Chapter 3.5

a. To take advantage of high prices for snow shovels during a snowy​ winter, Alexander​ Shovels, Inc., decides to increase output. 4. b. The success of​ Pepsi's LIFEWTR and​ Coke's smartwater leads more firms to begin producing premium bottled water. 3. c. In the six months following the Japanese earthquake and tsunami in​ 2011, production of automobiles in Japan declined by 20 percent. 1

4 3 1

Which of the following events would cause the supply curve to increase from S1 to S3​? A.A decrease in the price of inputs. B.An increase in the price of inputs. C.Higher expected future prices. D.A decrease in the number of firms in the market.

A.A decrease in the price of inputs.

What do economists mean when they use the Latin expression ceteris paribus​? A.All else equal. B.The whole is just the sum of the parts. C.Prior to an event D.The thing speaks for itself.

A.All else equal.

Suppose that the table shows the quantity supplied of UGG boots at five different prices in 2018 and in 2019. Refer to the table and note the change in the supply of UGG boots from 2018 to 2019. Which of the following could explain the change in supply observed in​ 2019? ​(Check all that​ apply.) A.An increase in the expected future price. B.A decrease in the price of UGG boots. C.A decrease in the demand for UGG boots. D.A decrease in the number of sellers.

A.An increase in the expected future price. D.A decrease in the number of sellers.

Recent medical research revealed that the presence of gluten in oats can cause celiac disease in the elderly. Since the elderly are an important consumer segment in this​ market, industry experts predicted a fall in the price of​ commercially-available oats.​ However, after the publication of the​ research, the price of oats actually increased. The industry experts most likely assumed which of the​ following? A.In​ general, the elderly were not aware of the recent research concerning gluten and celiac disease. B.Elderly individuals who are concerned about celiac disease would consult with their doctors before altering their diets. C.Celiac disease is the most important health concern for the elderly. D.The elderly are greater consumers of oats than any other market segment. E.Commercially-available oats provide no significant health benefits.

A.In​ general, the elderly were not aware of the recent research concerning gluten and celiac disease.

From 1979 to​ 2015, China had a policy that allowed couples to have only one child.​ (Since 2016, couples have been allowed to have two​ children.) The​ one-child policy caused a change in the demographics of China. Between 1980 and​ 2015, the share of the population aged 14 and under decreased from 36 percent to 17 percent.​ And, as parents attempted to ensure that the lone child was a​ son, the number of male children relative to female children increased. ​Sources: World​ Bank, World Development Indicators​, April​ 2016; and​ "China New​ 'Two Child' Policy Increases Births by 7.9​ Percent, Government​ Says," cbsnews.com, January​ 23, 2017. How has the​ one-child policy changed the relative demand for goods and services in​ China? A.It has undoubtedly shifted away from goods and services appealing to youthful​ buyers, particularly youthful female buyers. B.The Chinese economy is still largely a command​ economy; market​ forces, and hence relative​ demands, are insignificant. C.One would only expect the relative demand for baby related products to be reduced. D.The sheer number of consumers in​ China, coupled with that​ country's very rapid​ growth, renders relative demand shifts totally insignificant.

A.It has undoubtedly shifted away from goods and services appealing to youthful​ buyers, particularly youthful female buyers.

According to a news story about the International Energy​ Agency, the agency forecast that​ "the current slide in​ [oil] prices​ won't [reduce] global​ supply." ​Source: Sarah​ Kent, "Plunging Oil Prices​ Won't Dent Supply in Short​ Term," Wall Street Journal​, December​ 12, 2014. Would a decline in oil prices ever cause a reduction in the supply of​ oil? A.No, a decline in oil prices would reduce the quantity of oil​ supplied, not the supply of oil. B.yes, a decline in oil prices would reduce the supply of​ oil, but not the quantity of oil supplied. C.No, the supply of oil is fixed. D.yes, a decline in oil prices would reduce both the quantity of oil supplied and the supply of oil.

A.No, a decline in oil prices would reduce the quantity of oil​ supplied, not the supply of oil.

