Econ 201 Chapter 4

Suppose that bananas and apples are normal goods, and that the price of bananas falls. If the income effect outweighs the substitution effect, we would predict that people will consume_________ bananas and ________ apples. a. more; more b. more: less c. less; more d. less; less

A People are substituting away from apples and into bananas because of the price change. However, the increase in their purchasing power causes them to buy more of both goods. The income effect dominates the substitution effect.

Suppose that a product benefits from a successful advertising campaign. The result is that: a. The demand for the product increases b. The demand for the product decreases c. The supply of the product increases d. The supply of the product decreases

A.

16. When Mary's income increases, she purchases less hamburger. We can conclude that hamburger is: a. a normal good b. an inferior good c. a substitute good d. a complementary good

B.

14. Figure 4.2 illustrates the demand for guitars. An increase in price of guitars would bring about a movement from: a. Point B to point C b. Point B to point A c. D1 to D0 d. D1 to D2

B. Law of demand.

The income effect of a price change implies that a. As the price of a normal good falls, people are likely to buy more of the good b. As the price of a good falls, people are likely to buy more of all normal goods c. As the price of a normal good falls, people are likely to buy less of the good d. As the price of a good falls, people are likely to buy less of all normal goods

B. The income effect of a price change effects all goods not just the one whose price has fallen. So if I buy only spaghetti and frozen pizza and the price of frozen pizzas falls I have more purchasing power overall. That is I can buy the same number of pizza and spaghetti as I normally buy but have more money left over. I will spend this extra money not just on pizza, whose price fell, but on all goods that I buy, even though their prices did not fall.

18. Figure 4.3 illustrates the supply of guitars. An increase in the price of rosewood, which is used to make guitars, would most likely cause a movement from: a. Point B to point C b. Point B to point A c. S1 to S0 d. S1 to S2

D.

The law of demand states that quantity demanded of a product increases as a. consumer income rises b. the prices of other products fall c. the price of the product rises d. the price of the product falls

D.

17. If a technological advance makes it possible to produce bananas at a lower cost: a. The demand for bananas increases b. The demand for bananas decreases c. The supply of bananas increases d. The supply of bananas decreases

C.

19. Figure 4.3 illustrates the supply of guitars. An increase in the number of guitar manufacturers would most likely cause a movement from: a. Point B to point C b. Point B to point A c. S1 to S0 d. S1 to S2

C.

9. Figure 4.1 illustrates the supply and demand for blue jeans. If the actual price of blue jeans is $50, we would expect the price of blue jeans to ___________, the quantity demanded of blue jeans to ___________ and the quantity supplied of blue jeans to ___________. a. increase; increase; increase b. increase; decrease; increase c. decrease; increase; decrease d. decrease; decrease; increase

C.

Becky demands more raisins as her income increases. From this, we can conclude that: a. Raisins are an inferior good b. Raisins are a complementary good c. Raisins are a normal good d. Raisins are a substitute good

C.

The law of supply states that: a. Firms supply more of a product as consumer income rises b. Firms supply more of a product as consumer income falls c. Firms supply more of a product as the price of the product rises d. Firms supply more of a product as the price of the product falls

C.

34. A major freeze in Florida has reduced the orange yield this winter. Illustrate the effect of this freeze on the price and quantity in the orange market, and also in the peach market. (Assume that oranges and peaches are substitutes).

This is very similar to the questions above, email me if you have questions about it. Supply of oranges shifts in and demand for peaches shifts out.

8. Figure 4.1 illustrates the supply and demand for blue jeans. If the actual price of blue jeans is $30, there is a. excess demand of 40 pairs of blue jeans b. excess supply of 40 pairs of blue jeans c. excess demand of 50 pairs of blue jeans d. excess supply of 50 pairs of blue jeans

A. Consumers are willing to buy 120 jeans since they are so cheap. However, suppliers are only willing to supply 80. If the government were to set a price ceiling at $30 then the equilibrium would be at $30 and 80 jeans, and there would be 40 people without pants. If there is no government intervention then the naked people will bid up the price of jeans to the market equilibrium at $40 and 100 jeans.

Bananas and apples are substitutes. When the price of bananas rises, the equilibrium quantity of apples will __________ and the equilibrium price of apples will ___________. a. rise; rise b. rise; fall c. fall; rise d. fall; fall

A. Draw the graph for apples. If bananas and apples are substitutes then an increase in the price of bananas will cause people to substitute into apples - shifting the demand curve for apples out. When the demand shifts out we find the new equilibrium at a higher price and higher quantity.

