Chapter 4 : Equilibrium - How Supply and Demand Determine Prices

Shortage

a situation in which the quantity demanded is greater than the quantity supplied

Surplus

a situation in which the quantity supplied is greater than the quantity demanded

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). If the trade takes place at $4, how much producer surplus goes to Vincent? a. $1 b. $3 c. $4 d. $8

a. $1

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). If the trade takes place at $7, how much consumer surplus goes to Jules? a. $1 b. $3 c. $4 d. $8

a. $1

When demand increases what happens to price and quantity in equilibrium? a. Equilibirum price increases and equilibrium quantity increases. b. Equilibrium price increases and equilibrium quantity decreases. c. Equilibrium price decreases and equilibrium quantity increases. d. Equilibrium price decreases and equilibrium quantity decreases.

a. Equilibirum price increases and equilibrium quantity increases.

Suppose that the forecast is for a snowstorm tomorrow. How does this affect the market for snow shovels? a. It causes an increase in demand for snow shovels. b. It causes a decrease in demand for snow shovels. c. It causes an increase in the quantity of snow shovels demanded. d. It causes a decrease in the quantity of snow shovels demanded.

a. It causes an increase in demand for snow shovels.

When the market price of a good is above the equilibrium price, what does greed (in other words, selfinterest) on the part of sellers tend to do to the price? a. It pushes the price down. b. It pushes the price up. c. It doesn't affect the price. d. The impact of greed on price is unpredictable.

a. It pushes the price down.

Economists often say that prices are a "rationing mechanism." If the supply of a good decreases, how do prices "ration" these now-scarce goods in a competitive market? a. Prices allocate goods to the people with the highest willingness to pay. b. Prices allocate goods to the people with the lowest willingness to pay. c. Prices allocate goods to those with the lowest value of their own time. d. Prices use a combination of willingness to pay and value of time to allocate goods.

a. Prices allocate goods to the people with the highest willingness to pay.

When the crime rate falls in the area around a factory, what probably happens to wages at that factory? a. Wage rates would rise. b. Wage rates would fall. c. Wage rates would remain the same. d. The wages would rise initially, then drop back to what they were before the crime rate fell.

b. Wage rates would fall.

If the price in a market is above the equilibrium price, then the market is experiencing: a. a shortage. b. a surplus. c. an equilibrium. d. Any of these is possible.

b. a surplus.

"According to the supply and demand model, all else equal, an increase in consumer incomes will cause the price of a good to increase." This statement is: a. true. b. false, because whether price rises or falls depends on whether the good is normal or inferior. c. false, because whether price rises or falls depends on whether the good is a substitute or a complement. d. false, because an increase in consumer incomes will cause the price of a good to decrease.

b. false, because whether price rises or falls depends on whether the good is normal or inferior.

What do lower production costs result in? a. higher equilibrium price b. lower equilibrium price c. lower equilibrium quantity d. no change in equilibrium price

b. lower equilibrium price

Bill is in Japan, trying to get a job as a full-time translator; he wants to translate English TV shows into Japanese and vice versa. He notices that the wage for translators is very low. Who is the competition that is pushing the wage down? a. businesses that hire translators b. other translators c. both businesses that hire translators and other translators d. Japanese businesses that do not hire translators.

b. other translators

Jon is on eBay bidding for a first edition of the influential Frank Miller graphic novel Batman: The Dark Knight Returns. In this market, with whom is Jon competing? a. the seller of the graphic novel b. others who are bidding on the graphic novel c. both the seller and other bidders d. himself

b. others who are bidding on the graphic novel

Think about two products, "safe cars" (a heavy car such as a BMW 530xi with infrared night vision, fourwheel antilock brakes, and electronic stability control), and "dangerous cars" (a lightweight car without much in the way of safety features). Economists would describe these as: a. complements. b. substitutes. c. supplements. d. unrelated goods.

b. substitutes.

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). If the trade takes place at $4, how much consumer surplus goes to Jules? a. $1 b. $3 c. $4 d. $8

c. $4

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). If the trade takes place at $7, how much producer surplus goes to Vincent? a. $1 b. $3 c. $4 d. $8

c. $4

If the price of margarine decreases, what happens to the demand for butter? What happens to the equilibrium quantity and price for butter? a. Demand for butter increases and the equilibrium price and quantity of butter increase. b. Demand for butter increases, the equilibrium price of butter decreases, and the equilibrium quantity of butter increases. c. Demand for butter decreases and the equilibrium price and quantity of butter decrease. d. Demand for butter dec

c. Demand for butter decreases and the equilibrium price and quantity of butter decrease.

When supply increases what happens to price and quantity in equilibrium? a. Equilibrium price increases and equilibrium quantity increases. b. Equilibrium price increases and equilibrium quantity decreases. c. Equilibrium price decreases and equilibrium quantity increases. d. Equilibrium price decreases and equilibrium quantity decreases

c. Equilibrium price decreases and equilibrium quantity increases.