Suppose the demand for premium bottled water increases rapidly during​ 2018. At the same​ time, six more firms begin producing premium bottled water. A student remarks​ that, because of these​ events, we​ can't know for certain whether the price of premium bottled water will rise or fall. The​ student's remarks​ (that, because of these​ events, we​ can't know for certain whether the price of premium bottled water will rise or​ fall) is A.correct. When there is an increase in supply and an increase in​ demand, the new equilibrium quantity increases but whether the equilibrium price increases or decreases is unknown. B.incorrect. When there is an increase in supply and an increase in​ demand, the new equilibrium price will be unambiguously higher. C.correct. When there is an increase in supply and an increase in​ demand, the change in both new equilibrium price and equilibrium quantity are unknown. D.incorrect. When there is an increase in supply and an increase in​ demand, the new equilibrium price will be unambiguously lower. The new equilibrium quantity will be A.between points E and F. B.either point C or point D. C.point D. D.point C.

A.correct. When there is an increase in supply and an increase in​ demand, the new equilibrium quantity increases but whether the equilibrium price increases or decreases is unknown. B.either point C or point D.

In the diagram to the​ right, point A provides the​ _____, point B the​ _____, and point C the​ _____. A.equilibrium​ price; market​ equilibrium; equilibrium quantity B.market clearing​ price; equilibrium​ point; shortage C.equilibrium​ price; market​ equilibrium; surplus D.equilibrium​ price; surplus or​ shortage; equilibrium quantity

A.equilibrium​ price; market​ equilibrium; equilibrium quantity

According to the law of​ demand, A.there is an inverse relationship between price and quantity demanded. B.when the price of a product​ falls, quantity demanded will decrease. C.when the price of a product​ increases, quantity demanded will increase. D.All of the above.

A.there is an inverse relationship between price and quantity demanded.

A student was asked to draw a demand and supply graph to illustrate the effect on the market for premium bottled water of a fall in the price of electrolytes used in some brands of premium bottled​ water, holding everything else constant. She drew the graph to the right and explained it as​ follows: ​"Electrolytes are an input to some brands of premium bottled​ water, so a fall in the price of electrolytes will cause the supply curve for premium bottled water to shift to the right​ (from S1 to S2). Because this shift in the supply curve results in a lower price P2, consumers will want to buy more premium bottled water and the demand curve will shift to the right​ (from D1 to D2). We know that more premium bottled water will be​ sold, but we​ can't be sure whether the price of premium bottled water will rise or fall. That depends on whether the supply curve or the demand curve has shifted farther to the right. I assume that the effect on supply is greater than the effect on​ demand, so I show the final equilibrium price P3 as being lower than the initial equilibrium price P1.​" Where is the flaw in the​ student's argument? A. Supply will shift inward. B. Demand will not shift. C. Demand will shift inward.

B. Demand will not shift.

The diagram in panel b is an example of A.a supply schedule. B.a supply curve. C.the income effect. D.the substitution effect.

B.a supply curve.

An article in the Wall Street Journal noted that an​ "increase in the price of oil quickly reduces demand for​ oil." ​Source: Josh​ Zumbrun, "Oil's Plunge Could Help Send Its Price Back​ Up," Wall Street Journal​, February​ 22, 2015. This statement is A.accurate because a change in the price of oil affects the quantity of oil demanded​, but does not affect the demand for oil. B.incorrect because a change in the price of oil affects the quantity of oil demanded​, but does not affect the demand for oil. C.accurate because a change in the price of oil affects the demand for oil​, but does not affect the quantity of oil demanded. D.incorrect because a change in the price of oil affects the demand for oil​, but does not affect the quantity of oil demanded.

B.incorrect because a change in the price of oil affects the quantity of oil demanded​, but does not affect the demand for oil.

Years​ ago, an apple producer argued that the United States should enact a​ tariff, or a​ tax, on imports of bananas. His reasoning was​ that: ​"the enormous imports of cheap bananas into the United States tend to curtail the domestic consumption of fresh fruits produced in the United​ States." ​Source: Quoted in Douglas A.​ Irwin, Peddling​ Protectionism: Smoot-Hawley and the Great​ Depression, Princeton,​ NJ: Princeton University​ Press, 2011, p. 22. This producer apparently assumed apples and bananas to be substitutes. In a graph​ (not shown) of the banana market in the United​ States, the imposition of a tariff on banana imports would A.shift supply​ leftward, decreasing equilibrium price and increasing equilibrium quantity. B.shift supply​ leftward, increasing equilibrium price and decreasing equilibrium quantity. Your answer is correct. C.shift demand​ leftward, decreasing equilibrium price and equilibrium quantity. D.not shift any curve but raise the equilibrium price because taxes are always passed on to the consumer.

