Supply and Demand
Given a supply slope of 1000, the government would like to increase supply of pizzas by 2,000 by lowering the tax ____ per pizza.
$2.00: E = chg Q / chg P; ch P = chg Q / E; 2,000/1,000 = $2.00
Equation A: P = 50 + .7Q Equation B: P = 100 - .3Q What is the slope of the demand line?
-.3
Given the supply line: P = 80 + .02Q, slope is _____ and the vertical intercept is _____.
.02, 80
Slope represents the change in quantity over the change in price.
False, it is the change in PRICE over the change in QUANTITY.
Services that consume a large part of the budget are inelastic.
False, items that consume a large part of the budget are more elastic.
Eliminating substitutes causes demand to be more elastic.
False, less substitutes makes demand more inelastic.
Decreasing the marginal product of capital decreases product demand.
False, marginal product of capital does not affect consumer product demand.
Negative externalities shift social costs onto producers.
False, onto consumers
Perfect information means that the product must be free of defects.
False, perfect information means that the buyer and seller have equal and full knowledge concerning the transaction. Buying a flawed product may be desirable if the price is right.
The cross-price elasticity of demand between coke and pepsi will be negative.
False, positive, as Coke prices increase, so will Pepsi's sales.
Increasing number of buyers causes supply to increase.
False, producers change supply, customers change demand. As demand increases, price increases, then QUANTITY supplied increases but supply itself does not shift.
The law of supply states that quantity supplied decreases as price increases.
False, quantity supplied would increase as price increases
Congress passes a law subsidizing corn farmers, the supply of corn will decrease.
False, supply of corn would increase.
Supply increases when the number of suppliers drops.
False, supply would decrease.
A firm facing higher taxes will increase production.
False, the ability of firms to supply services will decrease at each price point.
A parallel shift of either the demand or supply line would cause their slope to change.
False, the slope remains the same, only the intercept changes (we assume only parallel shifts).
The vertical intercept explains the percentage of price determined by quantity.
False, the vertical intercept is the price level at which quantity is zero.
Consumers cannot use the market price system to determine an allocation of income.
False, they do
Transaction costs include the product price.
False, transaction costs are defined in this course to include costs other than the price.
Significant positive externalities can cause the market to overproduce goods and services.
False, underproduce
40.Any two points on a straight line will produce the same slope.
40.True
If an additional 50 labor hours are required to produce 200 pizzas, then the marginal product of labor is ______.
4: 200/50
Equation A: P = 50 + .7Q Equation B: P = 100 - .3Q What is the vertical intercept of the supply function?
50
When quantity increases from 2.0 million units to 2.5 million units as income increases 5%, then the income elasticity of demand equals _____.
5: 25%/5%
Equation A: P = 50 + .7Q Equation B: P = 100 - .3Q What is the equilibrium price and quantity (P, Q)?
85, 50
The change in _____ can be used to evaluate the desirability of government projects.
98.social surplus
A large number of buyers and suppliers is not an assumption for a competitive market.
False, without a large number of both buyers and sellers, one would enjoy market power and thus be able to manipulate price.
Social surplus is bad for an economy.
False.
Improving the level of technology shifts the production possibilities curve outward.
True, allows more output with a given level of input.
The income elasticity of demand for autos will be positive.
True, as people earn more income, they buy more cars or more expensive cars.
When price elasticity > 1, then demand is elastic.
True, note we assume absolute value.
Given inelastic demand for alcohol, increasing the price will increase revenue.
True, people will not reduce purchases and will pay the higher price.
As the price of Mountain Dew increases, the supply of Pepsi could decrease.
True, suppliers would shift from making Pepsi to making Dew.
Significant transactions costs can give sellers market power.
True, the can raise prices by the amount of transactions costs without losing customers
Blocking exit can cause firms to reconsider entry.
True, the risk of failure has increased.
Decreasing the price of green fees increases sales of golf balls.
True, they are complementary goods.
Restricting entry allows incumbent firms some market power.
True, they can increase price without fear of competition.
The State of Florida has increased taxes on advertising agencies, the supply of advertising will decline.
True, this has actually happened in Florida.
Improving the level of technology generally improves both the marginal product of labor and capital.
True, true by definition.
A price elasticity of -1.4 implies that demand is price _____, that is, _____.
elastic, sensitive
Homogeneous goods exist as goods that are viewed by the consumer as being _____.
equal
Total Revenue (TR) is maximized where price elasticity _____.
equals one (the absolute value that is)
Which of the following are correct assumptions of a competitive market.
free entry and exit, many buyers and sellers.