Suppose that the forecast is for a snowstorm tomorrow. How does this affect the supply side of the market for snow shovels? a. It causes an increase in the supply of snow shovels. b. It causes a decrease in the supply of snow shovels. c. It causes an increase in the quantity supplied of snow shovels. d. It causes a decrease in the quantity supplied of snow shovels.

c. It causes an increase in the quantity supplied of snow shovels.

Equilibrium Price

the price at which the quantity demanded is equal to the quantity supplied

Equilibrium Quantity

the quantity at which the quantity demanded is equal to the quantity supplied

In recent years, there have been news reports that toys made in China are unsafe. When those news reports show up on CNN and Fox News, what probably happens to the equilibrium price and quantity of toys made in China? Are Chinese toymakers made better or worse off by such news? a. The equilibrium price and quantity of toys falls and Chinese toymakers are worse off. b. The equilibrium price and quantity of toys rises and Chinese toymakers are better off. c. The equilibrium price of toys rises and the equilibrium quantity falls. The impact on Chinese toymakers is uncertain. d. The equilibrium price of toys falls and the equilibrium quantity rises. The impact on Chinese toymakers is uncertain.

a. The equilibrium price and quantity of toys falls and Chinese toymakers are worse off.

Over the last 10 years, China and India have both become substantially richer. At the same time, oil prices have risen. The change in oil prices is due to: a. a rise in demand. b. a fall in demand. c. a rise in supply. d. a fall in supply

a. a rise in demand.

A movement along a fixed demand curve caused by a rightward shift in the supply curve is BEST described as: a. an increase in quantity demanded. b. an increase in demand. c. a decrease in supply. d. an increase in quantity supplied.

a. an increase in quantity demanded.

What does a decrease in supply result in? a. higher equilibrium price b. lower equilibrium price c. no change in equilibrium price d. higher equilibrium quantity

a. higher equilibrium price

Jules wants to purchase a Burger Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most that Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). How large are the potential gains from trade if Jules and Vincent agree to make this trade? In other words, what is the sum of producer and consumer surplus if the trade happens? a. $3 b. $5 c. $8 d. $11

b. $5

When supply decreases what happens to price and quantity in equilibrium? a. Equilibrium price increases and equilibrium quantity increases. b. Equilibrium price increases and equilibrium quantity decreases. c. Equilibrium price decreases and equilibrium quantity increases. d. Equilibrium price decreases and equilibrium quantity decreases.

b. Equilibrium price increases and equilibrium quantity decreases.

Suppose you decide to follow in Vernon Smith's footsteps and conduct your own experiment with your friends. You give out 10 cards, five cards to buyers with the figures for willingness to pay of $1, $2, $3, $4, and $5, and five cards to sellers with the amounts for costs of $1, $2, $3, $4, and $5. The rules are the same as Vernon Smith implemented. Assuming the market works as predicted and moves to equilibrium, will the buyer who values the good at $1 be able to purchase? Why or why not? a. Yes, because one of the producers can make the good for a cost of $1, even the person with the lowest willingness to pay will be able to get the good. b. No, in equilibrium the price will be higher than this buyer is willing to pay so they won't get the good. c. Maybe; it's unclear from Smith's experiment which customers will be able to purchase the good at equilibrium. d. No, in equilibrium only the person with this highest willingness to pay, $5 in this case, will get the good.

b. No, in equilibrium the price will be higher than this buyer is willing to pay so they won't get the good.

When supply falls, what happens to quantity demanded in equilibrium? a. Quantity demanded increases. b. Quantity demanded decreases. c. Quantity demanded is unchanged. d. The answer cannot be determined without further information

b. Quantity demanded decreases.

Suppose that the forecast is for a snowstorm tomorrow. How does this affect the equilibrium price and quantity of snow shovels? a. The equilibrium price and quantity would both fall. b. The equilibrium price and quantity would both rise. c. The equilibrium price would rise and the equilibrium quantity would fall. d. The equilibrium price would fall and the equilibrium quantity would rise.

b. The equilibrium price and quantity would both rise.

In recent years, the Paleo diet, which emphasizes eating more meat and fewer grains, became very popular. What do you suppose that did to the price and quantity of bread? a. The price and quantity of bread rose. b. The price and quantity of bread fell. c. The price of bread rose, and the quantity of bread fell. d. The price of bread fell, and the quantity of bread rose

b. The price and quantity of bread fell.

Suppose you decide to follow in Vernon Smith's footsteps and conduct your own experiment with your friends. You give out 10 cards, five cards to buyers with the figures for willingness to pay of $1, $2, $3, $4, and $5, and five cards to sellers with the amounts for costs of $1, $2, $3, $4, and $5. The rules are the same as Vernon Smith implemented. At a price of $3.50 how many units are demanded? How many units are supplied? a. The quantity demanded is 1 and the quantity supplied is 5. b. The quantity demanded is 2 and the quantity supplied is 3. c. The quantity demanded is 3 and the quantity supplied is 2. d. The quantity demanded is 5 and the quantity supplied is 1.

b. The quantity demanded is 2 and the quantity supplied is 3.

