Test Bank for Microeconomics, 21st Edition

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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

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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

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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

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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

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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

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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

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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

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Answer:(a) The equilibrium price and quantity for oats will be $1.20 and 25,000 tons.(b) The equilibrium price and quantity on the graph are labelledPeandQe.(c) If the Federal government decided to support the price of oats at $1.40 per ton, therewould be a surplus of 35,000 - 15,000 = 20,000 tons.(d) See surplus labelled on above figure.8

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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

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Answer:(a) The equilibrium price and quantity for wheat will be $3.60 and 200,000 tons.(b) The equilibrium price and quantity on the graph are labelledPeandQe.(c) If the Federal government decided to support the price of wheat at $4.00 per ton, therewould be a surplus of 220,000 - 150,000 = 70,000 tons.(d) See surplus labelled on figure.26)Evaluate. An increase in demand causes price to rise which, in turn, causes demand to fall.Therefore, an increase in demand will not have lasting effects.Answer:While an increase in demand, which causes the demand curve to shift to the right, does leadto an increase in price, the resulting increase in price does not cause demand to fall. Achange in price affects the quantity demanded and is represented by a movement along thedemand curve. The higher price reduces the quantity demanded until a new equilibrium isestablished. Therefore, the statement is not correct.27)Evaluate. A decrease in supply causes price to rise which, in turn, causes supply to rise. Therefore,a decrease in supply will not have lasting effects.Answer:While a decrease in supply, which causes the supply curve to shift to the left, does lead anincrease in price, the resulting increase in price does not cause supply to rise. A change inprice affects the quantity supplied and is represented by a movement along the supply curve.The higher price increases the quantity supplied until a new equilibrium is established.Therefore, the statement is not correct.10

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28)In the space below each of the following, indicate the effect [increase(+),decrease(-)] onequilibrium price (P) and equilibrium quantity (Q) of each of these changes in demand and/orsupply.Answer:(a) +, +; (b) -, +; (c) -, -; (d) +, -29)In the spaces below each of the following, indicate the [increase (+), decrease (-),orindeterminate(ind)] on equilibrium price (P) and equilibrium quantity (Q)of each of thesechanges in demand and/or supply.Answer:(a) ind, +; (b) +, ind; (c) ind, -; (d) -, ind;30)In each case below, indicate the effect [increase(+); decrease(-); indeterminate(ind)] uponequilibrium price (P) and equilibrium quantity (Q) and illustrate the change graphically. Where youbelieve the effect is indeterminate, two graphical illustrations may be necessary to demonstrate yourpoint.11

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Answer:12

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Answer:31)The price of gold is lower today than several decades ago. Yet, the production of gold is greaterthan in the past. How is this possible without violating the law of supply?Answer:The supply of gold has increased and as a result, the price of gold has fallen and the quantityof gold has risen. The main reason for the increase in the supply of gold is improvement intechnology that allows producers to lower production costs by using fewer resources.13