The _____ states that as price falls quantity increases.
law of demand
Anything that increases costs, causes the supply curve to shift to the _____.
left
Decreasing the number of suppliers would shift the supply curve to the _____.
left
For an inferior good, as income increases the demand curve shifts to the _____.
left
Increasing taxes on a firm would cause the supply curve to shift to the _____.
left
With free exit, markets experiencing _______ will find supply decreasing and prices _______ as firms exit.
losses, increasing
If Jorge wants to sell 1,000 more pizzas with a demand slope of -.004, then Jorge will need to _____ price by ______.
lower, $4
When there are many buyers and sellers then everyone is a _______.
price taker
Movement along the demand curve is due to a change in _____.
price.
If a drop in demand causes prices to drop, then ______ will decrease.
production (quantity supplied)
Price elasticity of demand is the percentage change in _____ divided by the percentage change in _____.
quantity, price
Shifting demand or supply lines would cause the slope to _____.
remain the same
Advertising is designed to influence tastes and preferences in favor of purchase thus shifting the demand curve to the ______.
right
An improvement in production technology would shift the supply curve to the ______.
right
Increasing demand causes the demand curve to shift to the ______.
right
Any slope is defined as _____ over _____.
rise, run
Market power is the ability to _____.
set price
A reduction in the labor force will cause the production possibilities curve to ______.
shift inward
Given a slope of .30, then for change in price of 100 the quantity supplied/demanded) will (increase/decrease) _____ units.
supplied, increase, 333; slope = rise/run; .3 = 100/x; solve for x
Increasing the price of a product related by production would cause _____ to shift to the left.
supply
If the cost of cheese decreases, then _____ of pizza will _____.
supply, not change
If the government fixes the price above the market price, then a(n) ______ will occur.
surplus
Increasing demand decreases producer surplus.
False, it increases it.
Differentiating goods allows sellers some degree of market power.
True, "extra features will cost you ..."
Demand curves slope _____ according to the law of demand.
downward
A government subsidizing a price will ______ its Treasury.
drain
_______ efficiency is the optimal distribution of utility.
Allocational
Increasing supply, increases demand.
False, demand comes from customers. Income of buyers, tastes of buyers, number of buyers, and prices of related goods affect demand.
Increasing the cost of coffee causes demand for cream to increase.
False, increasing the cost of coffee should lower coffee consumption, hence cream consumption should also decrease.
Consumer surplus is equal to producer surplus.
False , one can be greater than the other.
Asymmetric information is necessary for a competitive market.
False, Symmetric information
A change in price causes the demand curve to shift to the right.
False, a change in price moves along the demand curve, a change in income would shift it.
A competitive market minimizes producer surplus.
False, but it maximizes social surplus, the total of producer and consumer surplus.
A change in the number of suppliers increases demand.
False, demand comes from customers. Income of buyers, tastes of buyers, number of buyers, and prices of related goods affect demand.
______ is the amount of goods that is being given up.
Opportunity cost
Equation A: P = 50 + .7Q Equation B: P = 100 - .3Q Given a price of $50, there will be a _____ of _____ units.
Shortage, 167
A shortage suggests that quantity demanded is greater than quantity supplied.
True
Countercyclical industries may sell products that are income inferior.
True
Decreasing price, increases quantity demanded.
True
Decreasing the price of a good related in production increases supply.
True
Increasing demand causes price to increase which causes quantity supplied to increase.
True
Increasing national income normally causes consumer demand to increase.
True
Increasing peanut subsidies causes the supply of peanuts to increase.
True
Increasing supply increases consumer surplus.
True
Increasing taxes on commodities such as sugar causes their supply to decrease.
True
Increasing the marginal product of labor increases supply.
True
Increasing the price of Mountain Dew increases demand for Pepsi.
True
Increasing time allows demand to be more elastic.
True
Luxuries tend to be price elastic.
True
Movement along the demand curve is due only to a change in price.
True
Producers can use input prices to determine the best method of production.
True
Producers have an incentive to improve efficiency as they earn more profit.
True
The marginal rate of substitution is measure by the slope of the production possibilities curve.
True
The point at which the supply and demand lines intersect is equilibrium.
True
Vertical demand curves are more inelastic.
True
An increase in price causes supply to _____.
change quantity supplied.
Soda and chips would be considered _______ goods.
complementary
If demand for product A increases as the price of product B drops, then these are _____.
complementary goods.
Demand curve will increase due to a(n):
increase in income.
A supply curve will decrease due to a(n):
increase in production costs.
The marginal product of capital is _____ by technology improvements.
increased
_____ is the gain in trade to the seller.
Producer surplus
_____ is the maximum combinations of two or more goods that can be produced.
Production possibilities curve
_____ is the sum of the consumer and producer surplus.
Social surplus
What are the determinants of demand?
Tastes & preferences, number of buyers, income, and prices related to goods.
