Chapter 3 and 6

Suppose there are three buyers of candy in a market: Tex, Dex, and Rex. The market demand and the individual demands of Tex, Dex, and Rex are shown below. b. Which buyer demands the least at a price of $5? The most at a price of $7? c. Which buyer's quantity demanded increases the most when the price is lowered from $7 to $6? d. Which direction would the market demand curve shift if Tex withdrew from the market? What if Dex doubled his purchases at each possible price? e. Suppose that at a price of $6, the total quantity demanded increases from 19 to 38. Is this a "change in the quantity demanded" or a "change in demand"?

b. Dex Tex c. Tex d. To the left To the right e. Change in demand

Suppose that the total revenue received by a company selling basketballs is $600 when the price is set at $30 per basketball and $600 when the price is set at $20 per basketball. Without using the midpoint formula, identify whether demand is elastic, inelastic, or unit-elastic over this price range.

Demand is unit-elastic

The two market diagrams below show the market for public and private colleges. How will an increase in state subsidies to public colleges affect the market for public and private colleges?

In public colleges: Supply will shift to the right (down) In private colleges: Demand will shift to the left (down)

A price ceiling will result in a shortage only if the ceiling price is less than Correct the equilibrium price.

less than

a. Complete the total revenue column from the demand-schedule data given below. B. C. Price and total revenue move in the opposite direction when demand is elastics elected answer correct .

A. Price Quantity Demanded Total Revenue $5 1 $5 4 2 $8 3 3 $9 2 4 $8 1 5 $5

If a university passed a rule stating that university students must live in university dormitories, what effect would this have on the price elasticity of demand for dorm space? What effect would this have on room rates?

The price elasticity of demand would be more inelastic, and room rates would increase.

Table: Surplus (+) or Shortage (-) 88 $3.45 65 -23 81 3.70 71 -10 75 4.00 75 0 70 4.30 78 8 66 4.60 80 14 63 4.90 81 18 a. What is the equilibrium price in this market? At what price is there neither a shortage nor a surplus? c. How big is the surplus or shortage at $3.40? How big is the surplus or shortage at $4.90? d. How big a surplus or shortage results if the price is 60 cents higher than the equilibrium price? e. How big a surplus or shortage results if the price is 30 cents lower than the equilibrium price?

a. $4 $4 c. there is a shortage of 23 There is a surplus of 18 d. 14 e. 10

Given the following income elasticities of demand: a. The values indicate that b. If the income elasticity coefficient is negative, it means that

a. 1 percent increase in income will increase the quantity of movies demanded by 3.4 percent. b. the good is inferior so that if income falls, the quantity demanded of the good will rise.

Currently, at a price of $1 each, 100 popsicles are sold per day in the perpetually hot town of Rostin. Consider the elasticity of supply. In the short run, a price increase from $1 to $2 is unit-elastic (Es = 1.0). In the long run, a price increase from $1 to $2 has an elasticity of supply of 1.50. (Hint: Apply the midpoints approach to the elasticity of supply.) a. How many popsicles will be sold each day in the short run if the price rises to $2 each? b. How many popsicles will be sold per day in the long run if the price rises to $2 each?

a. 200 b. 300

Suppose that the demand and supply schedules for rental apartments in the city of Gotham are as given in the table below. a. What is the market equilibrium rental price per month and the market equilibrium number of apartments demanded and supplied? Market equilibrium rental price is: Market equilibrium quantity is: b. If the local government can enforce a rent-control law that sets the maximum monthly rent at $1,500, will there be a surplus or a shortage? c. Suppose that a new government is elected that wants to keep out the poor. It declares that the minimum rent that can be charged is $2,500 per month. If the government can enforce that price floor, will there be a surplus or a shortage? d. Start at the original (correct) equilibrium price and quantity in part a. Suppose that the government wishes to decrease the market equilibrium monthly rent by increasing the supply of housing. Assuming that demand remains unchanged, by how many units of housing would the government have to increase the supply of housing in order to get the market equilibrium rental price to fall to $1,500 per month?

a. 2000 12500 b. Shortage 5000 10000 c. Surplus 5000 10000 d. 5000 10000 15000

Suppose the cross elasticity of demand for products A and B is + 3.6 and for products C and D is - 5.4. a. What can you conclude about how products A and B are related? b. What can you conclude about products C and D?

a. A and B are substitutes. b. C and D are complements.

Critically evaluate: "In comparing the two equilibrium positions in the diagram below, I note that a smaller amount is actually demanded at a lower price. This refutes the law of demand."

a. A decrease in demand from D1 to D2 results in surplus b. This causes the price to fall c. This change in price results in an increase in quantity demanded along the D2 demand curve. d. This change in price results in a decrease in quantity supplied. e. The new equilibrium has a lower price and a lower quantity when compared to the original equilibrium. f. Does this refute the law of demand: No g. Why: Because there was a change in demand

a. Which statement is consistent with the law of demand? b. Which of the following characteristics lead to a downward-sloping demand curve? c. How is a market demand curve derived from individual demand curves?

a. A reduction in market price will lead to an increase in quantity demanded. b. Diminishing marginal utility checked An increase in purchasing power as market price decreases c. Add up quantities demanded by all individual consumers for each price.