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32)Given the products below and the events that affect them, indicate what happens to demand orsupply, and the equilibrium price and quantity. Identify the determinant of demand or supply thatcauses the shift.(a) Blue jeans. The wearing of blue jeans becomeslessfashionable among consumers.(b) Computers. Parts for making computers fall in price because of improvements in technology.(c) Lettuce. El Nino produces heavy rains that destroy a significant portion of the lettuce crop.(d) Chicken. Beef prices rise because severe winter weather reduces cattle herds.Answer:(a) Demand for blue jeans decreases because of a decline in buyer tastes for blue jeans, thusdecreasing the equilibrium price and quantity.(b) Supply of computers increases because of an improvement in technology, thus decreasingthe equilibrium price and increasing the equilibrium quantity.(c) Supply of lettuce decreases because of a fall in the number of suppliers, thus increasingthe equilibrium price and decreasing the equilibrium quantity.(d) Demand for chicken increases because of an increase in the price of a substitute food (beefprices rose because of a supply decrease), thus increasing the equilibrium price and quantity.33)Given the products below and the events that affect them, indicate what happens to demand, supply,equilibrium quantity, and equilibrium price. Identify the determinant of demand and supply thatcauses the shifts.(a) Calculators. More schools require students to buy and use calculators; improved productivityshortens the time it takes to make calculators.(b) Gasoline. Oil production declines due to a crisis in the Middle East; people take more carvacations and drive more.(c) New homes. The average incomes fall as the economy moves into recession; the productivity ofhome construction workers and builders increases.(d) Tobacco. The government cut its subsidy to tobacco farmers; more people quit smoking.Answer:(a) The demand for calculators increases because of an increase in the number of buyers. Thesupply of calculators increases because of a fall in resource prices (productivity reducesresource costs). The equilibrium quantity increases, but what happens to the equilibrium priceis indeterminate and depends on the magnitudes of the shifts.(b) The supply of gasoline decreases because of a rise in resource price (oil prices increasedue to a cutback in production). The demand for gasoline increases due to an increase in thetaste for taking driving vacations. The equilibrium price increases, but what happens to theequilibrium quantity is indeterminate and depends on the magnitudes of the shifts.(c) The demand for new homes decreases because of a decline in consumer incomes. Thesupply of new homes increases because of a fall in the price of labour resources (productivityincreases reduce resource costs). The equilibrium price decreases, but what happens to theequilibrium quantity is indeterminate and depends on the magnitudes of the shifts.(d) The supply of tobacco decreases because of a cut in government subsidies for tobacco.The demand for tobacco decreases due to a decline in the taste for smoking tobacco. Theequilibrium quantity decreases, but what happens to the equilibrium price is indeterminateand depends on the magnitudes of the shifts.14

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34)What is a price ceiling and what are its economic effects?Answer:A price ceiling means that the price is not allowed to rise above the maximum price set bygovernment. If the price ceiling is set below the equilibrium price in a market, then there willbe a shortage of the product at the government-set price. A price ceiling interferes with therationing function of price that serves to balance the decisions of suppliers and demanders.The shortage indicates that resources are being underallocated to the production of thisproduct and that there is economic inefficiency. Less output is being produced thanconsumers want. This output is not being produced because some producers cannot make aprofit at the price ceiling level.35)Use the data in the following table to explain the economic effects of a price ceiling at $6, at $5, andat $4.Answer:A price ceiling means that the price will not be permitted to rise above a maximum price. Ifthe price ceiling is below the competitive equilibrium price of $7, it would produce ashortage of the product. For example, if the price ceiling was set at $6, the quantitydemanded would be 5,000 units and the quantity supplied would be 3,500 for a shortage of1,500 units. With a price ceiling set at $5, the shortage would be 3,000 units, and with a priceceiling of $4, the shortage would be 4,500 units. A price ceiling interferes with the rationingfunction of price that serves to balance the decisions of demanders and suppliers. The priceceiling produces a shortage that indicates that resources are being underallocated; output isnot being produced because some producers cannot make a profit at the price ceiling level.36)Use the data in the following table to explain the economic effects of a price ceiling at $9.Answer:A price ceiling is a maximum price above which the price is not allowed to exceed. To beeffective, a price ceiling must be set below the equilibrium price. Since the price ceiling of$9 exceeds the equilibrium price, it is not binding. The price ceiling has no effect. Themarket remains at equilibrium where the price and quantity are $7 and 4,500 units.15

