Economics

Chapter02MarketForces:DemandandSupply
Chapter 02
Market Forces: Demand and Supply
MultipleChoiceQuestions
1.Inacompetitivemarket,themarketdemandisQd=606PandthemarketsupplyisQs=
4P.Apriceceilingof$3willresultina
A.Shortageof30units
b.Surplusof30units
c.Surplusof12units
Difficulty:Medium
4P.Thefulleconomicpriceunderapriceceilingof$3is
a.6
b.7
C.8
d.9
Difficulty:Hard
3.Thebuyersideofthemarketisknownasthe:
a.Incomeside
B.Demandside
c.Supplyside
d.Sellerside
Difficulty:Easy
2-1
4.Thelawofdemandstatesthat,holdingallelseconstant:
a.Aspricefalls,demandwillfallalso
b.Aspricerises,demandwillalsorise
c.Pricehasnoeffectonquantitydemanded
D.Aspricefalls,quantitydemandedrises
Difficulty:Medium
5.WhichofthefollowingwouldnotshiftthedemandforgoodA?
A.DropinpriceofgoodA
b.DropinpriceofgoodB
c.Consumerincome
d.ChangeinthelevelofadvertisingofgoodA
Difficulty:Easy
6.ChangesinthepriceofgoodAleadstoachangein:
a.DemandofgoodA
b.DemandofgoodB
C.ThequantitydemandedofgoodA
d.ThequantitydemandedofgoodB
Difficulty:Medium
7.Achangeinincomewillnotleadto:
A.Amovementalongthedemandcurve
b.Aleftwardshiftofthedemandcurve
c.Arightwardshiftofthedemandcurve
d.Allofthestatementsassociatedwiththequestionarecorrect
Difficulty:Medium
2-2
8.GoodAisaninferiorgood,anincreaseinincomeleadsto:
a.AdecreaseinthedemandforgoodB
B.AdecreaseinthedemandforgoodA
c.AnincreaseinthedemandforgoodA
d.NochangeinthequantitydemandedofgoodA
Difficulty:Easy
9.Whichofthefollowingisprobablynotanormalgood?
a.Designerdresses
b.Lobster
C.Macaroniandcheese
d.Expensiveautomobiles
Difficulty:Easy
10.Anincreaseinthepriceofsteakwillprobablyleadto:
A.Anincreaseindemandforchicken
b.Anincreaseindemandforsteak
c.Nochangeinthedemandforsteakorchicken
d.Anincreaseinthesupplyforchicken
Difficulty:Medium
11.Whichofthefollowingpairsofgoodsareprobablycomplements:
a.Televisionsandrollerskates
b.Frozenyogurtandicecream
c.Steakandchicken
D.Hamburgersandketchup
Difficulty:Easy
2-3
12.IfAandBarecomplements,anincreaseinthepriceofgoodAwould:
a.HavenoeffectonthequantitydemandedofB
b.LeadtoanincreaseindemandforB
C.LeadtoadecreaseindemandforB
d.Noneofthestatementsassociatedwiththisquestionarecorrect
Difficulty:Medium
13.Graphically,adecreaseinadvertisingwillcausethedemandcurveto:
a.Becomesteeper
b.Shiftrightward
c.Becomeflatter
D.Shiftleftward
Difficulty:Easy
14.Persuasiveadvertisinginfluencesdemandby:
a.Providinginformationabouttheavailabilityofaproduct
b.Offeringreducedpricesfortheproduct
C.Alteringtheunderlyingtastesofconsumers
d.Noneofthestatementsarecorrect
Difficulty:Medium
15.Whichofthefollowingcanexplainanincreaseinthedemandforhousinginretirement
communities?
a.Adropinrealestateprices
B.Anincreaseinthepopulationoftheelderly
c.Adropintheaverageageofretirees
d.Mandatorygovernmentlegislation
Difficulty:Medium
2-4
16.Thedemandfunctionrecognizesthatthequantityofagoodconsumeddependson:
a.Thepricesofothergoodsonly
b.Priceandsupplyshifters
C.Demandshiftersandprice
d.Demandshiftersonly
Difficulty:Easy
17.SupposethedemandforgoodXisgivenbyQdX=10+XPX+YPY+MM.Fromthe
lawofdemandweknowthatXwillbe:
A.Lessthanzero
b.Greaterthanzero
c.Zero
Difficulty:Easy
18.SupposethedemandforgoodXisgivenbyQdX=10+XPX+YPY+MM.IfYis
positive,then:
a.Goodsyandxarecomplements
b.Goodsyandxareinferiorgoods
c.Goodsyandxarenormalgoods
D.Goodsyandxaresubstitutes
Difficulty:Easy
19.SupposethedemandforgoodXisgivenbyQdX=10+XPX+YPY+MM.IfMis
negative,thengoodyis:
a.Anormalgood
B.Aninferiorgood
c.Acomplement
d.Asubstitute
Difficulty:Easy
2-5
20.SupposethedemandforgoodXisgivenbyQdX=102PX+PY+M.Thepriceofgood
Xis$1,thepriceofgoodYis$10,andincomeis$100.Giventhesepricesandincome,how
muchofgoodXwillbepurchased?
a.115
b.515
c.1,000
D.Noneofthestatementsassociatedwiththisquestionarecorrect
Difficulty:Medium
21.Otherthingsheldconstant,thegreaterthepriceofagood
a.Thelowerthedemand
b.Thehigherthedemand
c.Thegreatertheconsumersurplus
D.Thelowertheconsumersurplus
Difficulty:Medium
22.Thecurvewhichsummarizesthetotalquantityproducersarewillingandabletoproduce
atdifferingpricesisthe:
a.Marketdemandcurve
b.Consumersurpluscurve
c.Averagecostcurve
D.Marketsupplycurve
Difficulty:Easy
23.Thelawofsupplystatesthat,holdingallelseconstant,asthepriceofagoodfalls:
a.Quantitydemandedrises
B.Quantitysuppliedfalls
c.Quantitysuppliedrises
d.Quantitydemandedfalls
Difficulty:Easy
2-6
24.Theeconomicprinciplethatproducersarewillingtoproducemoreoutputwhenpriceis
highisdepictedbythe:
A.Upwardslopeofthesupplycurve
b.Extremesteepnessofthesupplycurve
c.Downwardslopeofthesupplycurve
d.Interactionofthesupplyanddemandcurves
Difficulty:Easy
25.Forasteelfactory,adecreaseinthecostofelectricitytotheplantwillcausethesupply
curveto:
a.Becomeflatter
b.Shifttotheleft
C.Shifttotheright
d.Becomeparalleltothepriceaxis
Difficulty:Medium
26.Changesinthepriceofagoodleadto:
A.Changesinthequantitysuppliedofthegood
b.Changesinsupply
c.Changesindemand
d.Noeffectsinquantitysuppliedordemanded
Difficulty:Easy
27.Technologicaladvanceswillcausethesupplycurveto:
a.Shifttotheleft
B.Shifttotheright
c.Becomeflatter
d.Becomesteeper
Difficulty:Easy
2-7
28.Anadvaloremtaxcausessupplycurveto:
a.Shifttotheright
b.Becomeflatter
C.Becomesteeper
d.Shifttotheleft
Difficulty:Medium
29.SupposethesupplyofgoodXisgivenbyQSX=10+2PX.HowmanyunitsofgoodXare
producedifthepriceofgoodXis20?
