Chapter 2: Demand & Supply
As the income of consumers increases, the demand for beef increases. Beef is called a. a complementary good. b. a substitute good. c. a normal good. d. an inferior good.
C
Consider the Audi automobile market. Suppose the current market price is $29,000 and 100,000 Audi A4 automobiles are demanded. However, Audi management has estimated that if they lower the market price to $27,000, then 124,000 Audi A4 automobiles will be demanded. Using the midpoint method, what is the price elasticity of demand over this price range? A. -7.14 B. 21.43 C. -3 D. -.33
C
Consider the market for hot dogs and the market for hot dog buns illustrated in the graph. Suppose consumers consider hot dogs and hot dog buns complements. Which of the following would cause (1) a decrease in the price of hot dogs and (2) an increase in the quantity demanded of hot dog buns? A. an increase in the price of flour B. a decrease in the price of flour C. an increase in the price of pork D. a decrease in the price of pork
D
Consider the market for pizza. Suppose the dairy cow population doubles, and thus the quantity supplied of cheese increases. Holding all else equal, what affect does this have on the market for pizza? a. equilibrium price increases and equilibrium quantity decreases b. equilibrium price decreases and equilibrium quantity decreases c. equilibrium price increases and equilibrium quantity increases d. equilibrium price decreases and equilibrium quantity increases
D
Consider the market for pork. Suppose that (1) disposable income increases and that pork is a normal good and (2) the price of hog feed decreases. Because of these changes, the equilibrium price of pork A. increases B. decreases C. does not change D. is indeterminate
D
ceteris paribus
is a Latin phrase that means other things equal; i.e. when the ceteris paribus assumption is imposed, every independent variable except the price of wine is held constant.
price ceiling
is a government imposed and legally enforced maximum market price
price floor
is a government imposed and legally enforced minimum market price
income elasticity of demand
is a measure of the relationship between a percentage change in income and a consequential percentage change in the quantity demanded of a product.
price elasticity of supply
is a measure of the relationship between a percentage change in the market price of a product and a consequential percentage change in the quantity supplied of a product.
price elasticity of demand
is a measure of the relationship between a percentage change in the market price of product and a consequential percentage change in the quantity demanded of a product
mid-point formula
is what economists use to calculate the price elasticity of demand.
Suppose the price elasticity of demand for retail telephone service in the US is 0.95. If the number of substitutes for retail telephone service increases (e.g. voice over internet protocol, cell phones, etc.), the price elasticity of demand will become more elastic or more inelastic.
more elastic
The initial market price was $100 and now buyers must pay $107 per iPod. After the tax is imposed the price that a buyer must pay per iPod increases by $7. Thus, the buyers pay $7 of the per unit cost. How much of the $10 per-unit tax is actually paid for by the sellers of iPods?
$3
The initial market price was $100 and now buyers must pay $97 per iPod plus $10 per unit tax, for a total of $107. After the tax is imposed, the price that a buyer must pay per iPod increases by $7 of the per unit tax. Suppose that the $10 per iPod tax on buyers is repealed. And instead, the government imposes a new law requiring each seller to pay $10 per-iPod tax to the government, ceteris paribus. How much of the $10 per-unit tax is actually paid for by the sellers of iPods?
$3
Buyers are now paying $107 per iPod, of which sellers get to keep $97 per iPod (because they have to pay the government $10 per iPod in tax). Before the tax, the seller kept $100 per iPod; after the tax they only keep $97 per iPod. Thus the seller pays $3 of the per-unit tax. Suppose that the $10 per iPod tax on buyers is repealed. And instead, the government imposes a new law requiring each seller to pay $10 per-iPod tax to the government, ceteris paribus. How much of the $10 per-unit tax is actually paid for by each iPod buyer?
$7
Consider the competitive iPod market. Assume the price of an iPod is $100 and the quantity demanded of iPods is 100,000. Suppose the government imposes a $10 per unit tax on each seller of an iPod. As a result, the market price for an iPod increases to $107 and the quantity demanded of iPods decreases to 95,000. How much of the $10 per-unit tax is actually paid for by each iPod buyer?
$7
a demand curve shifts...
...only to the southwest or northeast
Suppose the price elasticity of supply in the beer market is 0.75. If the price of beer increases by 1%, then the quantity supplied of beer will increase by ___ percent.