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37)What is a price floor and what are its economic effects?Answer:A price floor means that the price is not allowed to fall below a minimum price set bygovernment. If the price floor is set above the equilibrium price in a market, then there will asurplus of the product. A price floor interferes with the rationing function of price that servesto balance the decisions of suppliers and demanders. The surplus indicates that resources arebeing overallocated to the production of this product and that there is economic inefficiency;output is being produced which consumers do not want to purchase at the price floor.38)Use the data in the following table to explain the economic effects of a price floor at $8, at $9, andat $10. Explain the economic effects.Answer:A price floor means that the price is not allowed to fall below a minimum price set bygovernment. If the price floor is above the competitive equilibrium price of $7, a surplus ofthe product would result. If the price floor was set at $8, the quantity demanded would be4,000 units but the quantity supplied would be 5,500 units for a surplus of 1,500 units. At aprice floor of $9, the surplus would be 3,000 units, and with a price floor of $10, the surpluswould be 4,500 units. A price floor interferes with the rationing function of price that servesto balance the decisions of suppliers and demanders. The price floor that produces a surplusindicates that resources are being overallocated and that there is economic inefficiency;output is being produced which consumers do not want to purchase at the price floor.39)Use the data in the following table to explain the economic effects of a price floor at $6.Answer:A price floor is a minimum price below which the price is not allowed to fall. To beeffective, a price floor must be set above the equilibrium price. Since the equilibrium priceexceeds the floor price of $6, the price floor is not binding. The price floor has no effect. Themarket remains at equilibrium where the price and quantity are $7 and 4,500 units.16

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40)"Government-set prices undermine the rationing function of competitive prices." Explain carefullyin terms of both price ceilings and price floors.Answer:A ceiling price means that the government may hold prices at a level that is below the marketequilibrium price. Since the market equilibrium is where the quantity demanded is equal tothe quantity supplied, any price below that would find an excess quantity demanded overthat supplied. In other words, a shortage would develop and the market would fail to ration(QD>QS). In unregulated competition, this situation could not persist because competitionwould drive up the price until the equilibrium quantity and price were reached.A price floor means that the government may hold prices above the market equilibrium priceby agreeing to pay that price for any unsold surplus. The rationing function of the competitiveprice system will not work because sellers will have no competitive pressure to lower pricesto get rid of the surplus, if they can sell it to the government at the supported price there willbe a persistent product surplus (QS>QD).41)Despite a lower price for its product, the widget industry is selling fewer units. How is this possibleif the law of demand has not been violated? Give and explain two distinct reasons.Answer:One reason that can explain the lower sales despite the lower price is a decrease in demand.A leftward shift of the demand curve leads to both a lower equilibrium price and a lowerequilibrium quantity. The lower demand could be the result of an unfavourable change intastes, a decrease in the number of buyers, a decrease in income if widgets are normal goods,an increase in income if widgets are an inferior good, a decrease in the price of a substitute,an increase in the price of a complement, or newly formed expectations of a lower price.A second explanation for the lower sales is the imposition of a price ceiling which lowers theprice below the equilibrium price and reduces the quantity supplied to a level below theequilibrium quantity. Although buyers wish to purchase more units at the price ceiling,sellers have reduced the quantity supplied and therefore fewer units are sold.42)Despite a higher price for widgets, buyers are purchasing more units. How is this possible if thelaw of demand has not been violated? Give and explain two distinct reasons.Answer:One reason that can explain the higher sales despite the higher price is an increase indemand. The rightward shift of the demand curve leads to a lower equilibrium price and alower equilibrium quantity. The higher demand could be the result of an favourable changein tastes, an increase in the number of buyers, an increase in consumer income if widgets arenormal goods, a decrease in consumer income if widgets are an inferior good, an increase inthe price of a substitute, a decrease in the price of a complement, or newly formedexpectations of a higher price.A second explanation for the higher sales is the removal of a price ceiling, which raises theprice to its equilibrium level. Although buyers wish to purchase fewer units, actual sales arehigher since sellers are willing to increase the quantity supplied. When the price ceiling wasin place, a shortage existed and buyers could not purchase all of the units they desired.43)What are the consequences of reduced supply of lettuce for equilibrium price and quantity?Answer:The decrease in the supply of lettuce increases the equilibrium price of lettuce and reducesthe equilibrium quantity.17