B.shift supply​ leftward, increasing equilibrium price and decreasing equilibrium quantity.

The law of demand is the assertion that A.the quantity demanded of a product is directly related to its price. B.the quantity demanded of a product is inversely related to its price. C.the demand for a product is negatively related to its price. D.changes in price and changes in quantity demanded move in the same direction. An increase in the price of a product causes a decrease in quantity demanded because of the income and substitution effects. More​ specifically, A.the substitution effect is the decrease in quantity demanded because there are fewer consumers and the income effect is the decrease in quantity demanded because consumer incomes failed to increase. B.the substitution effect is the decrease in quantity demanded because the product is more expensive relative to other goods and the income effect is the decrease in quantity demanded owing to the decline in​ consumers' purchasing power. C.the substitution effect is the decrease in quantity demanded because the​ consumers' purchasing power is reduced and the income effect is the decrease in quantity demanded owing to the fact that the product is more expensive relative to other goods. D.the substitution effect is the decrease in quantity demanded because consumer tastes have changed and the income effect is the decrease in quantity demanded because consumer incomes have fallen.

B.the quantity demanded of a product is inversely related to its price. B.the substitution effect is the decrease in quantity demanded because the product is more expensive relative to other goods and the income effect is the decrease in quantity demanded owing to the decline in​ consumers' purchasing power.

According to the law of demandLOADING...​, there is an inverse relationship between price and quantity demanded. That​ is, the demand curve for goods and services slopes downward.​ Why? A.When the price of a good​ increases, consumers purchase complementary goods that are now relatively less expensive. B.When price​ increases, quantity demanded increases. C.When the price of a good​ increases, consumers' purchasing power​ falls, and they cannot buy as much of the good as they did prior to the price change. D.A and C only.

C.When the price of a good​ increases, consumers' purchasing power​ falls, and they cannot buy as much of the good as they did prior to the price change.

The diagram in panel b is an example of A.a demand schedule. B.the income effect. C.a demand curve. D.the substitution effect.

C.a demand curve.

Complete the following​ statement: ​"When there is a shortageLOADING... of a good A.as prices​ increase, producers are driven to produce less. B.producers react to shortages by lowering prices. C.consumers compete against one another by bidding the price upward. D.as prices​ increase, consumer demand more of a particular good. E.decreasing prices lead to a change in demand. The process continues until the market is finally in​ equilibrium."

C.consumers compete against one another by bidding the price upward.

[Related to Chapter​ Opener] A number of industry analysts believe that smartphone prices will decline over the next few years. ​Sources: Phil​ Goldstein, "IDC: Smartphone Shipments to Hit 1.4B in​ 2015, and Prices Will Keep​ Falling," fiercewireless.com, December​ 2, 2014; and Rob van der​ Meulen," Gartner Says Global Devices Shipments to Grow 2.8 Percent in​ 2015," gartner.com, March​ 19, 2015. If these forecasts are​ correct, the demand for smartwatches will A.increase and shift to the right because smartphones and smartwatches are substitutes. B.increase and shift to the left because smartphones and smartwatches are complements. C.decrease and shift to the left because smartphones and smartwatches are substitutes. D.decrease and shift to the right because smartphones and smartwatches are complements.

C.decrease and shift to the left because smartphones and smartwatches are substitutes.

Oil prices plummeted from over​ $100 per barrel in​ mid- 2014 to under​ $30 in early 2016. According to a Reuters​ article, oil traders in 2015 and 2016 put massive amounts of oil in storage​ (even on tankers at​ sea), anticipating higher prices in the future. The article noted that in early​ 2017, "traders are turning the spigots to drain the priciest storage tanks holding U.S. crude stockpiles as strengthening markets make it unprofitable to store for future​ sale." ​Source: Catherine Ngai and Liz​ Hampton, "Traders Drain Pricey U.S. Oil Storage as OPEC Deal​ Bites," reuters.com, February​ 24, 2017. Holding some oil in storage rather than selling it would A.increase the supply of​ oil, shifting it to the left. B.increase the supply of​ oil, shifting it to the right. C.decrease the supply of​ oil, shifting it to the left. D.decrease the supply of​ oil, shifting it to the right.

