ExamName___________________________________ESSAY. Write your answer in the space provided or on a separate sheet of paper.1)What are some of the characteristics of a market that can be described by a demand and supplymodel?Answer:A market that can be represented by a demand and supply curve is an institution ormechanism which brings togetherlarge numbersofindependently actingbuyersandsellerswho want to exchange somestandardized product. Examples of such markets are a centralgrain exchange, a stock market or a market for foreign currencies.2)Define "demand."Answer:Demand is a schedule or curve that shows the various amounts of a product buyers arewilling and able to purchase at each price in a series of possible prices during a specifiedperiod of time. Demand portrays alternative price/quantity possibilities which can be setdown in a table. The key point to be recognized is that demand is more than a statement ofquantity purchased at a certain price; it is a schedule of quantities which will be demanded atvarious prices, other things being equal, for a specified period of time.3)State the law of demand and explain why the other-things-equal assumption is critical to it.Answer:The law states that, other things being equal, as price increases, the corresponding quantitydemanded falls. Restated, there is an inverse relationship between price and quantitydemanded with everything else held constant. The other-things-equal assumption refers toconstant prices of related goods, income, tastes, and other things that affect demand besidesprice. The law of demand only looks at the relationship between price and quantitydemanded.4)Give two explanations for the law of demand.Answer:First, there is diminishing marginal utility: a decrease in satisfaction that results with anincrease in the amounts of a good or service. The second unit of a good yields lesssatisfaction (or utility) than the first. Second, there are income and substitution effects. Withan income effect, a lower price increases the purchasing power of money income, enablingyou to buy more at lower price. With a substitution effect, a lower price for good X gives anincentive to substitute away from the now relatively high-priced good Y and replace it withthe low-priced good X.5)Suppose that a decrease in the price of feed grain leads to a dramatic decrease in the price of beef.Use the income effect and the substitution effect to explain why there was an increase in thequantity of beef purchased.Answer:The income effect predicts that the quantity of beef purchased will rise when beef prices fallbecause people will now be able to afford more. The purchasing power of their income riseswhen prices fall, assuming other things remain the same.The substitution effect predicts that the lower price of beef will lead consumers of substitutefoods such as chicken and pork to buy more of the relatively less expensive beef and to buyless chicken or pork or other beef substitutes whose prices have not fallen.1

6)The demand schedules of three individuals (Tom, Dick, and Harry) are shown. If they are the onlythree buyers of CDs, complete the market demand schedule for CDs. Graphically, is the marketdemand for a product the horizontal or vertical sum of the individual demand schedules?The market demand is the horizontal sum of the individual schedules.Answer:7)List five basic determinants of market demand that could cause demand to decrease.Answer:(a) Consumers' tastes become less favourable toward the item.(b) The number of buyers decreases.(c) Incomes fall and the item is a normal good or incomes rise and the item is an inferiorgood.(d) A decrease in the price of a substitute product or an increase in the price of acomplementary product.(e) Consumers expect lower prices in the future.8)Differentiate between a normal (superior) and an inferior good.Answer:A normal (superior) good is one whose demand varies directly with income as is true formost goods and services the more income one earns, the more one is willing and able to buy.However, there are exceptions, called inferior goods, whose demand varies inversely withincome. Inferior goods are those whose demand increases when incomes fall and vice versa.9)Explain how the prices of related goods also affect demand.Answer:Substitute goods are those that can be used in place of each other. The price of the substituteand demand for the other good are directly related. If the price of Coke rises, demand forPepsi should increase. Complementary goods are those that are used together like tennis ballsand rackets. When goods are complements, there is an inverse relationship between the priceof one and the demand for the other. Some goods are not related to each other and areindependent goods. In these cases, a change in price of one will not affect the demand for theother.2

10)Give examples of two substitute goods and two complementary goods. In each case explain whythe goods are substitutes or complements.Answer:The pair of substitute goods given should correspond to the explanation that they aresubstitutes because when the price of one changes, the demand for the other changes in thesame direction. When the price of butter rises, one expects the demand for margarine toincrease; when the price of butter falls, one expects the demand for margarine to fall as butterlovers switch back to butter consumption.The pair of complementary goods should fit the explanation that they are complementsbecause when the price of one changes, the demand for the other is inversely related. Whenthe price of tennis equipment rises, the demand for tennis-club memberships should fall (iftennis playing is a normal good).11)What is the difference between a change in demand and a change in quantity demanded?Answer:A change in demand is a shift in the entire demand curve either to the left (a decrease indemand) or to the right (an increase in demand). "Demand" refers to the entire schedule orcurve. By contrast, a change in quantity demanded is a movement along an existing demandcurve or schedule from one price-quantity combination to another. A change in product pricecauses the change in quantity demanded.12)Suppose a producer sells 1,000 units of a product at $5 per unit one year, 2,000 units at $8 the nextyear, and 3,000 units at $10 the third year. Is this evidence that the law of demand is violated?Explain.Answer:No. The law of demand shows the relationship between price and quantity demanded. Ingeneral, as price falls the quantity demanded will increase. One of the assumptions, however,is that all other things are equal or held constant. In this case, this assumption may have beenviolated and that is why it seems there is a positive relationship between price and quantity.The most likely explanation for the set of events is that demand for the product increasedfrom one year to the next. If that was true, then price would rise and the equilibrium quantitywould increase.3