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44)What are the consequences of an increase in the demand for Euros on the equilibrium price andquantity of Euros? Does the Canadian dollar appreciate or depreciate as a result? Explain.Answer:The increase in the demand for Euros, increases the equilibrium price of Euros and increasesthe equilibrium quantity of Euros. The Canadian dollar depreciates since it takes moreCanadian currency to buy one Euro.45)What are the consequences for equilibrium price and quantity if the supply of pink salmon hasincreased and the demand for pink salmon has decreased? Assume that supply has increased morethan demand has decreasedAnswer:The equilibrium price of pink salmon has declined. Because supply has increased more thandemand has decreased, the equilibrium quantity of pink salmon has increased46)What are the consequences for equilibrium price and quantity if the supply of gasoline hasdecreased and the demand for gasoline has increased? Assume that the increase in demandoutweighs the decrease in supply.Answer:The equilibrium price rises. In this case, equilibrium quantity increases because the increasein demand outweighs the decrease in supply.47)What are the consequences for equilibrium price and quantity if there is an equal increase in thesupply and demand for sushi?Answer:The equilibrium quantity of sushi increases but the equilibrium price of sushi is unchanged.48)Explain the consequences on the primary and secondary markets for pre-setting below equilibriumprices for the popular women's figure skating event at the Olympic games?Answer:The preset price being below the equilibrium price that would equatequantity demanded and quantity supplied leads to a severe shortageof tickets in theprimary marketNthe market involving the official ticket office. The shortage,in turn, creates asecondary marketin which buyers bid for ticketsheld by initial purchasers rather than the original seller. This leads to the scalping of ticketswhich is selling them above the original ticket price.18

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49)(a) Using the schedules given, determine the demand equation and the supply equation.(b) What is the intercept of the demand equation? What is the slope of the demand equation?(c) What is the intercept of the supply equation? What is the slope of the supply equation?(d) What is the equilibrium price and quantity?Answer:(a) The demand equation is P = 20 - 0.2QDand the supply equation is P = 6 + 0.2QS.(b) The intercept of the demand equation is $20. The slope of the demand equation is -0.2.(c) The intercept of the supply equation is $6. The slope of the supply equation is 0.2.(d) The equilibrium price and quantity are $13 and 35 units.50)Demand is represented by the equation, P = 80 - 0.3QDand supply by the equation P = 30 + 0.2QS.(a) Determine the equilibrium price and quantity.(b) What are the economic effects of a price ceiling at $41?(c) What are the economic effects of a price ceiling at $72?(d) What are the economic effects of a price floor at $62?(e) What are the economic effects of a price floor at $37?Answer:(a) The equilibrium price and quantity are $50 and 100 units.(b) The price ceiling prevents the price from exceeding $41. At $41, the quantity demanded is130 units and the quantity supplied is 55 units. Therefore, a shortage of 75 units exists. Theprice ceiling interferes with the rationing function of price and causes an underallocation ofresources to this market. Not enough output is being produced to satisfy the desires of buyersbecause some producers cannot make a profit at this price level. Allocative efficiency is notachieved at the current level of output because the marginal benefit exceeds the marginal cost.(c) A price ceiling set above the equilibrium price is not effective. Therefore, a price ceiling atthis level has no economic effect and the market remains at equilibrium.(d) The price floor prevents the price from falling below $62. At $62, the quantity demandedis 60 units and the quantity supplied is 160 units. Therefore, a surplus of 100 units exists. Theprice floor interferes with the rationing function of price and causes an overallocation ofresources to this market. Output is being produced that buyers do not wish to purchase at thisprice. Allocative efficiency is not achieved at the current level of output because the marginalcost exceeds the marginal benefit.(e) A price floor set below the equilibrium price is not effective. Therefore, a price floor atthis level has no economic effect and the market remains at equilibrium.19