C.decrease the supply of​ oil, shifting it to the left.

The difference between a change in supply and a change in the quantity supplied is that the latter is A.conditional upon a change in the​ former, but not vice versa. B.determined by the willingness of producers to sell while the former is set by the ability of firms to produce. C.displayed graphically as a movement along a supply curve while the former is shown as a shift in the supply curve. D.caused by a variety of variables other than the product's price while the former is produced by a change in

C.displayed graphically as a movement along a supply curve while the former is shown as a shift in the supply curve.

​Historically, the production of many perishable​ foods, such as dairy​ products, was highly seasonal.​ Thus, as the supply of those products​ fluctuated, prices tended to fluctuate tremendously—typically by 25 to 50 percent or more—over the course of the year. One impact of mechanical​ refrigeration, which was commercialized on a large scale in the last decade of the nineteenth​ century, was that suppliers could store perishables from one season to the next. Economists have estimated that as a result of refrigerated​ storage, wholesale prices rose by roughly 10 percent during peak supply​ periods, while they fell by almost the same amount during the off season. ​Source: Lee A.​ Craig, Barry​ Goodwin, and Thomas​ Grennes, "The Effect of Mechanical Refrigeration on Nutrition in the​ U.S.," Social Science History​, Vol.​ 28, No. 2​ (Summer 2004), pp.​ 327-328. Choose the graph below that corresponds to the change for the peak season.

D

A perfectly competitive market is a market that meets the conditions of A.(1) many buyers and​ sellers, (2) all firms selling identical​ products, and​ (3) significant barriers to new firms entering the market. B.(1) few buyers and​ sellers, (2) all firms selling identical​ products, and​ (3) no barriers to new firms entering the market. C.​(1) many buyers and​ sellers, (2) all firms selling differentiated​ products, and​ (3) no barriers to new firms entering the market. D.(1) many buyers and​ sellers, (2) all firms selling identical​ products, and​ (3) no barriers to new firms entering the market.

D.(1) many buyers and​ sellers, (2) all firms selling identical​ products, and​ (3) no barriers to new firms entering the market.

When economists speak of a surplus​, they mean a situation in which A.firms have unsold goods piling up. B.the market price is above the equilibrium price. C.the quantity supplied exceeds quantity demanded. D.all of the above. E.A and B only.

D.all of the above.

According to an article in the Wall Street Journal​, the demand for orange juice is declining in the United States​ "as newer entrants in the beverage​ aisle, including​ more-exotic fruit​ juices, such as​ pomegranate, energy drinks and​ ready-to-drink coffee, have grabbed a greater share of the​ market." At the same​ time, orange juice production has been declining as bacterial infections reduce the quantity of fruit that orange trees can produce. The article notes that despite the decline in the demand for orange​ juice, the price of orange juice might increase. ​Source: Alexandra​ Wexler, "U.S.​ Orange-Juice Sales Fall to Record​ Low," Wall Street Journal​, August​ 18, 2014. On the graph to the​ right, assuming that the initial point is​ 'A', move the cursor to illustrate how the price of orange juice might also increase as a result of these events. Given the scenario described in the​ article, the price of orange juice could increase if A.demand decreased more than the supply decreased. B.demand increased less than the supply decreased. C.demand increased more than the supply decreased. D.demand decreased less than the supply decreased.

D.demand decreased less than the supply decreased.

