MicroEconomics Module 2 Supply and Demand Study

Assume equilibrium price for lemons is $1.50 for a dozen. If a government believes the price for lemons is too high, and sets a temporary price cap at $1.00 for a dozen, what will happen?

There will be a shortage of lemons. - - After the price cap is lifted, prices will return to the equilibrium price.

If there is a decrease in price for printers, what would we expect to happen to the demand for printer cartridges?

There will be an increase in demand for printer cartridges.

In 2009, the worst recession in 80 years hit the United States, generally reducing household incomes. Despite this, profits and sales for certain enterprises such as McDonald's and Dollar General actually increased during this time. What is the most likely conclusion about the products sold by these stores?

They are inferior goods.

True or false?-A decrease in demand for inferior goods results from a rise in income.

True

True or false?-For normal goods, there is a positive relationship between income and demand levels, while there is an inverse relationship for inferior goods.

True

True or false?-A rise in the price of a substitute for olive oil will increase demand for olive oil.

True- A rise in the price of a substitute will increase demand because people are likely to buy the more affordable product instead of the higher priced one.

Normal Good

a good in which the quantity demanded rises as income rises, and in which quantity demanded falls as income falls

If a product's demand rises as income rises, ceteris paribus, the product is ________.

a normal good

When considering factors that shift demand curves, all of the following will decrease demand except _______________.

a rise in income (for a normal good)

Which of the following cannot be an example of a pair of substitute goods?

computers and computer mouses

Which of the following is the definition of price floor?

A price floor is the minimum amount that can legally be charged for a good or service.

True or false?-Price ceilings are typically enacted in an attempt to keep prices high for those who produce the product.

False

True or false?- A surplus is the result of a price set above the equilibrium price. When producers face a surplus, they are willing to increase production even further. This combination of higher quantity and higher price increases industry profits, which are beneficial to producers.

False; - - By definition a surplus is an excess of supply--that is, quantity demanded cannot match quantity supplied. Firms cannot earn profits from unsold inventory, while production is costly. Since producers cannot find enough buyers at this price, producers in a competitive market will want to cut price and production levels.

Tea and coffee both contain caffeine and are often consumed in place of one another. You are the director of a large coffee plantation. In recent years, poor tea harvests have devastated tea production and significantly increased prices. How would you expect the demand for coffee to change, and why?

The demand for coffee should increase because the two goods are substitutes.

For generations, the Irish were among the poorest in the British Isles and relied almost exclusively on simple potatoes, which were inexpensive but not particularly tasty, for sustenance. Potatoes were an inferior food product favored by the poorer sections of the population. All else being equal, how would you expect the demand for potatoes per person to change after several decades of significant economic development?

The demand for potatoes is likely to decline.

A price floor will usually tend to create ___________ when the price floor is set above the market price.

excess supply

Which of the following would lead to a surplus?

excess supply

Which of the following best completes the statement below? If the price of coffee falls by 90%, we would expect demand for coffee stirrers to _____________. This occurs because the two goods are close ______________.

increase; complements

If the price of indoor cycling classes increase by $10, we would expect the demand for fitness classes to _______________. This is because indoor cycling classes and fitness classes are ______________.

increase; substitutes

A(n) _______________ is a good for which demand falls as income rises, and demand rises as income falls.

inferior good; - - An inferior good is defined as a good in which the quantity demanded falls as income rises, and in which quantity demanded rises as income falls. For example, lower-end food items, like Ramen noodles are inferior goods - when our income improves, we purchase less cheap foods like Ramen noodles and more restaurant meals.

What term is best described as the situation where the quantity demanded exceeds the quantity supplied?

shortage

if a price is set at $10, a ____________ will result, with eventual downward pressure on the price to reach equilibrium.

surplus

A price ceiling is _______________.

the maximum amount that can legally be charged for a good or service