the number of corn sellers and thus increases corn supply.
6. With an upward-sloping supply curve, which of the following is true?
a. An increase in price results in a decrease in quantity supplied.
b. An increase in price results in an increase in supply.
c. A decrease in price results in a decrease in quantity supplied.
d. A decrease in price results in an increase in supply.
ANS
a. Incorrect. This results in an “increase in quantity supplied.”
b. Incorrect. This results in an “increase in quantity supplied.”
c. Correct. This is a direct relationship between changes in price and quantity supplied.
d. Incorrect. This results in a “decrease in quantity supplied.”
7. A rightward shift in the demand curve is called a(an)
a. decrease in output.
b decrease in demand.
c. increase in demand.
d. increase in income.
ANS
a. Incorrect. It is an increase in demand.
b. Incorrect. It is an increase in demand.
c. Correct. Both phrases explains the same situation.
d. Incorrect. It is an increase in demand.
8. A surplus occurs when the
a. quantity demanded exceeds the quantity supplied.
b. price is below the equilibrium price.
c. price is at the equilibrium.
d. price is above the equilibrium.
ANS
a. Incorrect. This is a shortage.
b. Incorrect. This will cause a shortage.
c. Incorrect. There is neither a shortage nor a surplus at the equilibrium price.
d. Correct. This will cause a surplus.
9. A shortage occurs when the
a. quantity supplied exceeds the quantity demanded.
b. price is below the equilibrium price.
c. price is at the equilibrium.
d. price is above the equilibrium.
ANS
a. Incorrect. This is a surplus.
b. Correct. This will cause a shortage.
c. Incorrect. There is neither a shortage nor a surplus at the equilibrium price.
d. Incorrect. This will cause a surplus.
10. Which of the following decreases supply in the market for pizza?
a. Pizza shop employees successfully organize a union and negotiate a pay increase.
b. The Surgeon General announces that eating pizza reduces the incidence of stomach cancer.
c. Cheese prices drop because price supports for dairy farmers are removed.
d. Some hot sandwich shops can also make and sell pizzas, and consumer demand for hot sandwiches declines sharply, reducing the profitability of producing hot sandwiches.
ANS
a. Correct. This will raise production costs and decrease the pizza supply.
b. Incorrect. This will tend to increase demand.
c. Incorrect. This will reduce the cost of producing pizzas, and thus will increase supply.
d. Incorrect. This will tend to cause sandwich shops to convert to producing pizza, which will increase the supply of pizza.
11. Which of the following results from an increase in the price of a one-week vacation at beach resorts on the coast of Mexico?
a. An increase in the supply of bicycle tires in Toledo, Ohio.
b. An increase in the demand for vacations at resorts on Caribbean islands.
c. An increase in the supply of vacation opportunities at resorts on the coast of Mexico.
d. A decrease in the demand for vacations at resorts on Caribbean islands.
ANS
a. Incorrect. There is no obvious relationship between vacations at Mexican beach resorts and the supply of bicycle tires in Toledo.
b. Correct. The Caribbean and Mexico are substitutes in the market for tropical resort vacations, and when the price of Mexican vacations rises, some people who were considering going to Mexico will instead go to a Caribbean island.
c. Incorrect. An increase in price moves us along a given supply curve, but does not result in an increase in supply.
d. Incorrect. The effect is just the opposite.
12. There is news that the price of Tucker’s Root Beer will increase significantly next week. If the demand for Tucker’s Root Beer reacts only to this factor and shifts to the right, the position of this demand curve has reacted to a change in
a. tastes.
b. income levels.
c. the prices of related goods.
d. the number of buyers.
e. expectations.
ANS
a. Incorrect. Preferences are not anticipation of a future price change.
b. Incorrect. Income levels are not anticipation of a future price change.
c. Incorrect. The prices of related goods are not anticipation of a future price change.
d. Incorrect. The number of buyers is not anticipation of a future price change.
e. Correct. The present demand curve can shift when consumers anticipate future price changes.
13. Which of the following causes a shortage to become larger?
a. An increase in market price.
b. An increase in supply.
c. A decrease in demand.
d. A decrease in price.
ANS
a. Incorrect. This will reduce a shortage by increasing quantity supplied and decreasing quantity demanded.
b. Incorrect. An increase in supply will reduce or eliminate a shortage.
c. Incorrect. A decrease in demand will reduce or eliminate a shortage.
d. Correct. This will increase a shortage by increasing quantity demanded and decreasing quantity supplied.
14. Which of the following is true in ski-towns such as Crested Butte, Colorado and Whistler, British Columbia during the peak winter ski season as compared to the months of May and June?
a. Demand for motel rooms is higher.
b. Demand for motel rooms is lower.
c. There is a surplus of motel rooms.
d. The price of motel rooms will be lower.