a.10
b.20
c.30
Difficulty:Easy
30.Ifashortageexistsinamarket,thenaturaltendencyisfor:
a.Demandtoincrease
B.Pricetoincrease
c.Quantitysuppliedtodecrease
d.Nochangeinthemarket
Difficulty:Medium
31.SupposemarketdemandandsupplyaregivenbyQd=1002PandQS=5+3P.The
equilibriumpriceis:
a.$15
B.$19
c.$17
d.$20
Difficulty:Medium
2-8
32.SupposemarketdemandandsupplyaregivenbyQd=1002PandQS=5+3P.The
equilibriumquantityis:
a.92
b.81
c.45
D.62
Difficulty:Medium
33.Themaximumlegalpricethatcanbechargedinamarketis:
a.Apricefloor
b.Anadvaloremtax
c.Themarketequilibriumprice
D.Apriceceiling
Difficulty:Easy
34.SupposemarketdemandandsupplyaregivenbyQd=1002PandQS=5+3P.Ifaprice
ceilingof$15isimposed,
a.Therewillbeasurplusof40units
b.Therewillbeneitherasurplusorshortage
c.Therewillbeashortageof40units
D.Therewillbeashortageof20units
Difficulty:Medium
ceilingof$15isimposed,whatwillbetheresultingfulleconomicprice?
a.$19
b.$21
c.$6
D.$25
Difficulty:Medium
2-9
36.Theminimumlegalpricethatcanbechargedinamarketis:
A.Apricefloor
b.Apriceceiling
c.Nonpecuniaryprice
d.Fulleconomicprice
Difficulty:Easy
floorof$30isset,whatwillbesizeoftheresultingsurplus?
a.0
b.45
c.30
D.55
Difficulty:Medium
38.SupposemarketdemandandsupplyaregivenbyQd=1002PandQS=5+3P.Ifthe
governmentsetsapricefloorof$30andagreestopurchaseallsurplusat$30perunit,the
totalcosttothegovernmentwillbe:
A.$1,650
b.$1,375
c.$900
d.$1,125
Difficulty:Medium
39.Ifsteakisanormalgood,whatdoyousupposewouldhappentopriceandquantityduring
aneconomicrecession?
a.Pricewouldincreaseandquantitydecrease
b.Priceandquantitywouldbothincrease
C.Priceandquantitywouldbothdecrease
d.Pricewoulddecreaseandquantityincrease
Difficulty:Medium
2-10
40.Supposeyouproducewoodendesks,andgovernmentlegislationprotectingthespotted
owlhasmadeitmoreexpensiveforyoutopurchasewood.Whatdoyouexpecttohappento
theequilibriumpriceandquantityofwoodendesks?
a.Priceandquantitywillincrease
B.Pricewillincreasebutquantitywilldecrease
c.Priceandquantitywilldecrease
d.Pricewilldecreasebutquantitywillincrease
Difficulty:Medium
41.Supposethatsupplyincreasesanddemanddecreases.Whateffectwillthishaveonprice
andquantity?
a.Pricewillincreaseandquantitymayriseorfall
b.Pricewilldecreaseandquantitywillincrease
c.Pricewilldecreaseandquantitywilldecrease
Difficulty:Hard
42.Supposebothsupplyanddemanddecrease.Whateffectwillthishaveonprice?
a.Itwillfall
b.Itwillrise
C.Itmayriseorfall
d.Itwillremainthesame
Difficulty:Hard
43.Thelawofdemandstatesthatifthepriceofagoodfallsandallotherthingsremainthe
same,the
a.Quantitydemandedofthegoodfalls
B.Quantitydemandedofthegoodrises
c.Demandofthegoodrises
d.Allofthestatementsassociatedwiththisquestionarecorrect
Difficulty:Easy
2-11
44.Demandshiftersdonotinclude
A.Thepriceofthegood
b.Theconsumer'sincome
c.Thelevelofadvertising
d.Thepriceoftheothergoods
Difficulty:Easy
45.Changesinthepriceofothergoodsleadto
a.Achangeinquantitydemanded
B.Achangeindemand
c.Nochangeinthedemandcurve
d.Amovementalongthedemandcurve
Difficulty:Easy
46.GoodXisanormalgoodifanincreaseinincomeleadsto
a.AnincreaseinthesupplyforgoodX
B.AnincreaseinthedemandforgoodX
c.AdecreaseinthedemandforgoodX
d.AdecreaseinthesupplyforgoodX
Difficulty:Easy
47.Whichofthefollowingisleastlikelytobeanormalgood?
a.Steak
b.Airlinetravel
C.Bologna
d.Ahouse
Difficulty:Easy
2-12
48.SupposegoodXisanormalgood.Thenadecreaseinincomewouldleadto
a.Anoutwardshiftofthedemandcurve
B.Aninwardshiftofthedemandcurve
c.Noshiftofthedemandcurve
d.Amovementalongthedemandcurve
Difficulty:Easy
49.Aninferiorgoodisagood
a.Thathaslowquality
B.Thatconsumerspurchaselessofwhentheirincomesarehigher
c.Thatconsumerspurchasemorewhentheirincomesarehigher
d.Ofhighquality
Difficulty:Easy
50.SupposethatgoodXisasubstituteforgoodY.ThenanincreaseinthepriceofgoodY
leadsto
A.AnincreaseinthedemandofgoodX
b.AdecreaseinthedemandofgoodX
c.AdecreaseinthesupplyofgoodX
d.AnincreaseinthesupplyofgoodX
Difficulty:Medium
51.Whichofthefollowingareleastlikelytobesubstitutes?
a.Chickenandbeef
b.Carsandtrucks
c.Automobileandhousing
D.Automobileandgasoline
Difficulty:Easy
2-13
52.GoodYisacomplementtogoodXifanincreaseinthepriceofgoodYleadsto
a.AnincreaseinthedemandforgoodX
b.AnincreaseinthesupplyforgoodX
C.AdecreaseinthedemandforgoodX
d.AdecreaseinthesupplyforgoodX
Difficulty:Medium
53.Whichofthefollowingareleastlikelytobecomplements?