A news story from 2017 about the oil market​ stated, "crude oil prices fell ... in part​ [due to] renewed concerns about the global supply​ glut." ​Source: Paul​ Ebeling, "Crude Oil Prices​ Falling, Traders Worry About Global Supply​ Glut," livetradingnews.com, March​ 27, 2017. a. In referring to a​ "global glut," the article describes the result of a significant A.decrease in supply​ of, relative to the demand​ for, crude oil. B.increase in demand​ for, and the supply​ of, crude oil. C.increase in demand​ for, relative to the supply​ of, crude oil. D.increase in supply​ of, relative to the demand​ for, crude oil. This change resulted in a A.a shortage of oil such that there is a greater quantity demanded than quantity supplied of crude oil. B.a shortage of oil such that there is a greater quantity supplied than quantity demanded for crude oil. C.a surplus of oil such that there is a greater quantity demanded than quantity supplied of crude oil. D.a surplus of oil such that there is a greater quantity supplied than quantity demanded for crude oil. b. In response to the global glut of​ oil, the market price will A.rise to a​ new, higher equilibrium price at which the quantity demanded would equal the quantity supplied. B.fall to a​ new, lower equilibrium price at which the quantity demanded would be lower than the quantity supplied. C.rise to a​ new, higher equilibrium price at which the quantity demanded would be greater than the quantity supplied. D.fall to a​ new, lower equilibrium price at which the quantity demanded would equal the quantity supplied. Your answer is correct. c. The glut will start to shrink when crude oil producers A.increase the amount that they offer for​ sale, and buyers increase the amount they buy. B.reduce the amount that they offer for​ sale, and buyers decrease the amount they buy. C. reduce the amount that they offer for​ sale, and buyers increase the amount they buy. D.increase the amount that they offer for​ sale, and buyers decrease the amount they buy.

D.increase in supply​ of, relative to the demand​ for, crude oil. D.a surplus of oil such that there is a greater quantity supplied than quantity demanded for crude oil. D.fall to a​ new, lower equilibrium price at which the quantity demanded would equal the quantity supplied. C. reduce the amount that they offer for​ sale, and buyers increase the amount they buy.

Which diagram represents the​ cancer-fighting drug? Figure 2 ​Why? A.Market demand reflects the availability of many substitutes. B.Market demand reflects the availability of few substitutes. C.Market supply reflects the availability of few substitutes.

Figure 2 B.Market demand reflects the availability of few substitutes.

Proposals have been made to increase government regulation of childcare businesses​ by, for​ instance, setting education requirements for childcare workers. Suppose that these regulations increase the quality of childcare and cause the demand for childcare services to increase. At the same​ time, assume that complying with the new government regulations increases the costs of childcare businesses. Given the above​ developments: ​1.) Use the line drawing tool to draw a new demand curve. Label this line ​'D2​'. ​2.) Use the line drawing tool to draw a new supply curve. Label this line ​'S2​'. Carefully follow the instructions​ above, and only draw the required objects. Given these​ changes, the net effect on equilibrium price is an increase​, and the effect on equilibrium quantity is uncertain.

an increase uncertain

Refer to the diagram to the​ right: Use the line drawing tool to draw a demand curve shifting to the right. Label this line ​'D2​'. Carefully follow the instructions​ above, and only draw the required objects. With this​ shift, equilibrium price will increase and equilibrium quantity will increase.

increase increase

Consider the market for the Nissan Xterra. Suppose the price of​ metal, which is an input in automobile​ production, decreases. Use the line drawing tool to show how this affects the supply of Nissan Xterras by drawing a new supply curve. Properly label this line. Carefully follow the instructions​ above, and only draw the required objects. According to the​ graph, when the price of metal​ decreases, the quantity of Nissan Xterras supplied at any particular Xterra price increases. ​Instead, consider the future price of Xterras. If Nissan believes the future price of Xterras will be higher​, then Nissan may reduce supply today.

increases reduce

In the diagram to the​ right, when demand increases​, a shortage develops at the original price. Equilibrium price will rise and equilibrium quantity will rise as a new equilibrium is established.

shortage rise rise

In the diagram to the​ right, when the price is ​$65per​ player, the amount of the surplus is 40

surplus 40

You observe that when the price of Apple iPods decreases the demand for TI financial calculators remains the same. Apple iPods and TI financial calculators are considered to be You observe that when the price of Oscar Mayer hot dogs decreases the demand for Wonder hot dog buns increases. Oscar Mayer hot dogs and Wonder hot dog buns are considered to be You observe that when the price of Pepsi LIFEWTR increases the demand for Diet Coke increases. Pepsi LIFEWTR and Diet Coke are considered to be

unrelated goods. complementary goods. substitute goods.