micro chapter 2
Assume that tastes change so that tennis is no longer as desirable to play as it is now. What would happen to the market for tennis balls?
Demand decreases, the equilibrium quantity is smaller, and the price is lower
Okra was $13.00 per bushel in 2015, and 1.5 million bushels were sold. Okra was $14.00 per bushel in 2016, and 2.0 million bushels were sold. "If in both cases the okra market was in equilibrium, this must be an example of an exception to the law of demand."
False The quote is incorrect. Increasing demand for okra from 2015 to 2016 would cause an increase in price and equilibrium quantity. The law of demand holds only if everything else remains the same. The results in the okra market must represent a shift in demand rather than a movement along a demand curve. An increase in demand will cause an increase in the equilibrium quantity and price.
Expectations of falling income in the near future
Shift the demand curve to the left and a decrease in demand. (If the good is normal.)
Assume that the price in a market is currently below the equilibrium price. Explain exactly why that situation will change by putting the steps in the correct order.
There is a shortage since quantity demanded is greater than quantity supplied Some buyers are willing to pay more for a good and sellers can raise prices while still selling all of their supply Prices begin to rise Quantity demanded begins to decrease and quantity supplied increases The shortage becomes smaller The steps repeat until there is a new equilibrium A new equilibrium is reached with a larger quantity exchanged and a higher price
Since 1950, the labor force participation rate of women with young children has been increasing dramatically. In accordance with this trend, one would predict that there has been a An increase in the demand for child care services b An increase in the quantity demanded of child care services c A decrease in the demand for child care services d A decrease in the quantity demanded of child care services
a An increase in the demand for child care services This is an example of the number of buyers in the market increasing over time.
At what level of output is the market producing too little from a point of view of efficiency?
a 50 Explanation Too little is produced where the value of producing one more is greater than the cost of that unit. Production that is less than the equilibrium quantity shows such levels of output.
Oprah Winfrey made comments about the possibility of contracting mad-cow disease from eating beef. Some observers said that those comments had negative effects on the beef market. In the same period of time, changes in rate of production may have been the real culprit. If only Oprah's comments affected the market, then the equilibrium price would have ______________ and the equilibrium quantity would have ______________.
a Decreased; decreased Explanation If Oprah's comments are the only thing that caused a disturbance in the market, then she would have caused demand to decrease. If people listened to her and decided not to buy any meat, then the demand curve would shift to the left causing a surplus of meat. Suppliers inventories would increase and prices would have to go down to sell off the excess meat. This would result in a new equilibrium of lower prices and lower quantity supplied.
Christmas card sales increase during the last three months of the year, and the sale of fresh strawberries in the North increase during the early summer months. However, the equilibrium price movement of these two commodities is quite different during their peak sales seasons. Christmas cards increase in price when the equilibrium quantity increases, whereas strawberries decrease in price when the equilibrium quantity increases. Why does this difference occur?
a Demand for Christmas cards increases; supply of strawberries increases Explanation The cause of the increase in the quantity of Christmas cards is an increase in demand. Thus the price will rise and the quantity will increase. The cause of the increase in the quantity of strawberries is an increase in supply. Thus the equilibrium quantity will increase and the price will decrease.
An increase in the price of a substitute good will cause the equilibrium price of its substitute to ______________ and the equilibrium quantity to ______________.
a Increase; increase Explanation An increase in the price of a substitute good will cause demand for the other good to increase
What would be the initial change in the market for beer if a city suddenly restricted the number of bar licenses they permitted? (Note: A bar requires a licenses to operate.)
a Supply would decrease and there would be a shortage Explanation The reduced number of licenses would reduce the number of sellers of beer, leading to a decrease in supply. Since demand has remained constant and supply has decreased, quantity supplied is smaller than quantity demanded and there is a shortage.
An increase in the price of the good
a movement along a demand curve, no change in demand
An increase in the prices of inputs will cause the equilibrium price to ______________ and the equilibrium quantity to ______________.
b Increase; decrease An increase in the price of inputs decreases supply. This leads to a price increase and a quantity decrease in the new equilibrium
"Many Coca-Cola bottlers increased the price of Coke because the price of corn syrup (an important ingredient in Coke production) has increased." Other things constant, this most recent change in the market for Coca-Cola can best be explained as which of the following?
b A decrease in supply with demand relatively unchanged Explanation Corn syrup is an input that, when more expensive, decreases supply.
If income decreases and, at the same time, a new technology is discovered that lowers the cost of producing the good, which of the following will happen?
b Cannot tell the change in equilibrium quantity. The equilibrium price will decrease. Explanation A decrease in income will cause a decrease in demand of a normal good. The invention of a new technology will cause supply to increase. If demand decreases the equilibrium quantity will decrease, but an increase in supply leads to an increase in the equilibrium quantity. Without knowing the relative change in the supply and demand curves, one cannot tell the direction of the change in quantity in the new equilibrium. A decrease in demand will lower the equilibrium price and an increase in supply will decreases the equilibrium price. Since both changes move price in the same direction, the new equilibrium price will be lower.