ANS
a. Correct. There are more buyers of rental room services during the peak ski season than in the late spring when the mountains are muddy.
b. Incorrect. There are more buyers of rental room services during the peak ski season than in the late spring when the mountains are muddy.
c. Incorrect. There are more buyers of rental room services during the peak ski season than in the late spring when the mountains are muddy, which if anything will tend to create a shortage rather than a surplus.
d. Incorrect. During peak season when demand for rooms is high, people must generally pay a higher price for rooms than during the "off-peak" season.
15. In moving from a shortage toward the market equilibrium, which of the following is true?
a. Price falls.
b. Price rises.
c. Quantity demanded increases.
d. Quantity supplied decreases.
ANS
a. Incorrect. A lower price would tend to create a larger shortage.
b. Correct. As price rises, quantity demanded falls and quantity supplied rises, eventually eliminating the shortage.
c. Incorrect. Quantity demanded falls as we move from a shortage toward a market equilibrium.
d. Incorrect. Quantity supplied rises as we move from a shortage toward a market equilibrium.
16. The law of demand is the principle that there is ______relationship between the price of a good and the quantity buyers are willing to purchase in a defined time period, ceteris paribus.
a. a direct
b. no
c. an inverse
d. an independent
ANS
a. Incorrect. A direct relationship means that, as price increases, the quantity demanded increases. This is not true for demand.
b. Incorrect. No relationship means that price has no effect on quantity demanded. This is not true for demand.
c. Correct. An inverse relationship means that, as price increases, the quantity demanded decreases. This is true for demand.
d. Incorrect. This means zero relationship between variables.
17. A curve that is derived by summing horizontally individual demand curves is called
a. aggregate supply.
b. market supply.
c. aggregate demand.
d. market demand.
ANS
a. Incorrect. This is a macroeconomic concept.
b. Incorrect. This is a curve that is derived by summing horizontally individual supply curves.
c. Incorrect. This is a macroeconomic concept.
d. Correct. This is the method used to create a market demand curve.
18. A leftward shift in the demand curve is called a(an)
a. decrease in demand.
b. decrease in output.
c. increase in demand.
d. increase in income.
ANS
a. Correct. Both phrases explain the same situation.
b. Incorrect. It is a decrease in demand.
c. Incorrect. It is a decrease in demand.
d. Incorrect. It is a decrease in demand.
19. Under the law of demand, any increase in price will cause ______in quantity demanded.
a. a decrease
b. an increase
c. no change
d. constant change
ANS
a. Correct. The inverse relationship of the law of demand will cause a decrease in quantity demanded.
b. Incorrect. An increase in quantity demanded would mean that the law of demand is a direct relationship. It is an inverse relationship.
c. Incorrect. No change means that price has no effect on quantity demanded. This is not true for demand.
d. Incorrect. This means that price has a fixed effect on quantity demanded. This is not true for demand.
20. The law of supply is the principle that there is ______relationship between the price of a good and the quantity sellers are willing to offer for sale in a defined time period, ceteris paribus.
a. an inverse
b. a direct
c. no
d. an independent
ANS
a. Incorrect. An inverse relationship means that, as price increases, the quantity supplied decreases. This is not true for supply.
b. Correct. A direct relationship means that, as price increases, the quantity supplied increases. This is true for supply.
c. Incorrect. No relationship means that price has no effect on quantity supplied. This is not true for supply.
d. Incorrect. This means that price has a fixed effect on quantity demanded. This is not true for demand.
Exhibit 14 Demand and Supply Data for Video games
Price / Quantity Demandedof Video Games / Quantity Supplied
of Video Games
$75 / 400 / 900
70 / 450 / 850
65 / 500 / 800
60 / 550 / 750
55 / 600 / 700
50 / 650 / 650
45 / 700 / 600
40 / 750 / 550
21. Exhibit 14 presents supply and demand data for the video game market. If the price of video games was currently $70, there would be an ______of ______video games in this market.
a. excess demand; 450
b. excess demand; 500
c. excess supply; 400
d. excess supply; 850
e. excess demand; 400
ANS
a. Incorrect. Only at $70, quantity supplied (850) exceeds quantity demanded (450) by 400.
b. Incorrect. Only at $70, quantity supplied (850) exceeds quantity demanded (450) by 400.
c. Correct. Only at $70, quantity supplied (850) exceeds quantity demanded (450) by 400.
d. Incorrect. Only at $70, quantity supplied (850) exceeds quantity demanded (450) by 400.
e. Incorrect. Only at $70, quantity supplied (850) exceeds quantity demanded (450) by 400.
22. In Exhibit 14, if the price of video games was currently $45, there would be an