Chapter 2

Which of the following will NOT cause demand for apples to increase or decrease?

A reduction in the price of apples (a change in price causes a movement along the curve, not a shift in the curve. See Section 2.2.)

If the absolute value of the price elasticity of demand is 2, then demand is:

elastic (Demand is price elastic if the absolute value of the price elasticity of demand is greater than 1. See Section 2.5.)

if demand decreases:

equilibrium price decreases and equilibrium quantity decreases. (When demand shifts left, the price where the curves intersect is lower and the quantity where the curves intersect is lower. See Section 2.4.)

if demand is linear, a price decrease will cause consumer expenditures on the good to fall when:

E > −1. (Expenditures fall in the event of a price decrease when demand is inelastic, that is, when E > −1. See Section 2.5.)

When the prevailing price is above the price where supply intersects demand:

price falls because there is a surplus, so producers cut prices to try to attract buyers. (Quantity supplied exceeds quantity demanded, so the price will fall. See Section 2.4.)

If the cross-price elasticity between two goods is positive, then the goods are:

substitutes. (Cross-price elasticity is positive when demand for a good increases in response to an increase in price of a related good. This is the definition of substitute goods. See Section 2.5.)

The impact of an increase in demand on equilibrium price will be bigger when:

supply is steeper. (A steeper slope of supply results in a larger price change than if the slope of supply is flatter. See Section 2.4.)

if supply decreases:

equilibrium price increases and equilibrium quantity decreases (When supply shifts left, the price where the curves intersect is higher and the quantity where the curves intersect is lower. See Section 2.4.)

if demand increases and supply increases:

equilibrium price will be uncertain and equilibrium quantity will increase. (Both demand and supply increases cause equilibrium quantity to increase, so the total effect on quantity is an increase. But a demand increase causes price to rise, while a supply increase causes price to fall, so the total effect on price depends on which shift has a bigger impact. See Section 2.4.)

If the supply curve is Q^S= 4P-4, then the highest price at which no producer is willing to sell the good (i.e. the supply choke price) is:

1 (The supply choke price is the P intercept of the supply curve, which is 1. See Section 2.3.)

If the demand curve is Q^D= 10-2P, then the lowest price at which no consumer is willing to buy the good (i.e., the demand choke price) is:

5 (The demand choke price is the P intercept of the demand curve, which is 5.)

Which of the following would cause an increase in the quantity demanded of pizza?

an increase in the supply of pizza (An increase in supply causes the equilibrium price to fall, resulting in a movement along the demand curve and a change in quantity demanded. See Section 2.4.)

A decrease in supply:

creates excess demand, causing equilibrium price to increase. (When supply decreases, quantity demanded remains the same and quantity supplied falls at the old equilibrium price, creating a shortage or excess demand. Buyers then bid up the price. See Section 2.4.)

If the price of crude oil increases and the number of people who own cars falls:

the equilibrium price of gasoline will be uncertain and equilibrium quantity of gasoline will decrease. (Crude oil is an input in the production of gasoline, so when its price increases, supply decreases. At the same time demand for gasoline falls when the number of people who own cars falls, since the two goods are complements. The combination of these two shifts—a decrease in supply and a decrease in demand—causes an uncertain shift in price and a decrease in quantity in equilibrium. See Sections 2.2 to 2.4.)

If the price of crude oil decreases:

the equilibrium price of gasoline will decrease and equilibrium quantity of gasoline will increase. (Crude oil is an input in the production of gasoline, so when its price decreases, supply increases. As a result, price goes down and quantity goes up in equilibrium. See Sections 2.2 and 2.4.)

Which of the following is NOT an assumption underlying the supply and demand model?

Different firms sell their goods at different prices. (All firms are assumed to charge the same price.)

if demand is linear, a price increase will cause consumer expenditures on the good to fall when:

E < −1. (Expenditures fall in the event of a price increase when demand is elastic, that is, when E < −1. See Section 2.5.)

If the inverse demand curve is P= 12-2Q^D and the inverse supply curve is P=4Q^S, then the equilibrium price and quantity are:

Pe = 8; Qe = 2. (The solution is found by solving each equation for Q, setting QD equal to QS and solving for P, then plugging this solution into either equation to find Q. The only correct solution is B. See Section 2.4.)

The price elasticity of demand of a good whose demand curve is linear with a slope of −4:

decreases as quantity increases. (If demand is linear, it is price elastic at low quantities, unitary elastic at one particular quantity, and price inelastic above the quantity where it is unitary elastic. See Section 2.5.)

When demand increases:

demand curve shifts right (a shift to the right shows that a larger quantity is demanded at any given price, so demand has increased)

if supply increases and demand decreases:

equilibrium price will decrease and equilibrium quantity will be uncertain. (Both the demand decrease and the supply increase cause equilibrium price to decrease, so the total effect on price is a decrease. But a demand decrease causes quantity to fall, while a supply increase causes quantity to rise, so the total effect on quantity depends on which shift has a bigger impact. See Section 2.4.)

If the income elasticity of a good is positive, then the good is:

normal (If the income elasticity is positive, then demand increases when income increases, which is the definition of a normal good. See Section 2.5.)

The demand curve of a good is QD = 10 −2P. When P = 5, demand is:

perfectly elastic (Since consumers are infinitely responsive to price changes at this point, they cannot be less than elastic as defined by each of the other choices)

When the prevailing price is below the price where supply intersects demand:

price rises because a shortage, so buyers bid up the price. (When price is below the equilibrium, the quantity demanded exceeds the quantity supplied, so there is a shortage. In response, buyers offer to buy at higher prices to try to attract sellers. See Section 2.4.)

A decrease in demand:

produces excess supply, causing equilibrium price to decrease. (When demand decreases, quantity supplied remains the same and quantity demanded falls at the old equilibrium price, creating a surplus or excess supply. Sellers then cut prices to try to attract buyers. See Section 2.4.)