What effect will each of the following have on the supply of auto tires (keeping all else constant)?

a. A technological advance in the methods of producing tires: Increase b. A decline in the number of firms in the tire industry: Decrease c. An increase in the prices of rubber used in the production of tires: Decrease d. The expectation that the equilibrium price of auto tires will be lower in the future than currently: Increase e. A decline in the price of large tires used for semi trucks and earth-hauling rigs, a substitute in production (with no change in the price of auto tires): Increase f. The levying of a per-unit tax on each auto tire sold: Decrease g. The granting of a 50-cent-per-unit subsidy for each auto tire produced: Increase

a. Which statement is consistent with the law of supply? b. Which of the following characteristics leads to an upward-sloping supply curve? c.How do you derive a market supply curve from individual supply curves?

a. An increase in market price will lead to an increase in quantity supplied. b. Increasing opportunity costs Increasing marginal costs c. Add up quantities supplied by all individual producers for each price

The three demand schedules in the table below show how many rounds of golf per year Lorena will demand at each price under three different scenarios. In scenario D1, Lorena's income is $50,000 per year and movies cost $9 each. In scenario D2, Lorena's income is also $50,000 per year, but the price of seeing a movie rises to $11. And in scenario D3, Lorena's income goes up to $70,000 per year, while movies cost $11. a. Using the data under D1 and D2, calculate the cross elasticity of Lorena's demand for golf at all three prices. (To do this, apply the midpoints approach to the cross elasticity of demand.) b. Using the data under D2 and D3, calculate the income elasticity of Lorena's demand for golf at all three prices. (To do this, apply the midpoints approach to the income elasticity of demand.)

a. At $50, cross elasticity = -2.00 At $35, cross elasticity = -2.50 At $20, cross elasticity = -3.33 Is the cross elasticity the same at all three prices? No Are movies and golf substitute goods, complementary goods, or independent goods? Complementary goods b. At $50, income elasticity of demand = 1.20 At $35, income elasticity of demand = 2.00 At $20, income elasticity of demand = 2.57 Is the income elasticity the same at all three prices? No Is golf an inferior good? No

Danny "Dimes" Donahue is a neighborhood's 9-year-old entrepreneur. His most recent venture is selling homemade brownies that he bakes himself. At a price of $1.50 each, he sells 100. At a price of $1.00 each, he sells 300. a. Is demand elastic or inelastic over this price range? b. If demand had the same elasticity for a price decline from $1.00 to $0.50 as it does for the decline from $1.50 to $1.00, would cutting the price from $1.00 to $0.50 increase or decrease Danny's total revenue?

a. Elastic b. Increase

Look at the demand curves in the diagrams below. a. Use the midpoint formula and points a and b to calculate the elasticity of demand for that range of the demand curve. b. Do the same for the demand curve for the figure above.

a. Elasticity of demand for D1 (points a to b in the left diagram above) = 1.8 Elasticity of demand for D2 (points c to d in the right diagram above) = .56 b. Elasticity of demand for D3 (points e to f in the diagram above) = 1

a. What are the determinants of demand? b. Indicate whether a change in the value of each of the following determinants of demand leads to a movement along the demand curve or a shift in the demand curve. c.

a. Income Price of related goods Tastes and preferences Number of consumers b. i. Change in market price: Movement along demand curve ii. Change in income: Shift in demand curve iii. Change in consumer expectations: Shift in demand curve iv. Change in the price of a related good: Shift in demand curve . v. Change in the price of an unrelated good: No change vi. Change in preferences for this good: Shift in demand curve A change from point A to point B = A change in quantity demanded A change from point A to point C = A change in demand

a. What is the formula for measuring the price elasticity of supply? b. Suppose the price of apples goes up from $20 to $22 a box. In direct response, Goldsboro Farms supplies 1,200 boxes of apples instead of 1,000 boxes. Compute the coefficient of price elasticity (midpoints approach) for Goldsboro's supply. c. Is its supply elastic, or is it inelastic?

a. Percentage change in quantity supplied/percentage change in price b. Price elasticity = 1.91 c. Elastic

a. Use the figure to fill in the quantity supplied given the supply curve S1 for each price in the table below (second column, gray-shaded cells). b. Use those data to draw supply curve S2 on the graph below. d. Did the increase in production costs cause a "decrease in supply" or a "decrease in quantity supplied"?

a. Price S1 Quantity Supplied S2 Quantity Supplied Change in Quantity Supplied $3 15 4 -11 2 10 2 -8 1 5 0 -5 b. (0,1) (3,5) d. A decrease in supply

How would the following changes in price affect total revenue? That is, would total revenue increase, decrease, or remain unchanged?