a.Peanutbutterandjelly
b.Breadandbutter
c.Sportscoatsanddressslacks
D.Carsandtrucks
Difficulty:Medium
54.Firmsadvertiseinordertocausethedemandfortheirproductsto
A.Shifttotheright
b.Shifttotheleft
c.Remainunchanged
d.Allofthestatementsassociatedwiththisquestionarecorrect
Difficulty:Easy
55.Advertisingprovidesconsumerswithinformationabouttheunderlyingexistenceor
qualityofaproduct.Thesetypesofadvertisingmessagesarecalled
a.Persuasiveadvertising
B.Informativeadvertising
c.Greenadvertising
d.Influentialadvertising
Difficulty:Easy
2-14
56.Advertisingcaninfluencedemandbyalteringtastesofconsumers.Thistypeof
advertisingisknownas
A.Persuasiveadvertising
b.Informativeadvertising
c.Strategicadvertising
d.Influentialadvertising
Difficulty:Easy
57.Whichofthefollowingstatementsisincorrect?
a.Asthepopulationrises,themarketdemandcurveshiftstotheright
b.Asagreaterfractionofthepopulationbecomeselderly,thedemandformedicalservices
willtendtoincrease
c.Changesinthecompositionofthepopulationaffectthedemandforaproduct
D.Noneofthestatementsassociatedwiththisquestionareincorrect
Difficulty:Medium
58.Ifconsumersexpectfuturepricestobehigher
a.Theysubstitutecurrentpurchasesforfuturepurchasesofperishableproducts
B.Stockpilingwillhappenwhenproductsaredurableinnature
c.Thepositionofthedemandwillnotchange
d.Thedemandforautomobilestodaywillnotchange
Difficulty:Medium
59.Thedemandfunction
a.DescribeshowmuchofgoodXwillbepurchasedatthealternativepriceofgoodX,given
alltheothervariablesbeingconstant
B.Recognizesthatthequantityofagoodconsumeddependsonitspriceanddemandshifters
c.ShowstherelationshipbetweenthequantitydemandedofXandvariablesotherthanits
price
d.Doesnotincludeexpectations
Difficulty:Hard
2-15
60.Whichofthefollowingisalineardemandfunction?
A.QXd=0+XPX+YPY+MM+HH
b.QXd=0PXXPYYMaMHH
c.QXd=0+XPX2+YPY2+MM2+MH2
d.QXd=0+XlogPX+YlogPY+MlogM+MlogH
Difficulty:Easy
61.GoodXisanormalgoodanditsdemandisgivenbyQXd=0+XPX+YPY+MM+
HH.
Thenweknowthat
a.H>0
b.X>0
c.Y>0
D.M>0
Difficulty:Medium
62.SupposeXandYarecomplementsanddemandforXisQXd=0+XPX+YPY+MM+
HH.Thenweknow
a.H>0
b.X>0
C.Y<0
d.M<0
Difficulty:Medium
2-16
63.SupposethedemandforXisgivenbyQXd=1002PX+4PY+10M+2A,wherePX
representsthepriceofgoodX,PYisthepriceofgoodY,MisincomeandAistheamountof
advertisingongoodX.Basedonthisinformation,weknowthatgoodYis
A.AsubstituteforgoodX
b.AcomplementforgoodX
c.Aninferiorgood
d.Anormalgood
Difficulty:Easy
2-17
advertisingongoodX.Basedonthisinformation,weknowthatgoodXisa
A.SubstituteforgoodYandanormalgood
b.ComplementforgoodYandaninferiorgood
c.ComplementforgoodYandanormalgood
d.SubstituteforgoodYandaninferiorgood
Difficulty:Medium
advertisingongoodX.IfadvertisingongoodXincreasesby$10,000,thenthedemandforX
will
a.Decreaseby$20,000
b.Decreaseby$100,000
c.Increaseby$100,000
D.Increaseby$20,000
Difficulty:Medium
advertisingongoodX.GoodXis
a.Aninferiorgood
B.Anormalgood
c.AGiffingood
d.Acomplement
Difficulty:Medium
2-18
67.Consumersurplusis
a.Thevalueconsumersgetfromasupplier
b.Thevalueconsumersdonotpaybecauseofadiscountbysupplier
C.Thevalueconsumersgetfromagoodbutdonotpayfor
d.Equaltotheamountconsumerspayforagood
Difficulty:Easy
68.IfthepriceofgoodXbecomeslower,thenthelevelofconsumersurplusbecomes
a.Lower
B.Higher
c.Unchanged
d.Lowerintheshortrunbuthigherinthelongrun
Difficulty:Easy
69.Themarketsupplycurveindicatesthetotalquantityallproducersinacompetitivemarket
wouldproduceateachprice,
a.Holdingonlyinputpricefixed
b.Allowinginputpricetovary
C.Holdingallsupplyshiftersfixed
d.Allowingallsupplyshifterstovary
Difficulty:Easy
70.Whichofthefollowingisnotasupplyshifter?