In recent years, there have been news reports that toys made in China are unsafe. When those news reports show up on CNN and Fox News, what probably happens in the market for toys made in China? a. There is an increase in market demand. b. There is a decrease in market demand. c. There is an increase in market supply. d. There is a decrease in market supply.

b. There is a decrease in market demand.

Imagine that a major car company is producing fuel-efficient hybrid cars during a period of rising gas prices. As a result, dealerships are depleted of inventory, and customers remain on a waiting list. How can we BEST describe this phenomenon? a. This is a market in equilibrium. b. This is a shortage, because the quantity supplied is less than the quantity demanded. c. This is a surplus, because the quantity supplied is greater than the quantity demanded. d. This is a surplus, because the quantity demanded is greater than the quantity supplied.

b. This is a shortage, because the quantity supplied is less than the quantity demanded.

If oil executives read in the newspaper that new solar-power technologies have been discovered, but that these technologies won't become useful for another 10 years, what is likely to happen to the supply of oil today? What is the likely equilibrium impact on the price and quantity of oil today? a. Supply will decrease, equilibrium price will increase, and equilibrium quantity will decrease. b. Supply will decrease, equilibrium price will decrease, and equilibrium quantity will decrease. c. Supply will increase, equilibrium price will decrease, and equilibrium quantity will increase. d. Supply will increase, equilibrium price will increase, and equilibrium quantity will increase

c. Supply will increase, equilibrium price will decrease, and equilibrium quantity will increase.

If oil executives read in the newspaper that massive new oil supplies have been discovered under the Pacific Ocean, but that these supplies won't be useful until 10 years from now, what is likely to happen to the supply of oil today? What is the likely equilibrium impact on the price and quantity of oil today? a. Supply will decrease, price will increase, and quantity will decrease. b. Supply will decrease, price will decrease, and quantity will decrease. c. Supply will increase, price will decrease, and quantity will increase. d. Supply will increase, price will increase, and quantity will increase.

c. Supply will increase, price will decrease, and quantity will increase.

Think about two products, "safe cars" (a heavy car such as a BMW 530xi with infrared night vision, fourwheel antilock brakes, and electronic stability control), and "dangerous cars" (a lightweight car without much in the way of safety features). If new research makes it easier to produce safe cars, what happens to the supply of safe cars? What will happen to the equilibrium price of safe cars? a. The supply of safe cars will fall and the equilibrium price of safe cars will fall. b. The supply of safe cars will fall and the equilibrium price of safe cars will rise. c. The supply of safe cars will rise and the equilibrium price of safe cars will fall. d. The supply of safe cars will rise and the equilibrium price of safe cars will rise

c. The supply of safe cars will rise and the equilibrium price of safe cars will fall.

When the free market maximizes the total gains from trade, there may be: a. unexploited gains from trade. b. wasted resources. c. unsatisfied wants. d. sellers in the market with higher costs than sellers outside of the market.

c. unsatisfied wants.

When demand decreases what happens to price and quantity in equilibrium? a. Equilibrium price increases and equilibrium quantity increases. b. Equilibrium price increases and equilibrium quantity decreases. c. Equilibrium price decreases and equilibrium quantity increases. d. Equilibrium price decreases and equilibrium quantity decreases.

d. Equilibrium price decreases and equilibrium quantity decreases.

Think about two products, "safe cars" (a heavy car such as a BMW 530xi with infrared night vision, fourwheel antilock brakes, and electronic stability control), and "dangerous cars" (a lightweight car without much in the way of safety features). If new research makes it easier to produce safe cars and the price of safe cars falls, how does this affect the market for dangerous cars? a. There will be an increase in the quantity demanded of dangerous cars. b. There will be a decrease in the quantity demanded of dangerous cars. c. The demand for dangerous cars will increase. d. The demand for dangerous cars will decrease

d. The demand for dangerous cars will decrease

The book describes Vernon Smith's experiment with supply and demand models. What happened in Vernon Smith's lab? a. The price and quantity were close to equilibrium but gains from trade were far from the maximum. b. The price and quantity were far from equilibrium and gains from trade were far from the maximum. c. The price and quantity were far from equilibrium but gains from trade were close to the maximum. d. The price and quantity were close to equilibrium and gains from trade were close to the maximum.

d. The price and quantity were close to equilibrium and gains from trade were close to the maximum.

What's the best way to think about the rise in oil prices in the 1970s, when wars and oil embargoes wracked the Middle East? a. There was a rise in demand. b. There was a fall in demand. c. There was a rise in supply. d. There was a fall in supply and a rise in market demand.

d. There was a fall in supply and a rise in market demand.

For many years it was illegal to color margarine yellow (margarine is naturally white). In some states, margarine manufacturers were even required to color margarine pink! Who do you think supported these laws? (Hint: What color spread would you like to put on your toast?) a. butter manufacturers b. margarine manufacturers c. dairy farmers d. both A and C

d. both A and C

When the free market maximizes the total gains from trade, there are no: a. unexploited gains from trade. b. unsatisfied wants. c. wasted resources. d. unexploited gains from trade or wasted resources.

d. unexploited gains from trade or wasted resources.