Chapter 2

A market is in equilibrium when

the price is such that the amount consumers want to buy equals the amount producers want to sell.

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.

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 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​ 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.

Which one of the following would not cause the demand for​ Coca-Cola to​ shift?

The cost of producing​ Coca-Cola increases.

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

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.

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.