a.Leveloftechnology
b.Pricesofinputs
C.Averageincomelevel
d.Weather
Difficulty:Medium
2-19
71.Ifthepriceofaninputrises,producersarewillingtoproduce
a.Moreoutputateachgivenprice
B.Lessoutputateachgivenprice
c.Thesameoutputateachgivenprice
Difficulty:Easy
72.Asadditionalfirmsenteranindustry,themarketsupplycurve
A.Shiftstotheright
b.Shiftstotheleft
c.Remainsthesame
Difficulty:Easy
73.Anexcisetaxshiftsthesupplycurve
a.Downbytheamountofthetax
B.Upbytheamountofthetax
c.Byrotatingitcounterclockwise
d.Byrotatingitclockwise
Difficulty:Medium
74.Anadvaloremtaxshiftsthesupplycurve
a.Downbytheamountofthetax
b.Upbytheamountofthetax
C.Byrotatingitcounterclockwise
d.Byrotatingitclockwise
Difficulty:Medium
2-20
75.Iffirmsexpectpricestobehigherinthefutureandtheproductisnotperishable,then
A.Thecurrentsupplycurveshiftstotheleft
b.Thecurrentsupplycurveshiftstotheright
c.Producersproducemoreoutputtoholdbackforthefuture
Difficulty:Medium
76.Thesupplyfunction
a.DescribeshowmuchofgoodXwillbeproducedatanalternativepriceofgoodX,givenall
theothervariablesbeingconstant
B.Recognizesthatthequantityofagoodproduceddependsonitspriceandsupplyshifters
c.ShowstherelationshipbetweenthequantitysuppliedofXandvariablesotherthanitsprice
d.Doesnotincludetechnology
Difficulty:Easy
77.ThesupplyfunctionforgoodXisgivenbyQXS=1,000+PX5PY2PW,wherePXisthe
priceofX,PYisthepriceofgoodYandPWisthepriceofinputW.IfthepriceofinputW
increasesby$10,thenthesupplyofgoodX
a.Willincreaseby10units
b.Willincreaseby20units
c.Willdecreaseby10units
Difficulty:Medium
2-21
78.ThesupplyfunctionforgoodXisgivenbyQXs=1,000+PX5PY2PW,wherePXisthe
priceofX,PYisthepriceofgoodYandPWisthepriceofinputW.IfPX=100,PY=150,PW
=50,thenthesupplycurveis
a.QXS=550
b.QXS=150+PX
c.QXS=550+PX
D.QXs=150+PX
Difficulty:Medium
2-22
79.Ifanexcisetaxisimposedonagood,thenthesupplycurve
a.Shiftsupbytheamountofthedemandelasticity
b.Doesnotchange
c.Shiftsdownbytheamountofthetax
D.Shiftsupbytheamountofthetax
Difficulty:Hard
80.Producersurplusisthe
a.Areaabovethesupplycurvebutbelowthedemandcurve
B.Areaabovethesupplycurvebutbelowthemarketpriceofthegood
c.Minimumamountrequiredbyaproducerforproducingthegood
d.Maximumamountaproducercancollectfromconsumers
Difficulty:Easy
81.Whenquantitydemandedexceedsquantitysupplied
a.Thereexistsasurplusofagood
b.Thepricetendstofall
C.Thepriceisbelowtheequilibriumprice
d.Thereisnoexcessdemand
Difficulty:Medium
82.Competitivemarketequilibrium
A.Isdeterminedbytheintersectionofthemarketdemandandsupplycurves
b.Impliesthatquantitysuppliedissufficientlylargerthanquantitydemanded
c.Isdeterminedbytheintersectionoftheexcessdemandandexcesssupplycurves
d.Impliesthatquantitydemandedissufficientlylargerthanquantitysupplied
Difficulty:Easy
2-23
83.Apriceceilingis
a.Theminimumlegalpricethatcanbechargedinamarket
B.Themaximumlegalpricethatcanbechargedinamarket
c.Abovetheinitialequilibriumprice
d.Equaltotheinitialequilibriumprice
Difficulty:Easy
84.Underapriceceiling,thefulleconomicpriceis
a.Thedollarpricepaidtothefirm
b.Theopportunitycostofnotbeingabletobuyagoodwhenaconsumerneedsit
c.Lowerthanthefreemarketprice
D.Higherthanthefreemarketprice
Difficulty:Medium
85.Whenaneffectivepriceceilingisinplace
a.Everyconsumerisbetteroff
b.Everyconsumerisworseoff
C.Someconsumersarebetteroffandothersareworseoff
d.Onaveragethenetchangeinconsumersurplusiszero
Difficulty:Medium
86.Afloorpriceis
A.Theminimumlegalpricethatcanbechargedinamarket
b.Themaximumlegalpricethatcanbechargedinamarket
c.Belowtheinitialmarketequilibriumprice
d.Equaltotheinitialmarketequilibriumprice
Difficulty:Easy
2-24
87.Theminimumwage
A.Isanexampleoffloorprice
b.Leadstoanincreaseinthenumberofpeopleemployedinunskilledjobs
c.Leadstoadecreaseinthenumberofpeopleemployedinskilledjobs
d.Causesanincreaseinsocialwelfare
Difficulty:Medium
88.Ifdemandincreases,thenthe
a.Demandcurveshiftstotheleft
B.Demandcurveshiftstotheright
c.Equilibriumpricegoesdown
d.Equilibriumquantitygoesdown
Difficulty:Easy
89.Ifsupplyincreases,thenthe
a.Supplycurveshiftstotheleft
B.Equilibriumpricegoesdown
c.Equilibriumquantitygoesdown
d.Demandcurveshiftstotheright
Difficulty:Easy
90.Producersurplusismeasuredasthearea
a.Belowthedemandcurveandabovethemarketprice
b.Abovethedemandcurveandbelowthemarketprice
C.Abovethesupplycurveandbelowthemarketprice
d.Belowthesupplycurveandabovethemarketprice
Difficulty:Medium
2-25
91.Whengovernmentimposesapricefloorabovethemarketprice,theresultwillbethat
A.Surplusesoccur
b.Shortagesbecomeaproblem
c.Supplyanddemandwillshiftuptothenewequilibrium
d.Apricefloorsetabovetheequilibriumpricewillhavenoeffectonthemarketequilibrium
Difficulty:Easy
92.Janepaysthemarketpriceof$69foranewpairofrunningshoes,eventhoughshewould
behappytopayamaximumof$100forthesamepairofshoes.Thisisanexampleofthe
conceptof
a.Producersurplus
b.Priceceilings
c.Fulleconomicprices
D.Consumersurplus
Difficulty:Medium
6P.Apriceceilingof$4willresultina
a.Shortageof24units
B.Shortageof34units
c.Surplusof58units
d.Surplusof34units
Difficulty:Hard
94.Thelawofdemandindicatesthatasthepriceofagoodincreases,thequantitythat
a.Producerswillingtoproduceanitemincreases
b.Producerswillingtoproduceanitemdecreases
c.Buyersareabletopurchaseincreases
D.Buyersareabletopurchasedecreases
Difficulty:Easy
2-26
95.Whichofthefollowingisprobablynotanormalgood?
a.Designerjeans
b.Diamondrings
C.Intercitypassengerbustravel
d.Newautomobiles
Difficulty:Medium
96.Whichofthefollowingpairsofgoodsareprobablycomplements:
a.Electricityandnaturalgas
b.Butterandmargarine
c.Steakandchicken
D.KetchupandFrenchfries
Difficulty:Medium
97.Graphically,anincreaseinthenumberofvegetarianswillcausethedemandcurvefor
Tofu(ameatsubstitute)to
A.Shiftrightward
b.Shiftleftward
c.Becomeflatter
d.Becomesteeper
Difficulty:Easy
98.SupposethedemandforgoodXisgivenbyQdX=204PX+2PY+M.Thepriceofgood
Xis$5,thepriceofgoodYis$15,andincomeis$150.Giventhesepricesandincome,how
muchofgoodXwillbepurchased?