.75%
Suppose the price elasticity of demand for a Jeep Grand Cherokee is -2. If the price of a Jeep Grand Cherokee increases by 10%, the quantity demanded of Jeep Grand Cherokees will decrease by ____ percent.
20%
Suppose the income elasticity of demand for a Jeep Grand Cherokee is 2.1. If there is a 10% increase in consumer income, then the quantity demanded of Jeep Grand Cherokees will increase by ___ percent.
21%
Consider the market for beef, which is a substitute for chicken. Suppose the price of raising and feeding chickens decreases. Which of the following accurately describes how the beef market is affected by a decrease in the price of raising and feeding chickens? A. equilibrium price of beef decreases and equilibrium quantity decreases B. equilibrium price of beef increases and equilibrium quantity increases C. equilibrium price of beef increases and equilibrium quantity decreases D. equilibrium price of beef decreases and equilibrium quantity increases
A
Consider the market for hot dogs and the market for hot dog buns illustrated in the graph. Suppose consumers consider hot dogs and hot dog buns complements. Which of the following would cause (1) a decrease in the price of hot dogs and (2) a decrease in the quantity demanded of hot dog buns? A. an increase in the price of flour B. a decrease in the price of flour C. an increase in the price of pork D. a decrease in the price of pork
A
Consider the market for mustard, which is a complement to hot dogs. Suppose the price of hot dogs increases. Which of the following accurately describes how the mustard market is affected? A. equilibrium price decreases and equilibrium quantity decreases B. equilibrium price increases and equilibrium quantity increases C. equilibrium price increases and equilibrium quantity decreases D. equilibrium price decreases and equilibrium quantity increases
A
Consider the market for pork. Suppose that (1) disposable income increases and that pork is a normal good and (2) the price of hog feed decreases. Because of these changes, the equilibrium quantity of pork A. increases B. decreases C. does not change D. is indeterminate
A
Consider the market for pork. Suppose that the price of beef, a substitute for pork, increases. Because of the change in the price of beef, the equilibrium price of pork A. increases B. decreases C. does not change D. is indeterminate
A
Consider the market for pork. Suppose that the price of beef, a substitute for pork, increases. Because of the change in the price of beef, the equilibrium quantity of pork A. increases B. decreases C. does not change D. is indeterminate
A
Consider the market for pork. Suppose that the price of hog feed, an input to the production of pork, increases. Because of the change in the price of hog feed, the equilibrium price of pork A. increases B. decreases C. does not change D. is indeterminate
A
Consider the cheese and cracker markets. Suppose the current market price of a block of cheese is $3.50 and at this price 85 blocks of cheese are demanded. Also, suppose the current market price for a box of crackers is $3.00 and at this price 40 boxes of crackers are demanded. When the price of a box of crackers increases to $4.25, the price of cheese remains unchanged, the quantity demanded of crackers decreases to 32 boxes and the quantity demanded of cheese decreases to 72 blocks. Cheese and crackers are: A. normal goods B. complementary goods C. substitute goods D. inferior goods
B
Consider the market for hot dogs and the market for hot dog buns illustrated in the graph. Suppose consumers consider hot dogs and hot dog buns complements. Which of the following would cause (1) an increase in the price of hot dogs and (2) an increase in the quantity demanded of hot dog buns? A. an increase in the price of flour B. a decrease in the price of flour C. an increase in the price of pork D. a decrease in the price of pork
B
Consider the market for peanuts, which is a complement to baseball games. Suppose the price of baseball game tickets decreases. Which of the following accurately describes how the peanut market is affected by a decrease in the price of baseball game tickets? A. equilibrium price of peanuts decreases and the equilibrium quantity decreases. B. equilibrium price of peanuts increases and the equilibrium quantity increases. C. equilibrium price of peanuts increases and the equilibrium quantity decreases. D. equilibrium price of peanuts decreases and the equilibrium quantity increases.