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51)Determine the equilibrium price and quantity in each of the following.(a) Demand is represented by the equation, P = 28 - .2QDand supply by the equation P = 8 + .3QS.(b) Demand is represented by the equation, P = 30 - .5QDand supply by the equation P = 5 + .5QS.(c) Demand is represented by the equation, P = 20 - .3QDand supply by the equation P = 4 + .2QS.Answer:(a) The equilibrium price and quantity are $20 and 40 units.(b) The equilibrium price and quantity are $17.50 and 25 units.(c) The equilibrium price and quantity are $10.40 and 32 units.52)(a) Determine the equilibrium price and quantity if demand is represented by the equation, P = 40 -.2QDand supply by the equation P = 10 + .4QS.(b) Suppose demand changes and is now represented by the equation P = 52 - .2QD. Has demandincreased or decreased? What is the new equilibrium price and quantity?(c) Suppose instead supply changes and is now represented by the equation P = 16 + .4QS. Hassupply increased or decreased? What is the new equilibrium price and quantity?Answer:(a) The equilibrium price and quantity are $30 and 50 units.(b) Demand has increased since buyers are willing to pay a higher price at each level ofquantity demanded. The new equilibrium price and quantity are $38 and 70 units.(c) Supply has decreased since sellers require a higher price at each level of quantity supplied.The new equilibrium price and quantity are $32 and 40 units.20

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ExamName___________________________________MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.1)The economic concept that serves as the basis for the study of economics is:1)A)inflation.B)money.C)unemployment.D)scarcity.Answer:D2)As a consequence of the condition of scarcity:2)A)things which are plentiful have relatively high prices.B)production has to be centrally planned.C)there is always enough of everything.D)individuals and communities have to make choices among alternatives.Answer:D3)In every economic system, choices must be made because resources are:3)A)finite, but economic wants are insatiable.B)limited, and so are economic wants.C)infinite, but economic wants are finite.D)unlimited, but economic wants are limited.Answer:A4)Opportunity cost is best defined as:4)A)marginal cost minus marginal benefit.B)the value of the best foregone alternative.C)the time spent on an economic activity.D)the money cost of an economic decision.Answer:B5)Tammie makes $150 a day as a bank clerk. She takes off two days of work without payto fly to another city to attend the concert of her favourite music group. The cost oftransportation for the trip is $250. The cost of the concert ticket is $50. The opportunitycost of Tammie's trip to the concert is:5)A)$300B)$450C)$600D)$500Answer:C6)When a provincial government chooses to build more roads, the required resources areno longer available for spending on public education. This dilemma illustrates theconcept of:6)A)marginal analysis.B)opportunity cost.C)full production.D)full employment.Answer:B1

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7)Specialization and trade are beneficial to society because:7)A)scarce resources are utilized more efficiently.B)the output of economic goods may be increased with no increase in resources.C)a division of labour lowers prices for products.D)all of the above are correct.Answer:D8)When economists describe "a market," they mean:8)A)information networks that allow individuals to keep in touch with each other.B)a place where stocks and bonds are traded.C)a hypothetical place where the production of goods and services takes place.D)a mechanism which coordinates actions of consumers and producers to establishequilibrium prices and quantities.Answer:D9)The institution that coordinates actions of consumers and producers to establish pricesfor goods and services is known as:9)A)a market.B)a production possibilities curve.C)a monopoly.D)consumer sovereignty.Answer:A10)A major argument for economic growth is that it:10)A)reduces the amount of taxation.B)creates an equal distribution of income.C)protects common property resources.D)leads to a higher standard of living.Answer:D11)One of the basic economic defences of economic growth rests on the conclusion that:11)A)growth reduces the cost of "common property" resources to society.B)growth makes the gap between unlimited wants and scarce resources less acute.C)a growth-oriented society has a relatively equitable income distribution.D)growth makes workers less obsolete and more secure in employment.Answer:B12)Concern about the general level of prices in an economy is primarily a concern aboutthe economic goal of:12)A)economic efficiency.B)equity.C)economic security.D)price-level stability.Answer:D2