Continuing from 4.27, what would be the next two steps that follow after the shortage?
b Consumers will pay a higher price and producers will be able to raise their price while still selling all of their inventory. Explanation Since there is a shortage, consumers will be willing to pay a higher price in order to guarantee that they receive the good and the remaining sellers will be able to charge higher prices and still sell all of the quantity supplied that they would like to.
if (1) the cost of manufacturing computers decreases and (2) at the same time the quality improves, making computers more useful for households, which of the following is most likely to happen?
b Equilibrium price may increase or decrease; equilibrium quantity will increase Explanation The cost reduction increases supply and the quality improvement increases demand.
At what level of output is the marginal cost greater than the marginal benefit?
c 150 Explanation Another way of understanding value to a consumer is to think of it as the amount of benefit that will be gained from consuming the good. The marginal benefit (the value) is also represented by the demand curve, and the marginal cost, the price producers must have if they are going to produce one more unit of a good, is represented by the supply curve. At a level of output of 150 on the graph, the marginal benefit is about a $1.00 and the marginal cost is about $1.15. Thus, it costs more to produce than its value to consumers.
Oprah Winfrey made comments about the possibility of contracting mad-cow disease from eating beef. Some observers said that those comments had negative effects on the beef market. In the same period of time, changes in rate of production may have been the real culprit. If the "over-production" affected the market, then the equilibrium price would have ______________ and the equilibrium quantity would have ______________.
c Decreased; increased Explanation If the change in the market was driven by supply, then the situation changes. If overproduction became a factor, then farmers would have a larger supply than they needed and their supply curve would shift to the right. This would also cause a surplus. Prices would drop and the quantity supplied would be larger at the new equilibrium.
Continuing from 4.28, how will this new equilibrium compare to the initial equilibrium?
c Equilibrium price will be higher and equilibrium quantity will be lower. Explanation Once producers offer a higher price and consumers accept it, the equilibrium price will be higher. At the higher price, quantity supplied increases and quantity demanded decreases until a new equilibrium is reached. The end result is a smaller equilibrium quantity.
Oil-based products are a significant part of the materials used to build sailboats. What is likely to happen in the market for new sailboats and in the market for sails, if the price of oil begins to rise?
c Equilibrium quantity will be lower for sailboats and sails; Equilibrium price will be higher for sailboats and the change in equilibrium price for sails is ambiguous. Explanation Because oil-based products are used to build sailboats, an increase in the price of oil causes the cost of making each sailboat to increase. Since it costs more to make each sailboat, the suppliers can make fewer boats for sale at each price. This reduction in supply, while demand remains constant, causes a shortage. Because quantity demanded exceeds quantity supplied, suppliers realize they can raise the price of the sailboats and still sell them and thereby increase profits. The higher prices cause quantity supplied to increase and the quantity demanded to decrease. This process continues and the shortage gets smaller and smaller. The market reaches a new equilibrium quantity and price where the quantity supplied equals the quantity demanded. The price will be higher and the quantity will be lower than at the original equilibrium. Sailboats and sails are complements. So an increase in the price of sailboats reduces demand for sails. At the same time, the supply of sails will shift left due to the increase in the price of an input. These two changes result in a decrease in quantity sold, but the effect on price depends on the size of the shift in demand and supply.
A decrease in the price of a complementary good will cause its complement's equilibrium price to ______________ and the equilibrium quantity to ______________.
c Increase; increase Explanation This leads to an increase in demand for its complement.
New technology lowering the costs of production will cause the equilibrium price to ______________ and the equilibrium quantity to ______________
d Decrease; increase An improvement in technology increases supply.
"Falling oil prices have caused a sharp decrease in the supply of oil." Speaking precisely, this quotation is a Correct; a decrease in price always causes a decrease in supply. b Incorrect; a decrease in price causes an increase in supply, not a decrease in supply. c Incorrect; a decrease in price causes an increase in the quantity supplied, not a decrease in supply. d Incorrect; a decrease in price causes a decrease in the quantity supplied, not a decrease in supply
d Incorrect; a decrease in price causes a decrease in the quantity supplied, not a decrease in supply. Prices only affect quantity supplied or quantity demanded.
Health insurance makes medical care more affordable for individuals. What will happen to the equilibrium price of medical care as a result of better health care coverage and why?
d Price increases because demand increases Explanation Because health insurance makes medical care cheaper for the consumer at every price level, demand increases. Because of this increase in demand, the equilibrium price increases.
"The winds of the recent hurricanes in Florida are bringing significant financial gain to California orange growers. Due to the extensive damage to the Florida orange crop, many oranges were destroyed. The ones remaining were just as good as the previous oranges. California oranges are commanding their highest prices ever." If Florida and California oranges are substitute goods, which of the following statements best explains the economics of the quotation?
d The supply of Florida oranges has decreased, causing their price to increase and the demand for the California oranges to increase also. Explanation California and Florida oranges are perfect substitutes. The reduction in supply of Florida oranges causes a shortage for Florida oranges which raises their price. Since the price of a substitutes good increases, demand for California oranges increases, which raises their price
A decrease in the price of a substitute good
shift the demand curve to the left and a decrease in demand
An increase in income for a normal good
shift the demand curve to the right and an increase in demand
Expectations of rising prices in the near future
shift the demand curve to the right and an increase in demand now