Suppose that in 1996,12 million cars were purchased at $15,000 each, while in 1997, 10 million cars were purchased at $12,000 each. What might have caused this change? a. The price of airplane tickets (a substitute for cars) fell b. The price of airplane tickets (a substitute for cars) rose c. Automobile manufacturing technology increased d. Automobile manufacturing technology decreased

A. Draw the graph for cars and do the same exercise as above. In this case, however, both price and quantity fell. You will not be able to move your

30. Peaches and cream are complements. When the price of peaches falls, and the price of raw milk (used to make cream) rises, a. The equilibrium price of cream rises and the equilibrium quantity of cream might rise or fall b. The equilibrium price of cream falls and the equilibrium quantity of cream might rise or fall c. The equilibrium price of cream falls and the equilibrium quantity of cream falls d. The equilibrium price of cream falls and the equilibrium quantity of cream rises

A. Draw the graph for cream. When the price of peaches falls we would expect people to buy more cream since they are complements { so demand for cream shifts out. This leads to an increased price and quantity. The increase in the price of an input cause supply to shift back. This causes upward pressure on the price and downward pressure on quantity. So in this case we know that the price increased but we are not sure what happened to quantity. It just depends on the size of each shift.

Suppose that a freeze in California reduces the supply of avocados. Avocados are an input in the production of guacamole, and guacamole is in turn a substitute for salsa. The equilibrium price of guacamole will __________ and the equilibrium price of salsa will ________. a. rise; rise b. rise; fall c. fall; rise d. fall; fall

A. Draw the graph for guacamole. A reduction in the supply of avocados will cause their price to rise. Since avocados are an input into the production of guacamole this causes the supply curve for guacamole to shift back-upward pressure on price downward pressure on quantity. Since the price of guacamole has increased the demand for salsa ( a substitute) should increase. So there is upward pressure on both price and quantity for salsa - I suppose you should draw the graph for salsa as well.

Suppose that the population of a country increases. We would predict that the equilibrium quantity of steak will __________ and the equilibrium price of steak will ___________ in that country. a. rise; rise b. rise; fall c. fall; rise d. fall; fall

A. Draw the graph for steak. As the number of buyers increases the demand curve shifts out.

3. The substitution effect of a price change implies that as the price of a good falls, people are likely to a. buy more of the good b. buy more of all goods c. buy less of the good d. buy less of all goods

A. The substitution effect occurs when people substitute away from other goods into the cheaper good. So if the price of spaghetti falls I may substitute away from frozen pizza into spaghetti. This works the other way around too. If the price of spaghetti rises I will substitute away from spaghetti and into frozen pizzas.

Suppose that the price of fertilizer, an input in the production of corn, falls. We would predict that the equilibrium quantity of corn will __________ and the equilibrium price of corn will ___________. a. rise; rise b. rise; fall c. fall; rise d. fall; fall

B. Draw the graph for corn. When the price of an input, fertilizer, falls we would expect to see a shift out in the supply curve. The new equilibrium should be lower and to left of the original. So price falls and quantity rises.

Suppose that ramen noodles are an inferior good. When income increases, and at the same time the price of pasta, an input in the production of ramen noodles, falls: a. The equilibrium price of ramen noodles rises and the equilibrium quantity of ramen noodles might rise or fall b. The equilibrium price of ramen noodles falls and the equilibrium quantity of ramen noodles might rise or fall c. The equilibrium price of ramen noodles falls and the equilibrium quantity of ramen noodles falls d. The equilibrium price of ramen noodles falls and the equilibrium quantity of ramen noodles rises

B. Draw the graph for ramen noodles. When income increases the demand for ramen noodles shifts back. They are an inferior good remember so when income rises people will buy less ramen noodles and more of other types of food. This shift causes downward pressure on both the price and quantity. As the price of an input falls supply shifts out. So this causes downward pressure on the price but upward pressure on the quantity. So price definitely falls and we're not sure what happens to quantity.

Suppose that the quantity supplied of pizza exceeds the quantity demanded for pizza. We would expect that: a. The price of pizza will increase b. The price of pizza will decrease c. The supply will decrease to meet the demand d. The demand will increase to meet the supply

B. On the exams DRAW A GRAPH WHENEVER POSSIBLE!! I swear that you will save yourself from making some silly mistakes if you do. On the typical X shaped supply and demand graph the premise of this question is that supplier are producing at a level higher than the market equilibrium. They would do this if they expected the price to be higher, i.e. suppliers are expecting the price to be upward and to the left of the actual equilibrium. They might do this if they expected demand to be greater than it turned out to be. So the suppliers are expecting to receive a high price for their goods, unfortunately not many people want buy from them at that price. So the gap between what suppliers are prepared to supply and what consumers want is an 'excess supply' or a 'surplus'. Some suppliers will and they cannot sell all or any of their product at the price they were expecting so they lower the price to attract more buyers. As they bid the price down we move downward along the demand curve (more people are buying the good { or buying more of it) untilwe reach the market equilibrium.

20. Figure 4.4 illustrates a set of supply and demand curves for a product. When the economy moves from point B to point C there has been: a. a decrease in supply and a decrease in demand b. a decrease in supply and a decrease in quantity demanded c. a decrease in quantity supplied and a decrease in demand d. a decrease in quantity supplied and a decrease in quantity demanded

C. & D. The answer was intended to just be C - demand shifts back. However, the quantity demanded has ,in fact, decreased as well.