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13)Assume that a tradeoff exists in the short run between inflation and unemployment. Thisrelationship means that:13)A)a low rate of unemployment causes a low rate of inflation.B)less unemployment can be achieved with more inflation.C)the unemployment rate always equals the inflation rate.D)less unemployment can be achieved with less inflation.Answer:B14)The study of economics is primarily concerned with:14)A)keeping private businesses from losing money.B)demonstrating that capitalistic economies are superior to socialistic economies.C)determining the most equitable distribution of society's output.D)choices which are made in seeking to use scarce resources efficiently.Answer:D15)The assertion that "There is no free lunch" means:15)A)marginal analysis is not used in economic reasoning.B)choices do not need be made if behaviour is rational.C)there are always tradeoffs between economic goals.D)all production involves the use of scarce resources and thus the sacrifice ofalternative goods.Answer:D16)The study of economics exists because:16)A)resources are scarce in relation to human material wants.B)government interferes with the efficient allocation of scarce resources.C)the market system is an obstacle to the efficient use of plentiful resources to satisfyconstrained wants.D)resources are overly abundant as compared to wants; thus, an allocation problemexists.Answer:A17)Economics may best be defined as:17)A)the empirical testing of value judgments through the use of induction and deduction.B)the study of the behaviour of people and institutions in the production, distribution,and consumption of scarce goods.C)the interaction between macro and micro considerations.D)the use of policy to refute facts and hypotheses.Answer:B18)Purposeful behaviour suggests that:18)A)individuals make decisions with some desired outcome in mind.B)resource availability exceeds material wants.C)everyone will make identical choices.D)an individual's economic goals cannot involve tradeoffs.Answer:A3

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19)Consumers spend their incomes to get the maximum benefit or satisfaction from thegoods and services they purchase. This is a reflection of:19)A)the tradeoff problem which exists between competing goals.B)marginal costs which exceed marginal benefits.C)purposeful behaviour.D)resource scarcity and the necessity of choice.Answer:C20)The "economic perspective" refers to:20)A)the making of rational decisions in a context of marginal costs and marginalbenefits.B)macroeconomic phenomena, but not microeconomic phenomena.C)microeconomic phenomena, but not macroeconomic phenomena.D)unlimited resources in a context of limited material wants.Answer:A21)The "economic perspective" entails:21)A)the altering of behaviour when marginal benefits and marginal costs change.B)rational behaviour by individuals and institutions.C)a comparison of marginal benefits and marginal costs in decision making.D)all of the above.Answer:D22)The economic perspective used in customer decision making at fast-food restaurants isreflected in:22)A)customers leaving rather than waiting if all lines are long.B)all customer lines tending to be of equal length.C)customers selecting the shortest line.D)all of the above.Answer:D23)How is the economic perspective reflected in lines for fast food?23)A)Customers select the shortest line because they believe it will reduce their time costof obtaining food.B)Lines will typically be of unequal length because of the inefficiencies in counterservice.C)Customers select the shortest line because they have perfect information.D)The set of food choices is often too complex for most customers and thus createslong lines.Answer:A4

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24)From an economic perspective, when consumers leave a fast-food restaurant becausethe lines to be served are too long, they have concluded that the:24)A)management is exhibiting irrational behaviour by not maximizing profits.B)marginal cost of waiting is less than the marginal benefit of being served.C)management is making an assumption that other things are equal.D)marginal cost of waiting is greater than the marginal benefit of being served.Answer:D25)Consumers might leave a fast-food restaurant without being served because:25)A)they conclude that the marginal cost (monetary plus time costs) exceeds themarginal benefit.B)the lines waiting for service are not of equal length.C)the environment is not conducive to a rational choice.D)they are misinformed about the marginal cost and marginal benefits of the foodbeing served.Answer:A26)At fast-food restaurants:26)A)decisions are usually made by trial and error.B)decisions entail comparisons of marginal costs and marginal benefits.C)consumers enjoy complete and accurate information.D)benefits always exceed costs.Answer:B27)Economics involves "marginal analysis" because:27)A)much economic behaviour is irrational.B)most decisions involve changes in the status quo.C)marginal benefits always exceed marginal costs.D)marginal costs always exceed marginal benefits.Answer:B28)You should decide to go to a movie:28)A)if your income will allow you to buy a ticketB)because movies are inherently good products.C)if the marginal benefit of the movie exceeds its marginal cost.D)if the marginal cost of the movie exceeds its marginal benefit.Answer:C29)Marginal costs exist because:29)A)most decisions do not involve sacrifices or tradeoffs.B)wants are scarce relative to resources.C)households and businesses make rational decisions.D)the decision to produce more of some product means the sacrifice of other products.Answer:D5

