Chapter 2
Suppose the demand for natural gas is perfectly inelastic. What would be the effect, if any, of natural gas price controls? If demand is perfectly inelastic, then price controls will
not change the quantity demanded.
Which of the following will cause the demand for kerosene heaters to increase?
A decrease in the price of kerosene.
Which one of the following would not occur if the market price was above the market-clearing price? A. Producers would want to produce and sell more than consumers would want to buy. B. Consumers would bid up the price. Your answer is correct. C. Producers would begin to lower their prices to sell off excess inventory. D. There would be a surplus.
B
A market is in equilibrium when
the price is such that the amount consumers want to buy equals the amount producers want to sell.
In a discussion of tuition rates, a university official argues that the demand for admission is completely price inelastic. As evidence, she notes that while the university has doubled its tuition (in real terms) over the past 15 years, neither the number nor quality of students applying has decreased. Would you accept this argument? Explain briefly. (Hint: The official makes an assertion about the demand for admission, but does she actually observe a demand curve? What else could be going on?) The school official's argument
could be incorrect because the demand curve could have instead shifted to the right and the supply curve could have shifted to the left.
Industries that manufacture products whose demands fluctuate sharply in response to short-run changes in income are called
cyclical industries.
Explain why for many goods, the long-run price elasticity of supply is larger than the short-run elasticity. The long-run price elasticity of supply is typically larger because
in the short run, some firms may be constrained by their productive capacity.
Steel and aluminum are substitutes. If the price of steel increases, other things remaining the same, we would expect the price of aluminum to [increase/decrease] and the equilibrium quantity of aluminum to [increase/decrease].
increase ; increase
If a 2-percent increase in the price of corn flakes causes a 9-percent decline in the quantity demanded, what is the elasticity of demand?
4.5
Which one of the following would not cause the demand for Coca-Cola to shift?
The cost of producing Coca-Cola increases.
Farmers complain that they cannot make a living selling sugar at the current market-clearing price. They successfully lobby the government to initiate price controls on the sale of sugar. The government sets a price floor substantially above the equilibrium price, and no one is allowed to sell sugar for a price less than the price floor. As a result,
there will be a surplus of sugar.
The supply of apartments is more inelastic in the short run than in the long run. This statement is
true because the supply of apartments in the short run is limited by capacity constraints.
A product's price and the quantity consumed both increased from one year to the next. Which of the following could have happened?
Demand increased and supply remained constant.
Even though the annual consumption of copper is now about 100 times greater than it was in 1880, the real price of copper has remained relatively unchanged. Which of the following help account for this pattern?
New deposits that were cheaper to mine were discovered, More efficient technologies reduced production costs, AND Demand for copper grew dramatically.
Explain the difference between a shift in the supply curve and a movement along the supply curve.
Price changes result in movements along the supply curve, and changes in other supply-determining variables such as the number of firms result in shifts in the supply curve.
In an effort to get more Americans to drink milk, the government sets a price ceiling on milk that is substantially below the equilibrium price. Which of the following will occur?
There will be a shortage of milk.
The elasticity of demand is the same as the slope of the demand curve. This statement is
false because the price elasticity of demand equals the slope of the demand curve multiplied by price divided by quantity, AND false because the price elasticity of demand changes along the demand curve.
The cross-price elasticity will always be positive. This statement is
false because the cross-price elasticity will be negative for complements.
For most industries, supply is [more/less] elastic in the short run than in the long run.
less
Suppose the government regulates the price of beef and chicken and sets them below their market-clearing levels. Explain why shortages of these goods will develop. The shortages will develop because at prices set below market-clearing levels firms will supply [more/less] than consumers wish to purchase.
less
If the prices of beef and chicken are set below market-clearing levels, then the price of pork will [fall/rise] because pork is a [compliment/substitute] for beef and chicken.
rise ; substitute
Suppose that unusually cold weather causes the demand curve for ice cream to shift to the left. Why will the price of ice cream fall to a new market-clearing level? The cold weather will
shift the demand curve to the left, initially creating a surplus until the price falls to where quantity supplied again equals quantity demanded.
When supply increases, the supply curve
shifts to the right.
What factors will determine the sizes of the shortages? The extent of the excess demand implied by the shortages will depend on
the elasticities of supply and demand, where the shortages will be larger if both supply and demand are more elastic.