a.160
B.180
c.220
Difficulty:Medium
2-27
99.Forawoodfurnituremanufacturer,anincreaseinthecostoflumberwillcausethesupply
curveto:
a.Becomeflatter
b.Becomesteeper
C.Shifttotheleft
d.Shifttotheright
Difficulty:Easy
100.Demandshiftersdonotincludethe
A.Priceofthegood
b.Consumer'stastesandpreferences
c.Thepriceoftheotherrelatedgoods
d.Consumer'sexpectationsaboutfuturepricesofthegood
Difficulty:Easy
101.GoodXisaninferiorgoodifadecreaseinincomeleadsto
a.AnincreaseinthesupplyofgoodX
b.AdecreaseinthesupplyofgoodX
C.AnincreaseinthedemandforgoodX
d.AdecreaseinthedemandforgoodX
Difficulty:Easy
102.Allelseheldconstant,asadditionalfirmsenteranindustry
A.Moreoutputisavailableateachgivenprice
b.Lessoutputisavailableateachgivenprice
c.Thesameoutputisavailableateachgivenprice
d.Outputcouldincreaseordecreaseateachgivenprice
Difficulty:Medium
2-28
103.Anexcisetaxof$1.00pergallonofgasolineplacedonthesuppliersofgasoline,would
shiftthesupplycurve
a.Downby$1.00
b.Downbymorethan$1.00
C.Upby$1.00
d.Upbylessthan$1.00
Difficulty:Easy
104.Supposethereisasimultaneousincreaseindemandanddecreaseinsupply,whateffect
willthishaveontheequilibriumprice?
A.Itwillrise
b.Itwillfall
c.Itmayriseorfall
d.Itwillremainthesame
Difficulty:Medium
105.GivenalineardemandfunctionoftheformQXd=1000.5PX,findtheinverselinear
demandfunction.
A.PX=2002QX
b.PX=1000.5QX
c.PX=1002QX
d.PX=100QX0.5PX
Difficulty:Easy
106.GivenalineardemandfunctionoftheformQXd=5002PX3PY+0.01M,findthe
inverselineardemandfunctionassumingM=20,000andPY=10.
a.PX=5002QX3PY+0.01M
B.PX=3350.5QX
c.PX=3352QX
d.PX=5002QX
Difficulty:Medium
2-29
107.GivenalinearsupplyfunctionoftheformQXS=10+5PX,findtheinverselinearsupply
function.
A.PX=2+0.2QX
b.PX=10+0.2QX
c.PX=10+5QX
d.PX=2+5QX
Difficulty:Easy
108.GivenalinearsupplyfunctionoftheformQXS=3,000+3PX2PRPW,findtheinverse
linearsupplyfunctionassumingPr=$1,000andPW=$100.
a.QXS=900+3PX
b.PX=300+0.3333QX
C.PX=300+0.3333QX
d.PX=2,900+3PX
Difficulty:Medium
109.SupposethemarketdemandforgoodXisgivenbyQXd=202PX.Iftheequilibrium
priceofXis$5perunitthenconsumersurplusis
a.$100
b.$75
c.$50
D.$25
Difficulty:Easy
2-30
priceofXis$5perunit,thenthetotalvalueaconsumerreceivesfromconsumingthe
equilibriumquantityis
a.$100
B.$75
c.$50
d.$25
Difficulty:Medium
2-31
priceofXis$5perunitthenconsumers'expenditureonXis
a.$5
b.$25
C.$50
d.Cannotbedeterminedfromtheinformationcontainedinthequestion
Difficulty:Easy
112.SupposethemarketsupplyforgoodXisgivenbyQXS=100+5PX.Iftheequilibrium
priceofXis$100perunitthenproducersurplusis
A.$400
b.$1,600
c.$16,000
Difficulty:Easy
113.SupposethemarketsupplyforgoodXisgivenbyQXS=100+5PX.Iftheequilibrium
priceofXis$100perunitthenproducers'revenuefromXis
a.$100
b.$20,000
c.$40,000
D.Cannotbedeterminedfromtheinformationcontainedinthequestion
Difficulty:Medium
114.Consideramarketcharacterizedbythefollowinginversedemandandsupplyfunctions:
PX=102QXandPX=2+2QX?Computethesurplusreceivedbyconsumersandproducers.
a.$24and$24,respectively
B.$4and$4,respectively
c.$2and$6,respectively
d.$6and$2,respectively
Difficulty:Medium
2-32
PX=102QXandPX=2+2QX?Computetheequilibriumpriceandquantityinthismarket.
a.$24and24units,respectively
b.$4and4units,respectively
c.$2and6units,respectively
D.$6and2units,respectively
Difficulty:Easy
PX=102QXandPX=2+2QX?Computethenumberofunitsandthepriceatwhichthose
unitswillbeexchangedwhenthereisan$8perunitpricefloor.
A.1unitand$6perunit
b.1unitand$8perunit
c.3unitsand$6perunit
d.3unitsand$8perunit
Difficulty:Medium
PX=102QXandPX=2+2QX?An$8perunitpricefloorwillresultina
a.Shortageof1unit
B.Surplusof2units
c.Shortageof3units
d.Surplusof3units
Difficulty:Medium
2-33
PX=102QXandPX=2+2QX?Computethesurplusconsumersreceivewhenan$8perunit
pricefloorisimposedonthemarket.
a.$0
B.$1
c.$3
d.$5
Difficulty:Medium
2-34
PX=102QXandPX=2+2QX?Computethesurplusproducersreceivewhenan$8perunit
pricefloorisimposedonthemarket.
a.$1
b.$2
c.$32
D.$33
Difficulty:Hard
PX=102QXandPX=2+2QX?Computethelossinsocialwelfarewhenan$8perunitprice
floorisimposedonthemarket.
a.$0
B.$1
c.$2
d.$3
Difficulty:Hard
EssayQuestions
2-35
121.WhenIraqinvadedKuwait,themarketpriceofcrudepetroleumjumpedfrom$21.54per
barrelto$30.50perbarrelanincreaseofalmost42percent.Yourbossispuzzled,because
thepriceincreaseactuallyoccurredbeforetherewasaphysicalreductioninthecurrent
amountofoilavailableforsale.
a.Explainwhythepriceofoilincreasedsorapidly
b.Oneyearaftertheinvasion,thepriceofoilfellto$21.32perbarrel,itsprewarlevel.