13)What effect should each of the following have upon the demand for MP3 players? Explain yourreasoning in each case.(a) the development of reasonably-priced smart phones that compete with MP3 players(b) an increase in population and incomes(c) a substantial increase in the number and quality free downloadable MP3s(d) consumer expectations of substantial price increases in MP3 players(e) a decrease in the price of MP3 playersAnswer:(a) Would cause a decrease in demand for MP3 players as the smart phone can substitute as anMP3 player.(b) Would cause an increase in demand because there are more consumers and they have moreincome to spend. This assumes that MP3 players are a normal good and more would bebought with higher incomes.(c) Would increase demand as with more songs available people will want more MP3 playersto hear their music.(d) Would increase current demand as consumers will want to beat the future price increase.(e) Would not change demand for MP3 playersNa different quantity will be demanded, butthe demand schedule/curve would not move.14)Define "supply."Answer:Supply is a schedule or curve that shows the various amounts of a product sellers are willingand able to produce and offer for sale at each price in a series of possible prices during aspecified period, other things being equal.15)Describe and give a reason for the law of supply.Answer:The law of supply indicates that, other things being equal, producers will produce and bewilling to sell more of their product at a high price than at a low price. This means that thereis a direct relationship between price and quantity supplied. The basic explanation is that,given product costs, a higher price means greater profits and thus more incentive for businessto increase the quantity supplied.16)List six basic determinants of market supply that could cause supply to increase.Answer:(a) Resource prices decrease.(b) Production technology advances.(c) Lower taxes or higher subsidies reduce production costs.(d) Prices of other related goods decrease.(e) In many types of manufacturing industries, newly formed expectations that price willincrease may induce firms to add another shift of workers or to expand their productionfacilities, causing current supply to increase. (f) The number of sellers increases.4

17)The Federal government is considering passing an excise tax that would increase the price of apack of cigarettes by $1.00. What would be the likely effect of this change on the demand andsupply of cigarettes? What is likely to happen to cigarette prices and the quantity consumed if thetax bill is enacted?Answer:In the short run, the excise tax would decrease the supply of cigarettes because in essence itincreases the cost of production. The decrease in supply would increase the price ofcigarettes and decrease the quantity of cigarettes consumed. The demand for cigaretteswould not change, but the quantity demanded would decrease.18)What is the difference between a change in supply and a change in quantity supplied?Answer:A change in supply is a shift in the entire supply curve either to the left (a decrease insupply) or to the right (an increase in supply). A change in supply, therefore, is a change inthe entire supply schedule or curve. In contrast, a change in quantity supplied is a movementalong an existing supply curve or schedule from one price-quantity combination to another.A change in product price causes the change in quantity supplied.19)Newspaper item: "Due to lower grain prices, consumers can expect retail prices of choice beef tobegin dropping slightly this spring with pork becoming cheaper after midsummer," the AgricultureDepartment predicted. "This reflects increasing supply," the department said. Is the term "supply"used correctly? What effects might this announcement have on consumer demand? Explain.Answer:The announcement does use the term "supply" correctly because the drop in price predicted isa result of lower resource (grain) prices. This means that producers of beef and pork willlower prices for each quantity on the existing supply schedule assuming "all other thingsremain equal."Consumer demand at present might decrease as consumers wait to make big purchases ofbeef and pork in the future when prices are predicted to drop. By spring, if beef prices drop,there should be an increase in the quantity of beef demanded and probably a decrease in thedemand for pork, which is a substitute for beef. By midsummer, if pork prices drop, therewill be an increase in the quantity of pork demanded, and depending on what is thenhappening with beef prices, a decline in the demand for beef. If beef prices had continued tofall, it is hard to say whether there would be much of a change in demand due to the price ofthe substitute pork falling. More likely, there would be only a movement along the curve forbeef if the price continued to fall.5

Loading page 6...