B
Consider the market for pork. Suppose that disposable income increases and that pork is an inferior good. Because of the change in income, the equilibrium price of pork A. increases B. decreases C. does not change D. is indeterminate
B
Consider the market for pork. Suppose that the price of hog feed, an input to the production of pork, increases. Because of the change in the price of hog feed, the equilibrium quantity of pork A. increases B. decreases C. does not change D. is indeterminate
B
The initial market price was $100 and now buyers must pay $97 per iPod plus $10 per unit tax, for a total of $107. After the tax is imposed, the price that a buyer must pay per iPod increases by $7 of the per unit tax. Suppose that the $10 per iPod tax on sellers is repealed. And instead, the government imposes a new law requiring each buyer to pay $10 per-iPod tax to the government, ceteris paribus. Would the share of the tax paid by the buyer or the share of the tax paid by the seller change? A. yes B. no
B
Which of the following is not an element of the market demand curve for wine? A. the price of wine B. the price of a wine bottling machine C. income D. expectations E. the price of a substitute good
B
Suppose that the current price of a blat is $10 per ounce and at that price there are 250 blats demanded. Ceteris paribus, if the price of a zing increases from $5 per pound to $10 per pound, the quantity demanded of zings decreases from 40 zings to 30 zings and it causes the quantity demanded of blats to increase to 300. Using your answer from the previous queston, are blats and zings complements or substitutes?
Because the coefficient of the cross price elasticity is a positive number, the two goods are substitute goods.
Consider the apple juice and orange juice markets. Suppose the current price of a half gallon of apple juice is $2.50 and at this price 18 bottles of apple juice are demanded. Also suppose the current market price for a half-gallon of orange juice is $3.25 and at this price 17 bottles of orange juice are demanded. When the price of a half-gallon of orange juice increases to $3.75, and the price of apple juice remains unchanged, the quantity demanded of orange juice decreases to 14 bottles and the quantity demanded of apple juice increases to 22 bottles. Apple juice and orange juice are: A. normal goods B. inferior goods C. substitute goods D. complementary goods
C
Consider the market for gasoline in Tampa, Florida. Suppose the following two things occur. Firstly, there is an expectation of a gasoline shortage because of the imminent damage of Hurricane Ivan. Secondly, the state of Florida imposed a binding no price gouging law, which mandates that prices cannot change when a state of emergency is declared. Holding all else equal, what effect does this have on the market for gasoline in Tampa, Florida? A. there is a surplus of gasoline because quantity demanded exceeds quantity supplied B. there is a surplus of gasoline because quantity demanded is less than quantity supplied C. there is a shortage of gasoline because quantity demanded exceeds quantity supplied D. there is a shortage of gasoline because quantity demanded is less than quantity supplied
C
Consider the market for gasoline in Tampa, Florida. Suppose there is an expectation of a gasoline shortage because of the imminent damage of hurricane Ivan. Holding all else equal, what effect does this have on the market for gasoline in Tampa, Florida? A. equilibrium price increases and equilibrium quantity decreases. B. equilibrium price decreases and equilibrium quantity decreases. C. equilibrium price increases and equilibrium quantity increases. D. equilibrium price decreases and equilibrium quantity increases.
C
Consider the market for hot dogs and the market for hot dog buns illustrated in the graph. Suppose consumers consider hot dogs and hot dog buns complements. Which of the following would cause (1) an increase in the price of hot dogs and (2) a decrease in the quantity demanded of hot dog buns? A. an increase in the price of flour B. a decrease in the price of flour C. an increase in the price of pork D. a decrease in the price of pork
C
Suppose that in year 1, Jim's quantity demanded of Pepsi is 7 bottles per week, when the price of Pepsi is $1.75 per bottle and Jim's income is $60,000. In year 2, Jim's quantity demanded of Pepsi increases to 14 bottles per week, when the price of each bottle of Pepsi is $1.75 and his income is $75,000. Use this information to calculate Jim's income elasticity for Pepsi. Given his income elasticity, what type of good does Jim consider a bottle of Pepsi? A. substitute good B. inferior good C. normal good D. complementary good
C
Suppose that in year 1, Jane's quantity demanded of bus rides is 17 per week, when the price of each bus ride is $1.50 and her income is $20,000. In year 2, Jane's quantity demanded of bus rides decreases to 10 per week, when the price of each bus ride is $1.50 and her income is $30,000. Bus rides are: A. complementary good B. substitute good C. normal good D. inferior good
D
Which of the following is NOT an element of the market demand curve for pizza? a. The price of pizza b. The price of a complementary good c. Income d. Expectations e. The price of flour
E
Which of the following is NOT an element of the market supply curve for books? a. The price of books b. The price of labor c. The price of paper d. The price of capital equipment e. The price of a notebook
E
Which of the following would lead to an increase in the current price of beef? Assume beef is a normal good. a. An increase in consumers' income b. A increase in the price of a substitute good c. A decrease in the price of a complementary good d. An increase in farm labor costs e. All of the above
E
T/F: A price floor is a legally imposed maximum price.