a. Price falls and demand is inelastic: Decrease b. Price rises and demand is elastic: Decrease c. Price rises and demand is inelastic: Increase d. Price falls and demand is elastic: Increase e. Price falls and demand is of unit elasticity: Remain unchanged

a. What are the major determinants of price elasticity of demand? b. Use those determinants and your own reasoning in judging whether demand for each of the following products is probably elastic or inelastic:

a. Substitutability Proportion of income Luxuries versus necessities Time b. Bottled water: Elastic Toothpaste: Inelastic Crest toothpaste: Elastic Ketchup: Inelastic Diamond bracelets: Elastic Microsoft's Windows operating system: Inelastic

How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market; that is, do price and quantity increase or decrease, or are the answers indeterminate because they depend on the magnitudes of the shifts?

a. Supply decreases and demand is constant. Price: Increases Quantity: Decreases b. Demand decreases and supply is constant. Price: Decreases Quantity: Decreases c. Supply increases and demand is constant. Price: Decreases Quantity: Increases d. Demand increases and supply increases. Price: Indeterminate Quantity: Increases e. Demand increases and supply is constant Price: Increases Quantity: Increases f. Supply increases and demand decreases. Price: Decreases Quantity: Indeterminate g. Demand increases and supply decreases. Price: Increases Quantity: Indeterminate h. Demand decreases and supply decreases. Price: Indeterminate Quantity: Decreases

a. What are the determinants of supply? b. Indicate whether a change in the value of each of the following determinants of supply leads to a movement along the supply curve or a shift in the supply curve. c. Given the following diagram, indicate whether these changes represent a change in supply or a change in quantity supplied.

a. Technology Resource prices Number of producers b. i. Change in market price: Movement along the supply curve ii. Change in factor productivity: A shift in the supply curve iii. Change in producer expectations: A shift in the supply curve iv. Change in the price of other goods: A shift in the supply curve v. Change in technology: A shift in the supply curve vi. Change in resource prices: A shift in the supply curve vii. Change in taxes: A shift in the supply curve c. A change from point A to point B = A change in quantity supplied A change from point A to point C = A change in supply

In 2001 an outbreak of hoof-and-mouth disease in Europe led to the burning of millions of cattle carcasses. What impact do you think this had on the following?

a. The supply of cattle hides: Decrease b. Hide prices: Increase c. The supply of leather goods: Decrease d. The price of leather goods: Increase

Suppose the total demand for wheat and the total supply of wheat per month in the Kansas City grain market are as shown in the table below. Suppose that the government establishes a price ceiling of $3.70 for wheat. a. What might prompt the government to establish this price ceiling? b. In the diagram below, demonstrate this price ceiling of $3.70. c. Next, suppose that the government establishes a price floor of $4.60 for wheat. What will be the main effect of this price floor?

a. To control food prices b. graph c. It will create a surplus.

Assume that demand for a commodity is represented by the equation P=10−0.2Qd. P=10−0.2Qd Supply is represented by the equation P=2+0.2Qs, P=2+0.2Qs, where Qd and Qs are quantity demanded and quantity supplied, respectively, and P is price.

a. Using the equilibrium condition Qs = Qd, determine equilibrium price. 6 b. Now determine equilibrium quantity. 20

The data below represent a demand schedule. a. In the diagram below, draw a demand curve. b. Use the midpoint formula for Ed to determine price elasticity of demand for each of the four possible $1 price changes. c. c. What can you conclude about the relationship between the slope of the demand curve above and its elasticity? d. Explain in a nontechnical way why demand is elastic in the upper-left segment of the demand curve and inelastic in the lower-right segment.

a. straight line down b. Moving from $5 to $4, Ed = 3.00 Moving from $4 to $3, Ed = 1.40 Moving from $3 to $2, Ed = 0.71 Moving from $2 to $1, Ed = 0.33 c. The demand curve has a constant slope of -1 Correct and elasticity decreases Correct as we move down the curve. d. When the initial price is high and the initial quantity is low, the percentage change in quantity exceeds the percentage change in price, making demand elastic. When the initial price is low and the initial quantity is high, the percentage change in quantity is less than the percentage change in price, making demand inelastic.

In 2015, Paul Gauguin's painting When Will You Marry sold for $300 million. Portray this sale in a demand and supply diagram when the quantity is 1. a. graph b. Is demand is elastic, inelastic or unit-elastic at this price?

a. straight line up b. elastic

A firm charges different groups of customers different prices in order to

increase revenue and profit. Lower afternoon movie prices are an example of this type of pricing.

Research has found that an increase in the price of beer would reduce the amount of marijuana consumed. This research indicates that the cross elasticity of the two products is

negative, such that beer and marijuana are complements.

If you compute the price elasticity of demand using a quantity of tickets from 1 to 8 and using a quantity of tickets from 1,000 to 8,000, the value of the price elasticity of demand is

the same because the percentage change in quantity demanded will remain the same.