Demand and Supply
Problem Set #2: Demand, Supply, and Market Equilibrium Key Concepts Demand: - quantity demanded of goods & services at each market price for all prices ceteris paribus. Supply: - quantity supplied of goods and services at each market price for all prices ceteris paribus Note: Do not confuse quantity demanded (supplied) at a particular price with Demand (Supply) which encompasses the quantities demanded (supplied) for all prices. Normal Good: Demand positively related to Income changes Inferior Good: Demand negatively related to Income changes Complement: Used with another commodity (or factor) Substitute: Used in place of another commodity (or factor) Equilibrium: state of rest (no tendency to change) Problems 1.
Use demand and supply diagrams to illustrate the effect on equilibrium price and quantity in the market for the normal good automobilies of each of the following events (considered separately), ceteris paribus: a) an increase in average household income b) a large increase in the price of public transit. c) a large increase in the price of gasoline. d) a decrease in the price of sheet metal. e) an increase in the wage rate of auto workers. f) an increase in the price of metal shavings, a complement in production
2.
More gasoline and more tomatoes are sold in the summer than in the winter, even though gasoline prices tend to be at their highest and tomato prices at their lowest in the summer. Can you make sense of these facts with supply-and-demand diagrams? Multiple Choice
1.
The Law of Demand says that a) Demand is inversely related to price b)Demand is positively related to price c) Quantity demanded rises when price falls and falls when price rises d) Quantity demanded falls when price falls and rises when price rises e)only a/ and c/ are correct
2.
If the demand for sugar decreases when the price of honey falls, then sugar a)is a normal good b) is an inferior good c) is a substitute for honey in consumption d) is a complement of honey in consumption e) is a complement of honey in production
3.
If potatoes are an inferior good, then an increase in the price of potatoes will cause a/ an increase in the demand for potatoes b/ a decrease in the quantity demanded of potatoes c/ a decrease in the demand for potatoes d/ an increase in the quantity demanded of potatoes e/ a decrease in money income
4.
An increase in the price of Y, a complement of X in consumption, will a/ increase the demand for Y b/ decrease the demand for Y c/ increase the demand for X d/ decrease the demand for X e/ increase the quantity demanded of X -1-
Problem Set #2: Demand, Supply, and Market Equilibrium 5.
If tapes and tape decks are complementary goods in consumption, then a decrease in the price of tape decks will cause which of the following changes in the market equilibrium for tapes? a) a fall in both price and quantity b) a fall in price and rise in quantity c) a rise in price and fall in quantity d) a rise in both price and quantity e) no change in either price or quantity
6.
Beef and hides are complements in production. An increase in demand for hides, ceteris paribus, would cause a a/ decrease in the price of hides and decrease in demand for beef b/ decrease in the price of hides and increase in demand for beef c/ increase in the price of hides and decrease in supply of beef d/ increase in the price of hides and increase in supply of beef e) no change in the price of beef
7.
An increase in household income and a technological change that improves production will cause which of the following equilibrium changes in the market for a normal good? a/ price and quantity would both be higher b/ price and quantity would both be lower c/ price might be higher or lower but the quantity would be higher d/ price would be lower but the quantity would be higher e) price and quantity could be lower or higher
8.
Suppose all farmers grow both wheat and oats for sale. If the price of oats increases, we would predict that farmers would react in such a way that, ceteris paribus, a/ the supply of wheat would increase causing the price of wheat to fall b/ the supply of wheat would decrease causing the price of wheat to rise c/ the price of wheat would not be affected d/ the price of wheat might rise or fall but the supply of wheat would definitely fall. e) the price of wheat would fall
9.
If the quantity demanded of commodity X decreases when the price of X decreases, then X is a/ a substitute good b/ a complementary good c/ a normal good d) a Giffen good e/ an inferior good with an downward sloping demand curve
10. Which of the following would increase quantity demanded for an inferior good ceteris paribus? a) an decrease in the price of the good b) a decrease in income c) an increase in income d) a fall in the price of a substitute good e) a rise in the price of a substitute good 11. Which of the following will decrease the price and increase the quantity of X at equilibrium? a) a decrease in the price of X b) an increase in the supply of X c) a decrease in the price of a substitute good in consumption d) a decrease in income if X is an inferior good e) a decrease in the price of a complement good in consumption 12. If the demand for X rises when the price of Y rises, then X in relation to Y is a) a complement b) a substitute c) a normal good d) an inferior good e) resource input 13. If the demand for X rises when the price of Y falls, then X in relation to Y is -2-
Problem Set #2: Demand, Supply, and Market Equilibrium a) a complement c) a normal good e) a Giffen good
b) a substitute d) an inferior good
14. A shift in Canadian consumers' demand for beef could be caused by a) a decrease in the number of beef farmers in Canada b) a change in the price of pork (a substitute in consumption for beef) c) a change in the price of beef d) the introduction of a quota on imported beef e) more than one of the above 15. The demand curve for shrimp would decrease if a) disposable incomes increase and shrimp was a normal good b) disposable incomes decrease and shrimp was an inferior good c) the price of white wine (a complementary good) decreases d) the price of salmon (a substitute good) decreases Solutions (Note: The answers assume equilibrium in the short run - the period in which capital is fixed -, a concept examined later) 1.a)
b)
d)
c)
e)
2. People drive their cars more in the summer and the increased demand for gas increases the price of gas. The increased supply of tomatoes in the summer decreases the price of tomatoes. Draw diagrams to illustrate these two points.