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30)Even though local newspapers are very inexpensive, people rarely buy more than one ofthem each day. This fact:30)A)is an example of irrational behaviour.B)implies that reading should be taught through phonics rather than the wholelanguage method.C)implies that, for most people, the marginal benefit of reading a second newspaper isless than the marginal cost.D)contradicts the economic perspective.Answer:C31)The process of developing hypotheses, testing them against facts, and using the resultsto construct theories is called:31)A)microeconomics.B)the scientific method.C)opportunity cost calculation.D)marginal analysis.Answer:B32)A "hypothesis" is:32)A)always the result of induction.B)a fundamental truth which all economists accept.C)the same as a normative statement.D)a tentative, untested principle.Answer:D33)From the perspective of economists, which term provides the highest degree ofconfidence for explaining economic behaviour?33)A)a factB)an economic principle or a lawC)a hypothesisD)an assumptionAnswer:B34)In constructing models, economists:34)A)make simplifying assumptions.B)must use mathematical equations.C)attempt to duplicate the real world.D)include all available information.Answer:A35)Economic models:35)A)are limited to variables which are directly related to one another.B)emphasize basic economic relationships by abstracting from the complexities of thereal world.C)are unrealistic and therefore of no practical consequence.D)are of limited use because they cannot be tested empirically.Answer:B36)An economic model is:36)A)built using theory.B)built on correlations.C)a fact.D)a value judgment.Answer:A6

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37)The term "ceteris paribus" means:37)A)that if event A precedes event B, A has caused B.B)prosperity inevitably follows recession.C)that economics deals with facts, not values.D)other things equal.Answer:D38)Suppose an economist says that "Other things equal, the lower the price of bananas, thegreater the amount of bananas purchased." This statement indicates that:38)A)all factors other than the price of bananas (for example, consumer tastes andincomes) are assumed to be constant.B)the quantity of bananas purchased determines the price of bananas.C)one cannot generalize about the relationship between the price of bananas and thequantity purchased.D)economists can conduct controlled laboratory experiments.Answer:A39)The term "other things equal" means that:39)A)when variable X increases so does related variable Y.B)many variables affect the variable under consideration.C)the associated statement is normative.D)the assumption that factors other than those being considered do not change.Answer:D40)The basic purpose of the "other things equal" assumption is to:40)A)allow one to focus upon macro variables by ignoring micro variables.B)allow one to focus upon micro variables by ignoring macro variables.C)allow one to reason about the relationship between variables X and Y without theintrusion of variable Z.D)determine whether X causes Y or vice versa.Answer:C41)Microeconomics is concerned with:41)A)a detailed examination of specific economic units which comprise the economicsystem.B)the establishing of an overall view of the operation of the economic system.C)the concealing of detailed information about specific segments of the economy.D)the aggregate or total levels of income, employment, and output.Answer:A42)Microeconomics:42)A)is concerned with the aggregate or total levels of income, employment, and output.B)is not concerned with details, but only with the overall "big picture" of theeconomy.C)describes the aggregate flows of output and income.D)is concerned with individual economic units and specific markets.Answer:D7