Explainwhy
a.TheinvasionofIraqledmanytobelievethatanalloutwarintheMiddleEastwasvery
likely.Expectationschanged,becauseifanalloutwardidbreakoutthesupplyofoilwould
bedrasticallyreduced,raisingtheequilibriumprice.Becauseofthelikelihoodofafuturerise
inthepriceofoil(ifanalloutwarweretooccur),manyproducerschosetoholdbacktheir
supplyofoilonthedayoftheinvasioninordertohavemoretosellintheeventofawar.The
impactoftheinvasiononthemarketforoilwastodecreasethewillingnessofproducersto
selloilattheoldprice,orineconomicterms,adecreaseinthesupplyofoil.Similarly,
refineriesthatbuycrudeoiltoconvertintogasolinesuddenlydesiredtobuymoreoilthatday,
inordertoavoidthehigherpricestheywouldhavetopayfortheinput(oil)intheeventofan
alloutwar.Thishadtheeffectofincreasingthedemandforcrudeoilonthedayofthe
invasion.Theendresultofthesetwoshiftswasasubstantialincreaseinthepriceofoil,and
roughlynochangeinthetotalamountofoilsoldonthemarket.
b.Intheend,therewasnoalloutwar,andthedemandandsupplycurvesshiftedbacktotheir
initialpositions.Consequently,thepriceofoiloneyearaftertheinvasionwasroughlythe
sameasitwasimmediatelypriortotheinvasion.
2-36
122.Caviarandchampagnearecomplements.Recentlypollutionhasbeenaprobleminthe
VolgaRiver,wheremuchoftheworld'scaviaroriginates.Thesturgeonthatliveinthese
watersarelayingfewereggsthanbefore.Showgraphicallyandexplaintheeffectsonthe
marketforcaviarandthemarketforchampagne.
Figure22(a)
Thepollutionproblemshiftsthesupplyofcaviartotheleftandresultsinanincreaseinthe
equilibriumpriceandadecreaseinthequantityofcaviarsold.Thisisshownasthemovement
fromAtoBinFigure22(a).
Figure22(b)
Anincreaseinthepriceofcaviardecreasesthedemandforchampagnesincetheyare
complements.Thisresultsinareductioninboththeequilibriumpriceandquantityof
champagnesoldasshownbythemovementfromAtoBinFigure22(b).
2-37
123.Intheearlypartof1998,crudeoilpricesfelltoanineyearlowat$13.28abarrel.
Fallingcrudeoilpricesweredueinparttotechnologicaladvancesthatmadelocating
reservoirsandextractioncheaper.Whatimpactwilltheselowercrudeoilpriceshaveonthe
priceofgasoline?
Sincecrudeoilisaninputtoproducinggasoline,lowercrudepriceswillreducethecostof
producinggasoline.Gasolineproducerswillnowbewillingtoproducemoregasatanygiven
price.Thatis,thesupplycurvewillshifttotheright.Theequilibriumpriceandquantity
combinationmovesfrompointAtopointBinFigure23:Theequilibriumpriceofgasoline
falls,whiletheequilibriumquantityrises.
Figure23
2-38
124.YouareanaidefortheSenateBankingCommitteeChairman.Hecomestoyouwitha
billthatproposessettinglimitsonwhatATMownerscanchargenonaccountholders,over
andabovewhatbankschargetheirowncustomers.Currently,largebankscharge
noncustomersanaveragefeeof$1.35pertransactioninadditiontothefeesthecustomer's
ownbankimposes.TheSenatorasksyoutolookataproposalthatwouldplacea$0.50cap
onthefeesATMownerscanchargenoncustomerforaccessingtheirmoney.Ifthislegislation
isenacted,whatwouldbethelikelyeffects?
Theproposalis,inessence,aneffectivepriceceilingof$.50.AsshowninFigure24,this
willcreateashortageofATMs.Theamountoftheshortagewillequalthedifferencebetween
thequantitydemandedandthequantitysuppliedatthepriceceiling,i.e.,thedifference
betweenpointsAandB.LongerlinesarelikelytodevelopatATMmachines.Includingthe
valueoflosttime,thefulleconomicpricepaidforATMusagewillexceedthecurrentprice
of$1.35pertransaction.ThefulleconomicpriceisdenotedP*inFigure24.Notethatthe
actualmagnitudeoftheshortageandfulleconomicpricewilldependontherelativeslopesof
thedemandandsupplycurves.
Figure24
2-39
125.Applesandorangesaresubstitutes.AfreezeinFloridadestroysmostoftheorangecrop.
Whatwouldyouexpecttohappentothemarketforthefollowing:
a.Oranges?
b.Apples?
c.Orangejuice?
a.Thedemandfororangesdoesnotchange,butsupplyshiftsleft.Thisimpliesanincreasein
priceandadecreaseinquantitysoldintheorangemarket.
b.Sinceapplesareasubstitutefororanges,anincreaseinthepriceoforangesincreasesthe
demandforapples.Asthesupplyofapplesdoesnotchange,thisimpliesanincreaseinboth
priceandquantitysoldintheapplemarket.
c.Orangesarethemaininputfortheproductionoforangejuice.Anincreaseinthepriceof
orangesdecreasesthesupplycurvefororangejuice.Ontheotherhand,thedemanddoesnot
change.Thisresultsinanincreaseinpriceandadecreaseinquantitysoldintheorangejuice
market.
126.In1987a386PCsoldatapriceof$6,995.Fiveyearslater,youcouldpurchase
essentiallythesamecomputerfor$1,495.Today,youcanpurchaseafasterPentiumfora
fractionoftheinitialpriceofaslower386PC.
a.Whyhavecomputerpricesfallensodramatically?
b.Whatimpact,ifany,doyouthinkthegrowinguseoftheInternetwillhaveonthepriceof
computers?
a.WhenthePCwitha386chipwasinitiallyintroduced,therewererelativelyfewfirms
producingaPCwitha386chip.Sincethen,literallyhundredsoffirmshaveenteredthe
marketforPCs,shiftingthesupplyofcomputerstotheright.Furthermore,advancesin
technologymakeitpossibletoproducemorechipsperdie,andimprovementsincleanrooms
havereducedthenumberofcomputerchipsthatarediscardedduringproductiondueto
defects.Suchimprovementshaveshiftedthesupplycurveevenfurthertotheright.Theend
result,asweallknow,isthatpersonalcomputersaremuchcheapertoday,andmorepeople
usePC'sthaneverbefore.
b.SincetheInternet,Prodigy,andCompuServearecomplementsforcomputers,their
growinguse(duetolowerpricesfortheservices)willtendtoshiftthedemandcurvefor
computerstotheright.Thiswillputupwardpressureoncomputerprices,offsettingtosome
extentthepricedeclinesbroughtonbysupplyenhancingtechnologicaladvances.
