Econ Ch:3.2

Tea and coffee both contain caffeine and are often consumed in place of one another. You are the director of a large coffee plantation. In recent years, poor tea harvests have devastated tea production and significantly increased prices. How would you expect the demand for coffee to change, and why?

The demand for coffee should increase because the two goods are substitutes. Tea and coffee, which both contain caffeine, are often considered substitutes. If they are substitutes, then we would expect some tea drinkers to respond to the price rise by entering the coffee market and shifting demand to the right.

There is a general decrease in airfares. What do you expect to happen to the demand for cross-country train tickets?

The demand for train tickets would decrease. Different modes of transportation can be viewed as substitutes, so if the price of one good decreases, the demand for the substitute good will also decrease.

Suppose the price of beer increases. What would you expect to happen to the demand for wine?

The demand for wine would increase. Because wine and beer are substitute goods, an increase in the price of one, increases the demand for the other good.

A popular athlete, whose fashion choices are closely followed by the public and often imitated, suddenly starts wearing pink pants. What most likely happens to the demand for pink pants (all else equal)?

The demand increases. Because the athlete is very popular, it's likely that people will be influenced by his/her style, increasing the demand for pink pants. This is an example of how consumer preferences can influence demand. Fashion trends and advertising often help shape consumer preferences.

The boundaries for a school district are redrawn to include more students from low income neighborhoods. What is the impact on the demand for the free or reduced lunch program in the district?

The demand will increase. As more students who are classified as low income are moved into the school district, the demand for the free/reduced lunch program will increase in the district. This is because more students are eligible to apply for this benefit after the boundaries are redrawn.

Choose the answer that best defines a substitute good.

a good or service that a consumer sees as the same or similar and can be used in place of another good or service A substitute good is one that can be used in place of another good or service. Its substitution for another good has an effect on the demand curve for the original good.

When considering factors that shift demand curves, all of the following will decrease demand except _______________.

a rise in income (for a normal good) A rise in income (for a normal good) will increase demand because people will have more money to spend.

Which of the following factors would not result in a change in the supply of automobiles?

an increase in the price of gasoline Changes in the price of inputs used to make an automobile (steel, rubber, and glass) would change the supply of automobiles. While gasoline is needed to run an automobile, it is not a factor of production. This would affect the demand for automobiles

A(n) _______________ good is a good for which demand falls as income rises, and demand rises as income falls?

inferior good Ex: An inferior good is defined as a good in which the quantity demanded falls as income rises, and in which quantity demanded rises as income falls. For example, lower-end food items, like Ramen noodles are inferior goods - when our income improves, we purchase less cheap foods like Ramen noodles and more restaurant meals.

Economists use the ceteris paribus assumption to make it easier to analyze complex problems by looking at one factor at a time.

Ceteris paribus is a Latin phrase that means "all other things being equal." Economists try to test hypotheses by observing actual behavior and using real-world data. By keeping all other factors constant, economists are able to analyze one factor at a time.

Suppose the price of adoption fees for shelter dogs decreases so that more dogs can be adopted. What would happen to the demand for dog food at the local pet store?

The demand for dog food will go up because the number of dogs being adopted has increased. Shelter dogs and dog food are complementary goods. If the price of adoption fees for shelter dogs goes down and more dogs are adopted, then the demand for dog food at the local pet store will increase.

Word leaks to consumers that a large sale will begin one week from today for a furniture store. As a result, the store's manager gives some employees the day off tomorrow in anticipation of weaker demand in the short term. Is this a wise move? Why?

It is a good decision, since consumers will defer buying now in anticipation of the sale later. Consumers expecting a price drop in the future will likely respond by decreasing their demand in the short run and waiting until prices are lower, when the sale goes into effect. For example, think about consumer interest in delaying major purchases until Black Friday or a tax holiday.

Suppose there is a soda tax to curb obesity. What should a reduction in the soda tax do to the supply of soda? Demonstrate the change on the graph below by shifting the appropriate curve.

Soda tax is collected from the sellers, which increases production cost for soda. If the tax decreases, production costs decrease. This causes an increase or rightward shift in supply. A rightward shift in supply means that at every given price, the quantity supplied is higher.

The assembly line allows workers to specialize in the production of one part rather than the entire product. How did the introduction of the assembly line to the automobile market impact the supply of automobiles?