Multiple Choice 1.
c)
8.
b)
15.
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d
Problem Set #2: Demand, Supply, and Market Equilibrium 2. 3. 4. 5. 6. 7.
c) b) d) d) d) c)
9. 10. 11. 12. 13. 14.
d) a), b), or e) b) b) a) b)
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Problem Set #2: Demand, Supply, and Market Equilibrium Could ask the impact on the equilibrium price and quantity of the normal goods and complements in production ,hides and of beef, e.g., ceteris paribus, given an increase in the income. Demand for hides and beef will increase due to income and the supply of both will increase because the price of the other increases. 1. Real Investment is a/ the creation of capital goods b/ depends upon savings, i.e., abstention from consumption c/ the financial and physical assets used to make other goods d/ all of the above e/ only a/ and b/ are correct 2.
The relative scarcity of resources a/ limits a society's ability to satisfy its members wants b/ is indicated by relative prices c/ necessitates choice in the allocation of resources d/ all of the above e/ only a/ and c/ are correct
5.
Opportunity Cost is a/ the cost of resources used in production b/ the cost of the foregone alternative c/ the money price of a good or service d/ the cost of the factors of production e/ none of the above
22. A Production Possibilities Curve demonstrates a) the relative scarcity of resources b) the need for choice to satisfy societal wants c) society's ability to choose among maximum output combinations d) all of the above, i.e., a, b, and c are correct e) only that a) and b) are correct e/
Compare the equilibrium positions, consumer surplus, and cost to the government of the price floor (Question 4)relative to the subsidy. Which policy would you recommend? Briefly explain your answer. (3 marks)
b) A politician argues that the benefit of a per unit subsidy will accrue entirely to producers if the demand for a commodity is perfectly elastic and the supply curve is upward sloping. Prove the truth or falsity of this statement by drawing a diagram incorporating this information. Be sure to indicate the original equilibrium price (Po), the equilibrium price with the subsidy (Ps), and the net price for the producers after the subsidy. Explain your answer briefly. (5 marks) 7.
Orange juice: orange pulp as a complement in production; oranges as an input
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Use demand and supply diagrams to illustrate the effect on equilibrium price and quantity in the market for the normal good automobilies of each of the following events (considered separately), ceteris paribus: a) an increase in average household income b) a large increase in the price of public transit. c) a large increase in the price of gasoline. d) a decrease in the price of sheet metal. e) an increase in the wage rate of auto workers. f) an increase in the price of metal shavings, a complement in production
2.
More gasoline and more tomatoes are sold in the summer than in the winter, even though gasoline prices tend to be at their highest and tomato prices at their lowest in the summer. Can you make sense of these facts with supply-and-demand diagrams? Multiple Choice
1.
The Law of Demand says that a) Demand is inversely related to price b)Demand is positively related to price c) Quantity demanded rises when price falls and falls when price rises d) Quantity demanded falls when price falls and rises when price rises e)only a/ and c/ are correct
2.
If the demand for sugar decreases when the price of honey falls, then sugar a)is a normal good b) is an inferior good c) is a substitute for honey in consumption d) is a complement of honey in consumption e) is a complement of honey in production
3.
If potatoes are an inferior good, then an increase in the price of potatoes will cause a/ an increase in the demand for potatoes b/ a decrease in the quantity demanded of potatoes c/ a decrease in the demand for potatoes d/ an increase in the quantity demanded of potatoes e/ a decrease in money income
4.
An increase in the price of Y, a complement of X in consumption, will a/ increase the demand for Y b/ decrease the demand for Y c/ increase the demand for X d/ decrease the demand for X e/ increase the quantity demanded of X -1-
Problem Set #2: Demand, Supply, and Market Equilibrium 5.
If tapes and tape decks are complementary goods in consumption, then a decrease in the price of tape decks will cause which of the following changes in the market equilibrium for tapes? a) a fall in both price and quantity b) a fall in price and rise in quantity c) a rise in price and fall in quantity d) a rise in both price and quantity e) no change in either price or quantity
6.
Beef and hides are complements in production. An increase in demand for hides, ceteris paribus, would cause a a/ decrease in the price of hides and decrease in demand for beef b/ decrease in the price of hides and increase in demand for beef c/ increase in the price of hides and decrease in supply of beef d/ increase in the price of hides and increase in supply of beef e) no change in the price of beef
7.