20)What effect will each of the following have upon the supply of television sets? Explain yourreasoning in each case.(a) an increase in the price of electronic equipment used in producing television sets(b) a decline in the number of firms producing television sets(c) a large new tariff on imported Japanese TV sets(d) new inexpensive satellite dishes which make televisions more popular among consumersAnswer:(a) This should decrease the supply because a higher price must be charged for each quantitydue to the rising price of resources. The supply curve will shift to the left.(b) The outcome is indeterminate because we don't know why the firms left the industry.Perhaps remaining firms are more efficient and will produce more. On the other hand, theremay be just a few firms remaining and the resulting decline in competition could lead tohigher prices for each quantity, or a decrease in supply.(c) A higher tariff will cause a decrease in the supply of imported television sets becausecosts, i.e., taxes, have risen. Because the supply of Japanese TV sets is part of the total marketsupply, the effect is to decrease the market supply.(d) New inexpensive satellite dishes should have no effect on the supply schedule. However,demand should increase resulting in a higher equilibrium price and greater quantity supplied.Note that supply does not shift, but that the quantity supplied changes.21)Economist Jones defines an increase in supply as a decrease in the prices needed to ensure variousamounts of a good being offered for sale. Economist Brown defines an increase in supply as anincrease in the amounts that producers will offer at various possible prices. Economist Cole definesan increase in supply as an increase in the amount firms will offer in the market which is caused byan increase in the price of the product. Which, if any, of these is defining an increase in supplycorrectly? Explain.Answer:Economists Brown and Jones are both correct. Brown recognizes that a shift in supply meansgreater quantities will be supplied at each of the various prices given for the original supplyschedule. In other words, more will be supplied at each of the prices on the original schedule.Jones recognizes that a shift in supply means sellers are willing to accept a lower price ateach of the various amounts of a good being offered for sale. It is an equivalent statement toBrown's. Cole is not correct. Cole is defining a change in the quantity supplied, or amovement along the supply curve, not an increase in supply.22)Assuming no government intervention, describe the market behaviour that should result if the priceof a product is below its equilibrium price; then describe the behaviour that should occur if theprice is above its equilibrium price.Answer:If the price of a product is below its equilibrium price, the quantity demanded will be greaterthan the quantity supplied and the price will be bid up as buyers compete to obtain theproduct and sellers realize that they can raise the price. As the price rises, the quantitysupplied will increase and the quantity demanded decrease until the two are equal at theso-called equilibrium or market-clearing price.If the price of a product is above its equilibrium price, the quantity supplied will be greaterthan the quantity demanded and a temporary surplus exists. As sellers compete, the price willfall. In response, the quantity demanded will increase and the quantity supplied will decreaseuntil the two are equal at the equilibrium or market-clearing price.6

Loading page 7...

23)Describe in words how one can recognize the market equilibrium point in a graph of a demandschedule and a supply schedule.Answer:The market equilibrium point is the point where the demand curve intersects the supplycurve. The quantity vertically below this point is the equilibrium quantity and the pricehorizontally opposite this point is the equilibrium price.24)Using the schedules given, plot the demand curve and the supply curve on the below graph. Labelthe axes and indicate for each axis the units being used to measure price and quantity. Then answerthe questions.(a) Give the equilibrium price and quantity for oats.(b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersectionof the supply and demand curves to the price and quantity axes.(c) If the Federal government decided to support the price of oats at $1.40 per ton, tell whetherthere would be a surplus or shortage and how much it would be.(d) Demonstrate your answer to part (c) on your graph being sure to label the quantity youdesignated as the shortage or surplus.7

Loading page 8...

Loading page 9...

25)Using the schedules given, plot the demand curve and the supply curve on the below graph. Labelthe axes and indicate for each axis the units being used to measure price and quantity. Then answerthe questions.(a) Give the equilibrium price and quantity for wheat.(b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersectionof the supply and demand curves to the price and quantity axes.(c) If the Federal government decided to support the price of wheat at $4.00 per ton, tell whetherthere would be a surplus or shortage and how much it would be.(d) Demonstrate your answer to part (c) on your graph being sure to label the quantity youdesignated as the shortage or surplus.9

Loading page 10...

Loading page 11...

Loading page 12...

Loading page 13...

Loading page 14...

Loading page 15...

Loading page 16...

Loading page 17...

Loading page 18...

Loading page 19...

Loading page 20...

Loading page 21...

Loading page 22...

Loading page 23...

Loading page 24...

Loading page 25...

Loading page 26...

Loading page 27...

Loading page 28...

Loading page 29...

Loading page 30...

Loading page 31...

Test Bank for Microeconomics, 21st Edition

Study Now!

Document Details

Related Documents

Microeconomics, 3rd Edition Test Bank

Test Bank for Psychology, 6th Edition

Test Bank For Campbell Biology, 11th Edition

Test Bank for Your Interpersonal Communication , 1st Edition

Test Bank for Nutrition: An Applied Approach, 5th Edition

Test Bank for Principles of Macroeconomics, 12th Edition

Test Bank for Microeconomics, 2nd Edition

Solution Manual For Macroeconomics, 16th Edition

Economics of Money, Banking and Financial Markets, The, Business School Edition, 5th Edition Solution Manual

Solution Manual For Microeconomics, Sixteenth Canadian Edition

Company

Explore

Study Tools