The automobile supply increased because workers can produce more efficiently. Improved technology, in this case, the introduction of the assembly line, increases supply due to an increase in production efficiency.

What is the reason the following statement is incorrect? The price of tuition at a specific university increased from what it was the previous year, but enrollment at the university still increased. This implies that the law of demand does not always hold.

The ceteris paribus condition has been violated. The law of demand depends on ceteris paribus. Since other factors that might shift the demand curve for university education to the right were not taken into account and were not held constant, we cannot say that the law of demand has been violated.

All other things unchanged, what happens to the demand curve for organic pasta if there is a decrease in family income? For this example, consider organic pasta a normal good.

The demand curve will shift to the left. A decrease in family income will cause the demand curve to shift to the left if organic pasta is a normal good but to the right if organic pasta is an inferior good.

Researchers found that LED light bulbs use significantly less energy than incandescent bulbs while producing same amount of light. However, producing LED bulbs is more costly. In order to encourage light bulb manufacturer to produce more LED bulbs, which of the following is most likely to happen?

The government will impose tax on incandescent light bulbs. The government will subsidize LED light bulbs.

Workers at factories building machinery go on strike. Which of the following describes how the supply of machines will be affected?

The supply of machines will decrease. When workers go on strike, there are not people available to produce the goods. Either the goods do not get produced, or the firm has to higher new workers, which raises the cost of production. This in turn decreases the supply of machines.

True or false? A decrease in demand for inferior goods results from a rise in income.

True A decrease in demand for inferior goods results from a rise in income because inferior goods are usually cheaper substitutes purchased with lower incomes.

True or false? A rise in the price of a substitute for olive oil will increase demand for olive oil.

True A rise in the price of a substitute will increase demand because people are likely to buy the more affordable product instead of the higher priced one.

True or false? A recession is likely to hit a gambling and entertainment mecca like Las Vegas particularly hard compared with the average city.

True Demand for most normal goods is certain to decline during a recession, but demand for luxuries like luxury vacations fall much faster. Las Vegas was in fact particularly hard hit by the 2009 recession for this reason.

True or false? In an effort to decrease sugar consumption, the government increases taxes on businesses that sell candy. The effect of this policy in the sugar industry will be to decrease supply, shifting the supply curve to the left.

True Government policies can affect the cost of production and the supply curve through taxes, regulations, and subsidies. When the U.S. government imposes a tax on producers, the producers treat the tax as an added production cost. Higher production costs decrease supply.

As an economic wizard, you know that a bad recession will strike next year. Which one of the following industries should you choose to invest in to weather out the recession?

dollar stores Dollar stores are the safest investment. There is likely to be significant substitution from higher-end retail stores to dollar stores, because people switch to lower-priced purchases as incomes fall.

Which of the following factors will primarily affect the supply of bicycles? Note that rubber and aluminum are used to produce bicycles.

higher prices for rubber lower prices for aluminum The price of inputs used to produce a good affect production costs, which impact supply. Higher prices for rubber, an input for bicycles, likely would lower the supply of bicycles while lower prices for aluminum, another input for bicycles, would likely increase the supply of bicycles. A decrease in overall consumer income or a decrease in the price of scooters would affect demand for bicycles.

Which of the following best completes the statement below? If the price of coffee falls by 90%, we would expect demand for coffee stirrers to _____________. This occurs because the two goods are close ______________.

increase; complements Coffee stirrers and coffee are clearly close complements, that is, the more coffee people consume, the more stirrers they require.

If the price of indoor cycling classes increase by $10, we would expect the demand for fitness classes to _______________. This is because indoor cycling classes and fitness classes are ______________.

increase; substitutes Indoor cycling classes and fitness classes are substitutes, so if the price of one rises, the demand for the other will also rise.

Which of the following is an example of a pair of substitute goods?

tea and coffee coal and natural gas A substitute good is one that can be used in place of another good or service. The substitution of a good has an effect on the demand curve for the original good. When rents increase, individuals turn to home purchases as a substitute. When the price of coal increases, energy producers will turn to less expensive substitutes such as natural gas.

The demand curve for a normal good is ______________.

sloped downwards The demand curves for both an inferior and normal good are sloped downwards as the slope is determined by the law of demand (which is a negative relationship between price and quantity demanded).