_____are directly related to exchanges such as recording fees in the Clerk of Circuit Court.
Transactions cost
Externalities occur when consumption or production of a good generate social _____ in the addition to private benefits or costs.
benefits or costs Production Possibilities Curve
Movement along the demand curve due to a change in price causes a _______.
change in quantity demanded
Movement along the supply curve due to a change in price causes a ______.
change in quantity supplied
A(n) _____ market is said to exist when buyers and sellers are price takes.
competitive
A cross-price elasticity of -2.0 implies that the product is a _____.
complement
Coffee and cream would be considered ______ goods.
complementary
Demand for ______ good increases as the price of the related good decreases.
complementary
Firms do not want to have large inventories as they incur ______.
costs
When firms experience excess inventories, they tend to ______ and/or ______.
cut prices, cut production
A competitive market _____ social surplus.
maximizes
To achieve equilibrium, we assume firms are taking actions consistent with ______.
maximizing profit
To achieve equilibrium we assume consumers are taking actions consistent with ______.
maximizing satisfaction
Governments will collect ____ tax revenues from a sales tax on inelastic goods or services.
more
An increase in capacity utilization would cause ______.
movement up along the supply curve
Marginal product of labor is the change in _____ resulting from one more unit of _____.
output, labor
The production possibilities curve shifts _____ when labor is increased.
outward
Normal income elasticity of demand will be ______.
positive
The trade-off between producing consumer goods versus capital goods reflects the choice between ______.
present and future consumption
Opportunity cost is the _____ of the best alternative.
price (could also be benefit)
If demand increases due to a change in tastes, then _____ will increase thereby causing _____ to increase.
price, production (quantity supplied)
Demand slope represents the change in _____ needed to change one unit of _____.
price, quantity
Slope is defined as the change in _____ over the change in ______.
price, quantity
Anything that increases profits, causes the supply curve to shift to the _____.
right
Increasing a subsidy would cause the supply curve to shift to the ______.
right
An improvement in technology will cause the production possibilities curve to _____.
shift outward (increases)
If the government fixes a price below the market price, then a(n) ______ will occur.
shortage
A price ceiling causes a _____ as quantity demanded is _____ quantity supplied.
shortage, greater than
Calculated elasticities are valid for ____ changes in demand.
small
Given the demand line: P = 120 -.01Q, slope is _____ and the vertical intercept is ______.
-.01, 120
If price decreases $10 while quantity increases 50, then the slope is _____.
-.20: (-10/50)
When price drops from $25 to $20, while quantity increases from 100 to 120, then the price elasticity of demand is _____. (Use the point elasticity formula)
-1: -20%/20% = -1
If 1,000 tons of wheat are given up to grow 2,000 tons of rice, then the marginal rate of substitution is _____.
.5 tons of wheat per ton of rice (1,000/2,000)
If price increases $20 while quantity increases 40, then the slope is _____.
.50: (20/40)
Given a demand line slope of -4,a price change of _____ would be necessary to increase quantity demanded by 50 units.
200; -4 = P / 50; p = -200; it is negative as it is a price cut.
If an additional 3 ovens are needed to bake 150 pizzas, then the marginal product of capital is ______.
50: 150/3
_____ exists when either the buyer or seller has an informational advantage in the transaction.
Asymmetric information
______ are held constant in constructing a production possibilities curve.
Labor, capital, and technology
_____ are fixed when graphing a particular production possibilities curve.
Capital and labor
_____ is the gain in trade to the buyer.
Consumer surplus
Given a slope of -.01, then to induce a change of 100 units in quantity demanded, _____ will have to (increase/decrease) by _____ dollars.
decrease, $1
If price decreases, quantity supplied ______.
decreases
If price increases, quantity demanded ______.
decreases
If the number of buyers decreases, demand ________.
decreases
As the number of buyers _____, the demand curve shifts to the left, thus _____.
decreases, decreasing
When demand is price elastic, _____ price increases Total Revenue (TR).
decreasing
If prices drop even though supply has not changed, then ______ must be responsible.
demand
Every point on a demand curve has a/the _____ elasticity.
different
Elasticities are often used for _____. Consumer and Producer Surplus
forecasting sales Consumer and Producer Surplus
An efficient allocation of capital means capital is put to its _____.
highest and best use
If income increases 5%, given an income elasticity of 2, then sales will _____.
increase 10%: 2 = x/5%, 5% * 2 = 10%
When prices rise, due to increased demand, firms ______ to maximize profit.
increase production
As income increases, demand for a normal good _____.
increases
If resource prices decrease, supply _____.
increases
If the cost of dough used in making pizzas drops then supply _____, price _____.
increases, decreases
An _____ relationship occurs when changes in one variable do not affect the value of another variable.
independent
A good that has an income elasticity of -1.0 is a(n) _____.
inferior good
Blocking entgry limits the number of _____.
suppliers (or sellers)
If price increases even though demand has not changed then ______ must be responsible.
supply
An increase in capacity would cause ______.
supply curve to shift to the right
A price floor causes a _______ as quantity demanded is _________ quantity supplied.
surplus, less than
Supply curves have a _____ slope according to the law of supply.
upward
The _____ intercept is the price where quantity equals zero.
vertical
The _____ and _____ are needed to describe a straight line.
vertical intercept, slope
