Econ 1 Macro | Practice Test Unit 3 (Supply & Demand)

A terrible storm wipes out 70% of the peanut crop. Explain and show graphically how this will affect the market for peanut butter and the market for jelly, a complementary good.

Higher peanut prices will shift the supply curve for peanut butter to the left (a decrease in supply). A higher price and a lower quantity demanded will result. The demand for jelly will decrease in response to higher peanut butter prices. This leftward shift in the demand curve will reduce the price of jelly and the quantity supplied.

Sam lives in a town with a population of 3,000. He says, "This town really needs a pizza restaurant. People want pizza and would be willing to pay a lot for it, but no one will open a pizza place because they couldn't make any money." Evaluate Sam's statement.

His statement clearly conflicts with the economic way of thinking. If there is money to be made selling pizza in Sam's hometown, someone will come along to fill this unmet demand. If this proves profitable, other pizza restaurants are likely to open. On the other hand, if the town does not value pizza, the restaurant will lose money and soon close. Likely the town does not value pizza enough to support a restaurant. If it did, we would expect a pizza restaurant to be there.

Suppose a person defects from Cuba (a country that generally disregards the use of markets) to the United States and asks to see a market in action. Where would you take her? Did you give her a complete showing of this market?

Take the person to a grocery store, a mall, an automobile dealership, or a flea market. (remember, a market is not necessarily a place but a term used to describe a process.

Two students are walking by a department store window that has on display a $400 dress. The English major declares, "I want that dress but can't afford it." The economics major replies, "No, you don't." Explain the logic of this reply.

The economics student fails to distinguish between "wants" and "needs". (Anyone who wants something, in an economic sense, will engage in activities to acquire it. The student could take a second job and earn enough money for the dress in three weeks. By not making an effort to acquire the dress, the student reveals that she values other goods, and/or her time, more than she does the dress.)

Around Easter time, the price of eggs rises. Some consumers complain about this and claim stores are 'price gouging.' Are there any positive functions played by the higher prices of eggs around Easter? What would happen if the price of eggs were not permitted to rise by law?

The price of eggs rises around Easter due to simple supply and demand. The positive side of this price increase is that it is what produces the increased quantity of eggs supplied to satisfy consumers around this time of year. If price were not permitted to rise, there would be a shortage of eggs around Easter.

Economists maintain that the price of a product has no effect demand. How can this be true?

When constructing the demand curve, price is the independent variable that determines quantity demanded. Economists who use the word demand refer to this schedule, which reflects every possible price and its respective quantity demanded. Price affects quantity demanded, while other factors, such as consumers' income, will influence the demand for the product.

(see practice test) Refer to figure 3-22. Graph A shows which of the following? a) an increase in the demand and an increase in quantity supplied b) an increase in demand and an increase in supply c) an increase in quantity demanded and an increase in quantity supplied d) an increase in supply and an increase in quantity demanded

a) an increase in the demand and an increase in quantity supplied

Because the height of the demand curve measures the marginal value of the good to consumers, the fact that a demand curve slopes downward to the right illustrates that a) as more of a product is consumed, consumers will value additional units less b) as more of a product is consumed, consumers will value additional units more c) the value of additional units of the good is unrelated to the amount consumed d) the cost of production for a good generally rises as more of it is produced

a) as more of a product is consumed, consumers will value additional units less

(see practice test) Refer to figure 3-14. The gasoline market was initially in equilibrium at point *e*. Other things constant, a decrease in the price of crude oil, an important ingredient used to produce gasoline, would likely move the equilibrium in this market toward point a) *r* b) *s* c) *t* d) *u*

b) *s*

Which of the following is the best description of the effects of an increase in the supply of bread? a) Consumers will pay more for bread b) Bread prices will fall, and bread sales will rise c) A permanent surplus of bread will remain on the market d) Bakers will have higher marginal costs

b) Bread prices will fall, and bread sales will rise

If the demand for a good decreased, what would be the effect on the equilibrium price and quantity? a) Price would increase, and quantity would decrease b) Price would decrease, and quantity would decrease c) Price would increase and quantity would increase d) Price would decrease, and quantity would increase

b) Price would decrease, and quantity would decrease

How will a reduction in the price of cotton influence the market for blue jeans? a) The cost of producing blue jeans will fall, and the supply curve for blue jeans will shift to the left b) The cost of producing blue jeans will fall, and the supply curve for blue jeans will shift to the right c) The cost of producing blue jeans will rise, and the supply curve for blue jeans will shift to the left d) The cost of producing blue jeans will rise, and the supply curve for blue jeans will shift to the right

b) The cost of producing blue jeans will fall, and the supply curve for blue jeans will shift to the right

If coffee and cream are complements, an increase in the price of coffee will cause a) the demand for cream to increase b) the demand for cream to fall c) the demand for coffee to fall d) no change in the demand for cream; only quantity demanded would be affected

b) the demand for cream to fall

If we observe a decrease in the price of a good and a decrease in the amount of the good bought and sold, this could be explained by a) an increase in the supply of the good b) an increase in the demand for the good c) a decrease in the demand for the good d) a decrease in the supply of the good

c) a decrease in the demand for the good

How will an increase in the price of coffee affect the market for cocoa, a substitute good? a) The supply of cocoa will increase, leading to a reduction in the price of cocoa b) The supply of cocoa will decrease, leading to an increase in the price of cocoa c) the demand for cocoa will increase, leading to an increase in the price of cocoa d) The demand for cocoa will decrease, leading to a reduction in the the price of cocoa

c) the demand for cocoa will increase, leading to an increase in the price of cocoa

the current demand for a good would decrease if a) the price of a complementary good rose b) the price of a substitute good rose c) consumers suddenly believed the price of the good would be sharply higher in the future d) consumer income increased

d) consumer income increased

which of the following would most likely increase the demand for televisions? a) a decrease in the price of televisions b) a decline in consumer income c) a decrease in the price of home stereo systems, a substitute for televisions d) a decrease in the price of DVD players, a product that is complementary with televisions

d) decrease in the price of DVD players, a product that is complementary with televisions

An increase in the price of a good would a) decrease the demand for the good b) decrease the quantity demanded for the good c) increase the demand for the good d) decrease the quantity supplied of the good

decrease the quantity demanded for the good

(see practice test) Figure 4-14 depicts the milk market. The horizontal line, P, represents a price ceiling imposed by the government. Which of the following is true? a) In equilibrium, the quantity demanded is 800 gal b) at the ceiling price, there is a surplus c) The quantity demanded at the price ceiling will equal the quantity supplied d) The equilibrium price would be $1 per unit without the price ceiling e) The quantity sold will be 500 gal

e) The quantity sold will be 500 gal

Producers are willing to offer greater quantities for sale at higher prices because a) they have the incentive to pay the increasing opportunity cost of resources necessary to attract them from alternative uses b)they will decrease their profits by expanding production at higher prices c) the government orders them to do solower prices attract new firms, which have higher costs of production e) they hire superior quality, higher-priced resources as production expands

e) they hire superior quality, higher-priced resources as production expands

substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other