2-40
127.AmericanTennishoe,Inc.,isconcernedbecauseCongresshasproposedanexcisetaxof
$1oneachpairoftennisshoessoldintheUnitedStates.Theyarelobbyingagainstthetax
throughanadvertisingcampaignthatsaysthetaxwillraisethepriceoftennisshoesby$1.
Usesupplyanddemandgraphstoshowhowmuchofthetaxwillactuallybepassedonto
consumers.
Supposeshoeproducersareresponsibleforpayingthetaxtothegovernment.Thenthe$1tax
shiftsthemarketsupplycurveupwardby$1foreachquantityofshoes.Thisresultsinan
increaseinpricefromP1toP2andadecreaseinquantityfromQ1toQ2inFigure27.
Noticethatthepricegoesupbylessthanthe$1tax.
Figure27
128.RB,Inc.,isawholesalerspecializingindryfoods,suchasriceanddrybeans.Its
manageristroubledbyarecentarticleinTheWallStreetJournalthatsayarecessionin
imminentandthatincomewillfallby3percentoverthenextyear.Whatdoyouthinkis
likelytohappentothepriceoftheproductsRB,Inc.,sells?Why?
Beansandriceareprobablyinferiorgoods.Ifso,areductioninincomeshiftsdemandfor
thesegoodstotheright.Consequently,theultimateimpactoftherecessionwillbetoraisethe
priceofgoodssoldbyRB,Inc.andmorebeansandricewillbesoldthanbefore.
2-41
129.Considerthemarketfortwogoodsthataresubstitutes,suchaspensandpencils.Ifa
technologicalbreakthroughreducedthecostofproducingpens:
a.Whatwouldhappentothesupplyofpens?
b.Whatwouldhappentothepriceofpensandthequantityexchanged?
c.Whateffectwouldthischangeinthepriceofpenshaveonthemarketforpencils?
a.Thecostofproducingpenswillbereducedforeachquantityofoutput,whichwillleadto
anincreaseinthesupplyofpens.
b.Pricewillbereducedwhilequantityexchangedwillincrease.
c.Areductioninthepriceofpensreducesthedemandforpencils.Thepriceandquantitysold
inthemarketforpencilswillbothdecrease.
130.RussianstatetelevisionhasimposedatemporarybanonallTVcommercials.Yourfirm
specializesinexportstoRussia.90percentofitsalesconsistofconsumergoodsshippedto
Russia.Yoursupervisorwantstoknowthelikelyimpactofthebanonyourfirm'soperations.
Whatdoyoutellher?
Abanonadvertisingwilllikelyreducethedemandforyourfirm'sproduct,resulting
ultimatelyinalowerpriceandquantitysold.
2-42
131.Thefederalgovernmentrecentlydecidedtoraisetheexcisetaxonhardliquor.
a.Graphicallyillustratetheeffectsofthistaxonthemarketforhardliquor
b.Woulda$1increaseintheexcisetaxonliquorincreasetheequilibriumpriceofliquorby
$1?Explain
c.Howwouldtheexcisetaxonhardliquoraffectabeerdistributor?
a.AscanbeseenfromFigure211,themarketsupplyforhardliquorwilldecreasebythe
amountoftheexcisetax.Thisresultsinhigherprices(fromP1toP2)andsmallerquantities
soldinthemarketforhardliquor(fromQ1toQ2).
Figure211
b.No,a$1increaseintheexcisetaxonliquorshiftstheinitialsupplyup(leftward)by$1.
Thisreducestheequilibriumquantityexchangedinthemarket.Whiletheequilibriumprice
increasestoP2(whichislessthantheP1plustheexcisetax),itmustpayUncleSam$1(the
differencebetweentheinitialandfinalsupplycurve).Thefirmendsupkeepingtheprice
associatedwithQ2ontheinitialsupplycurve,whichislessthantheinitialequilibriumprice,
P1.Alternatively,notethataddinga$1excisetaxtotheinitialequilibriumpriceP1,isgreater
thantheposttaxequilibriumprice,P2.
c.Sincehardliquorandbeeraresubstitutesinconsumption,anincreaseinpriceinhard
liquorshiftsthedemandcurveforbeertotheright.Hence,boththeequilibriumpriceand
quantityofbeerwillincrease.Anticipatingthis,abeerdistributorshouldincreaseits
production.
2-43
132.EstimatessuggestthattheNorthAmericanFreeTradeAgreement(NAFTA)will
ultimatelyresultintariffcutsaveraging38percentglobally.Assumingtheseestimatesare
correct,wouldyouexpectthepriceoftheaverageimportedgoodstofallby38percent?
Explain.
Atariffreductioncanbeviewedasareductioninataxonsuppliers,whichshiftsthesupply
curvefortheaffectedproducttotheright.Iftariffsdeclinebyanaverageof38percent,one
wouldexpectpricestofallduetotheincreaseinsupplythetaxreductionbringsforth.
However,onlyifdemandisperfectlyinelasticwilltheentiretax(tariff)reductionbepassed
ontoconsumersintheformofa38percentpricedecline.
133.Thegovernmentdecidesthataspecificscarcegoodshouldbeprovidedforeveryone
whowantsitatapriceofzeroandpassesalawmakingitillegaltobuyorsellthegood.
However,peoplecangivethegoodaway.Thisgoodishighlydesirableforsomeofthe
population.Whateffectwillthislawhaveonthemarket?Whatwouldhappeninthismarket
ifthelawwereremoved?
Thenewlegislationisessentiallyapriceceiling.Thispriceceilingwillhavetwoeffects.First
itwillresultinashortageinthemarketsincequantitydemandedwillnowexceedquantity
supplied.Thisshortagewillbeaccompaniedbyafulleconomicpricethatisgreaterthanthe
previousequilibriumprice.Thesecondeffectwillbetheemergenceofablackmarket,where
thegoodwillbetradedillegally.Sincethereexistsapositivecostassociatedwithpossibly
beingcaughtsellingthegood,theblackmarketpricewillbehigherthantheprevious
equilibriumprice.
Ifthelawwereremoved,thefulleconomicpricewoulddecreaseandtheequilibriumquantity
wouldincrease.Also,theblackmarketwoulddisappear.
134.Youarethemanagerofacardealershipthatsellsluxuryautomobiles,whicharenormal
goods.Althougharecessionisexpectednextyear,youexpectyourclients'incomesto
increaseoverthecomingyear.Whatwillyoudoaboutorderingcarsfornextyearas
comparedtolastyear?Why?
Sincetheincomeofyourclientsisexpectedtorise,demandisexpectedtoincrease.Hence,
youshouldordermorecarsinthecomingyearascomparedtolastyear'sorder.