False
T/F: Suppose the price elasticity of demand for home heating oil is -0.4. The number tells us that a one percent increase in the price of home heating oil causes a 0.4 percent increase in the quantity demanded of home heating oil.
False
T/F: The law of demand states that if the price of a good increases, ceteris paribus, then the quantity demanded of that good will increase.
False
unit elastic
If the price elasticity of demand has ab absolute value of precisely one, then the demand curve is unit elastic or of unitary elasticity and the prices analyzed.
elastic
If the price elasticity of demand has an absolute value of greater than one, then the demand curve is elastic around the prices analyzed.
inelastic
If the price elasticity of demand has an absolute value of less than one, then the demand curve is inelastic around the prices analyzed.
T/F: Consider the steak market, where the demand for steak is downward sloping and the supply of steak is upward sloping. A per unit tax on buyers of steak would cause the market price to decrease and the quantity demanded to decreased
True
T/F: Suppose the cross price elasticity of demand for home heating oil with respect to the price of natural gas is +0.6. This number tells us that home heating oil and natural gas are substitute goods.
True
T/F: The law of supply states that if the price of a good increases, ceteris paribus, then the quantity supplied of that good will increase.
True
Suppose that the current price of a blat is $10 per ounce and at that price there are 250 blats demanded. Ceteris paribus, if the price of a zing increases from $5 per pound to $10 per pound, the quantity demanded of zings decreases from 40 zings to 30 zings and it causes the quantity demanded of blats to increase to 300. Using the mid-point method and rounding to two decimal places, what is the cross price elasticity of the demand for blats with regards to the price of zings?
[(300-250)/275]/[($10-$5)/$7.50] = (.1818/.666) = .27
cross price elasticity of demand
a measure of the relationship between a percentage change in the market price of product X and consequential percentage change in the quantity demanded of product Y.
tastes and preferences
economists lump measures of satisfaction, enjoyment, pleasure, etc into this category
model of demand and supply
economists use the model of demand and supply to analyze how buyers and sellers interact in the marketplace.
law of supply
i.e. If the price of wine increases, then ceteris paribus the quantity supplied of wine will increase. The reverse is also true. If the price of wine decreases, then ceteris paribus the quantity supplied of wine will decrease. This positive relationship between price and quantity is called the law of supply. As the price of a good increases, ceteris paribus, the quantity supplied of the good increases.
substitute goods
i.e. Sarah enjoys drinking wine, Tanqueray gin, and other fine liquors and she considers these beverages substitutes for one another.
market supply schedule
i.e. To calculate a market supply schedule, we sum up the number of bottles of wine that all vineyards in the market are willing to produce at every price of wine.
complementary goods
i.e. because Sarah likes to eat Gouda cheese and wheat crackers as she drinks wine, she considers them complementary goods to wine
law of demand
i.e. demand is a relationship that reveals how many bottles of wine Sarah demands at each and every price of wine, this negative relationship between the price of wine and the quantity demanded always holds true. As the price of a good increases, ceteris paribus, the quantity demand of the good decreases.
inferior good
i.e. if wine is an inferior good for Sarah, then positive changes in income will induce Sarah to purchase fewer bottles of wine at any given price
expectations of the future
i.e. suppose that Sarah unexpectedly discovers that her favorite wine and vintage is soon to run-out; because of this new information, Sarah reveals that she is now willing to buy more bottles at any given price
normal good
i.e.e if wine is a normal good, then positive changes in income will induce Sarah to purchase more bottles of wine at any given price
comparative-static analysis
the process of comparing two market equilibrium (static) points, one equilibrium point before and the other after a change in an independent variable.
market equilibrium
the quantity that sellers are willing to sell is equal to the quantity that buyers are willing to buy is called the market equilibrium point