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43)Which of the following is a microeconomic statement?43)A)The real domestic output increased by 2.5 percent last year.B)The general price level increased by 4 percent last year.C)Unemployment was 8.3 percent of the labour force last year.D)The price of personal computers declined last year.Answer:D44)Macroeconomics approaches the study of economics from the viewpoint of:44)A)the entire economy.B)individual firms.C)governmental units.D)the operation of specific product and resource markets.Answer:A45)Which of the following is associated with macroeconomics?45)A)an examination of the incomes of the University of Toronto Business SchoolgraduatesB)a case study of pricing and production in the textbook industryC)a study of the trend of pecan prices since World War IID)an empirical investigation of the general price level and unemployment rates in the2000sAnswer:D46)The problems of aggregate inflation and unemployment are:46)A)major topics of microeconomics.B)major topics of macroeconomics.C)not relevant to the Canadian economy.D)peculiar to socialistic economies.Answer:B47)Which of the following statements pertains to macroeconomics?47)A)The national productivity rate grew by 1.4 percent last year.B)The Pumpkin Center Chartered Bank increased its interest rate on consumer loansby 1 percent.C)Because the minimum wage was raised, Mrs. Beepath decided to enter the labourforce.D)A decline in the price of soybeans caused farmer Wanek to plant more land inwheat.Answer:A48)Macroeconomics can best be described as the:48)A)study of the large aggregates of the economy or the economy as a whole.B)analysis of how firms attempt to maximize their profits.C)analysis of how a consumer tries to spend income.D)study of how supply and demand determine prices in individual markets.Answer:A8

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49)Which of the following is a macroeconomic statement?49)A)The productivity of steelworkers increased by 1 percent in 2012.B)General Motors' profits increased in 2012.C)The gross profits of all Canadian businesses were $70 billion last year.D)The price of beef declined by 3 percent last year.Answer:C50)A positive statement is one which is:50)A)objective and is based on facts.B)subjective and is based on a value judgment.C)derived by an abstract generalization.D)suggestive of what should be done.Answer:A51)Which of the following is a positive statement?51)A)It is too hot to jog today.B)The temperature is 30 degrees today.C)The humidity is too high today.D)I enjoy summer evenings when it cools off.Answer:B52)A positive statement is concerned with:52)A)what is.B)some goal which is desirable to society.C)the formulation of economic policy.D)what should be.Answer:A53)A normative statement is one which:53)A)pertains only to microeconomics.B)pertains only to macroeconomics.C)is based on the law of averages.D)is based upon value judgments.Answer:D54)Which of the following is a normative statement?54)A)It is too hot to play tennis today.B)It will cool off later this evening.C)The humidity is high today.D)The temperature is high today.Answer:A55)Normative statements are concerned with:55)A)what is.B)rational choice involving costs and benefits.C)facts and theories.D)what ought to be.Answer:D9

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56)Most of the disagreement among economists involves:56)A)theories.B)positive statements.C)normative statements.D)facts.Answer:C57)Economics is concerned with using scarce productive resources efficiently in attemptingto satisfy society's material wants. This statement is:57)A)positive, but incorrect.B)normative and correct.C)normative, but incorrect.D)positive and correct.Answer:D58)Ben says that "An increase in the tax on beer will raise its price." Holly argues that"Taxes should be increased on beer because college students drink too much." We canconclude that:58)A)Holly's statement is normative, but Ben's is positive.B)Both statements are normative.C)Ben's statement is normative, but Holly's is positive.D)Both statements are positive.Answer:A59)The global financial crisis that spread to Canada in late 2008 has been dubbed:59)A)The great recession.B)The great depression.C)The great financial crisis.D)The housing bubble crash.Answer:A60)The individuals and society both face an economic problem. This problem arises fromthe fact that:60)A)resources are scarce relative to individual's wants.B)individuals and institutions behave only in their self-interest.C)both wants and resources are unlimited.D)wants are limited but the resources are not.Answer:A61)The individual's limited income problem:61)A)persists only because countries have failed to achieve continuous full employment.B)has been eliminated in affluent societies such as Canada and the United States.C)has been solved in all industrialized nations.D)exists because material wants are limited.Answer:D10

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