An increase in household income and a technological change that improves production will cause which of the following equilibrium changes in the market for a normal good? a/ price and quantity would both be higher b/ price and quantity would both be lower c/ price might be higher or lower but the quantity would be higher d/ price would be lower but the quantity would be higher e) price and quantity could be lower or higher
8.
Suppose all farmers grow both wheat and oats for sale. If the price of oats increases, we would predict that farmers would react in such a way that, ceteris paribus, a/ the supply of wheat would increase causing the price of wheat to fall b/ the supply of wheat would decrease causing the price of wheat to rise c/ the price of wheat would not be affected d/ the price of wheat might rise or fall but the supply of wheat would definitely fall. e) the price of wheat would fall
9.
If the quantity demanded of commodity X decreases when the price of X decreases, then X is a/ a substitute good b/ a complementary good c/ a normal good d) a Giffen good e/ an inferior good with an downward sloping demand curve
10. Which of the following would increase quantity demanded for an inferior good ceteris paribus? a) an decrease in the price of the good b) a decrease in income c) an increase in income d) a fall in the price of a substitute good e) a rise in the price of a substitute good 11. Which of the following will decrease the price and increase the quantity of X at equilibrium? a) a decrease in the price of X b) an increase in the supply of X c) a decrease in the price of a substitute good in consumption d) a decrease in income if X is an inferior good e) a decrease in the price of a complement good in consumption 12. If the demand for X rises when the price of Y rises, then X in relation to Y is a) a complement b) a substitute c) a normal good d) an inferior good e) resource input 13. If the demand for X rises when the price of Y falls, then X in relation to Y is -2-
Problem Set #2: Demand, Supply, and Market Equilibrium a) a complement c) a normal good e) a Giffen good
b) a substitute d) an inferior good
14. A shift in Canadian consumers' demand for beef could be caused by a) a decrease in the number of beef farmers in Canada b) a change in the price of pork (a substitute in consumption for beef) c) a change in the price of beef d) the introduction of a quota on imported beef e) more than one of the above 15. The demand curve for shrimp would decrease if a) disposable incomes increase and shrimp was a normal good b) disposable incomes decrease and shrimp was an inferior good c) the price of white wine (a complementary good) decreases d) the price of salmon (a substitute good) decreases Solutions (Note: The answers assume equilibrium in the short run - the period in which capital is fixed -, a concept examined later) 1.a)
b)
d)
c)
e)
2. People drive their cars more in the summer and the increased demand for gas increases the price of gas. The increased supply of tomatoes in the summer decreases the price of tomatoes. Draw diagrams to illustrate these two points.
Multiple Choice 1.
c)
8.
b)
15.
-3-
d
Problem Set #2: Demand, Supply, and Market Equilibrium 2. 3. 4. 5. 6. 7.
c) b) d) d) d) c)
9. 10. 11. 12. 13. 14.
d) a), b), or e) b) b) a) b)
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Problem Set #2: Demand, Supply, and Market Equilibrium Could ask the impact on the equilibrium price and quantity of the normal goods and complements in production ,hides and of beef, e.g., ceteris paribus, given an increase in the income. Demand for hides and beef will increase due to income and the supply of both will increase because the price of the other increases. 1. Real Investment is a/ the creation of capital goods b/ depends upon savings, i.e., abstention from consumption c/ the financial and physical assets used to make other goods d/ all of the above e/ only a/ and b/ are correct 2.
The relative scarcity of resources a/ limits a society's ability to satisfy its members wants b/ is indicated by relative prices c/ necessitates choice in the allocation of resources d/ all of the above e/ only a/ and c/ are correct
5.
Opportunity Cost is a/ the cost of resources used in production b/ the cost of the foregone alternative c/ the money price of a good or service d/ the cost of the factors of production e/ none of the above
22. A Production Possibilities Curve demonstrates a) the relative scarcity of resources b) the need for choice to satisfy societal wants c) society's ability to choose among maximum output combinations d) all of the above, i.e., a, b, and c are correct e) only that a) and b) are correct e/
Compare the equilibrium positions, consumer surplus, and cost to the government of the price floor (Question 4)relative to the subsidy. Which policy would you recommend? Briefly explain your answer. (3 marks)
b) A politician argues that the benefit of a per unit subsidy will accrue entirely to producers if the demand for a commodity is perfectly elastic and the supply curve is upward sloping. Prove the truth or falsity of this statement by drawing a diagram incorporating this information. Be sure to indicate the original equilibrium price (Po), the equilibrium price with the subsidy (Ps), and the net price for the producers after the subsidy. Explain your answer briefly. (5 marks) 7.
Orange juice: orange pulp as a complement in production; oranges as an input
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