Two goods are complements if: a. The supply of one good decreases when the price of the other increases b. The supply of one good decreases when the price of the other decreases c. The demand for one good decreases when the price of the other increases d. The demand for one good decreases when the price of the other decreases

C. Actually complements are more difficult to define due to the substitution and income effects. Under this definition we might conclude that a good is a complement when in fact it just has a very large income effect. Don't worry though, I will stick with the books definition.

Suppose that in October the price of a cup of caffe latte was $1.50 and 400 lattes were consumed. In November the price of a latte was $2.00 and 200 lattes were consumed. What might have caused this change? a. The price of tea (a substitute for caffe lattes) fell b. The price of tea (a substitute for caffe lattes) rose c. The price of coffee beans (an input of production of caffe lattes) rose d. The price of coffee beans (an input of production of caffe lattes) fell

C. Draw the graph for cream lattes and label the market equilibrium as having price $1.50 and quantity 400. We know that price rose and quantity fell. So put your pencil on the original equilibrium and move it in the direction of higher prices and lower quantity along one of the curves. You should only be able to do this along one of the curves (and in one direction) - the other curve shifted. In this case, in order to get to a higher price and lower quantity your pencil should move up the demand curve, so supply must have shifted back. This would occur if the price of an input increased.

15. Figure 4.2 illustrates the demand for guitars. If people expect the price of guitars to decrease in the near future, this would most likely bring about a movement from: a. Point B to point C b. Point B to point A c. D1 to D0 d. D1 to D2

C. Since people will wait to buy guitars after the price has dropped.

When the price of apples goes up: a. The demand for apples will decrease b. The demand for apples will increase c. The quantity demanded for apples will decrease d. The quantity demanded for apples will increase

C. This is an important question. The demand curve shows the relationship between the quantity demanded and produced of a good and its price. The point is that a change in the price of the good in the graph does not shift the curves it causes movement along the curves.

29. Bananas and apples are substitutes. When the price of bananas rises, and a technological advance in apple production occurs at the same time, a. The equilibrium price of apples rises and the equilibrium quantity of apples falls b. The equilibrium price of apples rises and the equilibrium quantity of apples rises c. The equilibrium price of apples rises and the equilibrium quantity of apples might rise or fall d. The equilibrium quantity of apples rises and the equilibrium price of apples might rise or fall

D. Draw the graph for apples. When the price of bananas rises the demand for apples shifts out. So we would expect to see higher prices and higher quantities in the apple market. A technological advance in the apple market will make it cheaper to produce apples, so the supply curve for apples also shifts out. This will cause more apples to be consumed but at a lower price. In both cases the quantity of apples rose. However, the increased demand caused upward pressure on the price while the increase in supply caused downward pressure on price. The new market price depends on the magnitude of these effects, i.e. on how far you drew the shifts in each curve.

Peaches and cream are complements. When the price of peaches rises the equilibrium quantity of cream will __________ and the equilibrium price of cream will ___________. a. rise; rise b. rise; fall c. fall; rise d. fall; fall

D. Draw the graph for cream.. If peaches and cream are complements then people consume them together. So when the price of peaches rises people will want to buy less cream - so the demand curve for cream shifts back. The new equilibrium for cream is at a lower price and lower quantity.

Suppose that steak is a normal good. When income decreases the equilibrium quantity of steak will __________ and the equilibrium price of steak will ___________. a. rise; rise b. rise; fall c. fall; rise d. fall; fall

D. Draw the graph for steak. If steak is a normal good then a drop in income will cause people to buy less of it - so demand shifts back.

Suppose that people expect that the price of orange juice will fall next month. We would predict that the equilibrium quantity of orange juice will __________ and the equilibrium price of orange juice will ___________ this month. a. rise; rise b. rise; fall c. fall; rise d. fall; fall

D. I am much less enamored of this question than when I chose it. The idea is that, if people expect to pay a lower price next month they will postpone their orange juice purchase for a month then stock up when the price changes. So demand shifts back this month as people await the price decrease. My problem is that orange juice is a perishable good so you are somewhat limited in your ability to stock up. Also people cannot substitute eating and drinking next month for eating and drinking this month.

Which of the following DOES NOT affect the quantity demanded of a product? a. The price of the product b. The price of related goods c. Consumer income d. The cost of producing the product

D. It effects supply not demand.

33. Use the supply and demand model to explain why it is difficult to find an on-campus parking space during peak mid-day times, while it is much easier to find a parking space during less popular evening hours.

The key to this is that the demand for parking spaces changes dramatically between these times. At peak times the demand curve shifts way out. During the evening hours demand is much lower - so the demand curve shifts way back. In order to get full points on this question you must also draw the supply curve as being a vertical line. That is because the supply of parking places is fixed, i.e. even if you raised the price of a parking spot the university could not provide you with one in the short run.