2-44
135.YouarethemanagerofFast&EasyDonuts.Almostallofyourdonutsalesarederived
fromthedrivethroughwindow.Youknowfromexperiencethatcoffeeisacomplementfor
yourdonuts.Themorningnewspapersaysthatamajorstormhasjustdestroyed50percentof
thisyear'scoffeebeancrop.Willthisaffecthowmuchflouryouorder?Willitaffecthow
manyemployeesyouschedule?Whatwillhappentoprices?
Destructionof50%ofthisyear'scoffeebeancropmeansadecreaseinthesupplycurveof
coffee.Theequilibriumpriceandquantityinthemarketforcoffeeishigherandlower,
respectively.Asthepriceofacoffeeincreases,thedemandcurveforitscomplement,donuts,
decreases.Hence,quantitiessoldinthedonutmarketwillbelowered.Youshouldorderless
flour.Also,youshouldhirefeweremployeessincepricesandquantitysoldareexpectedtobe
lower.
136.YouareaneconomicadvisortotheTreasureroftheUnitedStates.Congressis
consideringincreasingthesalestaxongasolineby$.03pergallon.Lastyearmotorists
purchased10milliongallonsofgaspermonth.Thedemandcurveissuchthatevery$.01
increaseinpricedecreasessalesby100,000gallonspermonth.Youalsoknowthatforevery
$.01increaseinprice,producersarewillingtoprovide50,000moregallonsofgasolinetothe
market.Thelegislaturehasstatedthatthe$.03taxwillincreasegovernmentrevenuesby
$300,000permonthandraisethepriceofgasolineby$.03pergallon.Isthiscorrect?
Giventheinformation,thesupplyanddemandcurvescanbedescribedasfollows:
Qs=10,000,000+5,000,000(psp0)
Qd=10,000,00010,000,000(pdp0),
Wherep0istheinitialpriceandthequantityofgoodsisinmillionsofunits.Withanexcise
taxof$.03,thepricepaidbyaconsumerisgreaterthanthepricereceivedbyaproducerby
$.03.Thatis,pd=ps+.03.Ifwesubstitutethisinforpdinthedemandfunctionweobtainps
p0=$.02andQs=Qd=9.9million.Thetotaltaxrevenueis9.9milliongallonsx$.03/gallon
=$297,000(permonth).Thenewpricepaidbyconsumersispd=ps+$.03=p0$.02+$.03
=p0+$.01.Hence,thepricewillrisebyonly$.01,insteadof$.03.
2-45
137.SupposeyouareanaidetoaU.S.Senatorwhoisconcernedabouttheimpactofa
recentlyproposedexcisetaxonthewelfareofherconstituents.YouexplainedtotheSenator
thatonewayofmeasuringtheimpactonherconstituentsistodeterminehowthetaxchange
affectsthelevelofconsumersurplusenjoyedbytheconstituents.Basedonyourarguments,
youaregiventhegoaheadtoconductaformalanalysis,andobtainthefollowingestimatesof
demandandsupply:
and
.
a.Graphthesupplyanddemandcurves
b.Whataretheequilibriumquantityandequilibriumprice?
c.Howmuchconsumersurplusexistsinthismarket?
d.Ifa$2excisetaxisleviedonthisgood,whatwillhappentotheequilibriumpriceand
quantity?
e.Whatwilltheconsumersurplusbeafterthetax?
a.SeeFigure217.
Figure217
b.Equilibriumquantityandpriceare100unitsand$80,respectively.
c.Consumersurplus=1/2(10080)(100)=$1,000.
d.Notethatbeforetheexcisetax,theinversesupplyfunctionisP=30+.5Qs.A$2excisetax
shiftstheinversesupplyfunctionupbytheamountofthetax,sotheinversesupplyfunction
aftera$2excisetaxmustbeP=32+.5Qs.Thismeansthatthesupplyfunctionafterthetaxis
Qs=2P64(NotethatthisexpressionisequivalenttoQs=2(P2)60,sincetheproducer
mustpay$2tothegovernmentforeachunitsold).Thedemandfunctionremainsunchanged
atQd=5005P.SettingQs=Qdandsolvingforprice,weobtainP=$80.57.Plugthisprice
intoeitherthedemandorsupplyfunctionyieldstheequilibriumquantity,Q=97.14.
e.Consumersurplus(posttax)=1/2(10080.57)(97.14)=$943.72.
2-46
138.Thedemandforyourproducthasbeenestimatedtobe
.Therelevantpriceandincomedataareasfollows:
,
,
,
.
a.WhichgoodsaresubstitutesforX?Whicharecomplements?
b.IsXaninferiororanormalgood?
c.HowmuchXwillbepurchased?
d.GraphthedemandcurveforXgiventheaboveinformation
e.HowwillthedemandcurvechangeifMfallsto35,000?
a.ZisasubstituteforX,whileYisacomplementforX.
b.Xisaninferiorgood.
c.
d.SeeFigure218.
Figure218
2-47
139.Supposethesupplycurveforaproductisgivenby
and
,
.
a.HowmuchXisproduced?
b.WhatistheinversesupplycurveforXgiventheaboveinformation?
c.Graphthissupplycurve
d.ShowwhathappenstothissupplycurveifthepriceofZgoesupby$10
a.QSX=300+4(30)+2(40)=100.Sincenegativeoutputisimpossible,quantitysuppliedis
zero.
b.TheinversesupplyfunctionisP=55+Q/4.
c.SeeFigure219.
Figure219
d.AfterachangeinthepriceofZ,theinversesupplyfunctionbecomesP=50+Q/4,as
showninFigure219.Thatis,foreveryprice,thequantitysuppliedwillincreaseby20units
comparedwiththeinitialcase.
2-48
140.Recently,theBrazilianAssociationofCitrusExports(Abecitrus)announcedthatorange
productionwouldbedown25percentthisyearbecauseofpoorweatherconditions,disease,
andtreestressresultingfromthreestraightbumpercrops.Whateffectwillthedecreased
productionoforangeshaveonthedemandfortomatojuice?
A25%reductionintheproductionoforangesshiftsthesupplycurvefororangesleftward,
raisingorangepricesanddecreasingthequantitydemanded.Sinceorangesareinputsin
productionfororangejuice,anincreaseinorangeprices,decreasesthesupplycurvefor
orangejuice,whichcausesorangejuicepricestoincreaseandthequantitydemandedto
decrease.Assumingorangejuiceandtomatojuicearesubstitutesinconsumption,higher
orangejuicepricescauseconsumerstoswitchfromdrinkingorangejuicetotomatojuice.
Thus,demandfortomatojuiceincreases.
2-49

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Chapter02MarketForces:DemandandSupply

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