Graded assignment #3

An increase in income for a normal good (Indicate which of the following will cause a movement along a demand curve. Which will shift the demand curve to the left? Which will shift the demand curve to the right? Will demand increase or decrease?)

shift the demand curve to the right and an increase in demand

An increase in the price of the good (Indicate which of the following will cause a movement along a demand curve. Which will shift the demand curve to the left? Which will shift the demand curve to the right? Will demand increase or decrease?)

A movement along a demand curve, no change in demand

New technology lowering the costs of production will cause the equilibrium price to ______________ and the equilibrium quantity to ______________. A Increase; increase B Increase; decrease C Decrease; decrease D Decrease; increase

D Decrease; increase (An improvement in technology increases supply.)

A decrease in the price of a substitute good (Indicate which of the following will cause a movement along a demand curve. Which will shift the demand curve to the left? Which will shift the demand curve to the right? Will demand increase or decrease?)

Shift the demand curve to the left and a decrease in demand

Expectations of falling income in the near future (Indicate which of the following will cause a movement along a demand curve. Which will shift the demand curve to the left? Which will shift the demand curve to the right? Will demand increase or decrease?)

Shift the demand curve to the left and a decrease in demand. (if the good is normal)

a decrease in the price of the good itself (Indicate which of the following will cause a movement along a supply curve. Which will shift the supply curve to the left? Which will shift the supply curve to the right? Will supply increase or decrease?)

a movement along the supply curve, no change in supply

price of related goods

demand and supply change

tastes and preferences

demand changes

Change in technology

supply changes

number of sellers

supply changes

a tax on the land used by the producer (Indicate which of the following will cause a movement along a supply curve. Which will shift the supply curve to the left? Which will shift the supply curve to the right? Will supply increase or decrease?)

shift the supply curve to the left, a decrease in supply

expectations of rising prices of the good in the near future (Indicate which of the following will cause a movement along a supply curve. Which will shift the supply curve to the left? Which will shift the supply curve to the right? Will supply increase or decrease?)

shift the supply curve to the left; a decrease in supply

At what level of output is each additional roll of film worth more to consumers than it costs to produce? SEE DOC A 50 B 100 C 150

A (50) (The demand curve represents what a good is worth to the consumer, or what consumers are willing to pay at each level of output. Along the demand curve, the value will change as the quantity changes. If the value to consumers is above the price at which a producer is willing to supply the good, then the value of one more unit of output is more than the cost. A production level of 50 represents this situation.)

An increase in the number of potential buyers will most likely cause which of the following? A An increase in demand B A decrease in demand C An increase in the quantity demanded D A decrease in the quantity demanded

A (An increase in demand) (The entire demand relationship will likely change and an increase in the number of buyers will increase the market demand for a product.)

An increase in the price of a substitute good will cause the equilibrium price of its substitute to ______________ and the equilibrium quantity to ______________. A Increase; increase B Increase; decrease C Decrease; decrease D Decrease; increase

A (Increase; increase) (An increase in the price of a substitute good will cause demand for the other good to increase.)

Indicate how an increase in tastes for apples will affect the equilibrium price and the equilibrium quantity in the market for apples. A Increase; increase B Increase; decrease C Decrease; decrease D Decrease; increase

A (Increase; increase) (The first part brings up changes in taste. As we learned, tastes and preferences influence demand. In this situation, as tastes for apples increase, the demand will increase. This means that at the current price, the quantity demanded will be higher than the quantity supplied, and a shortage is formed. As suppliers learn that consumers are willing to pay more, they will produce more apples and charge higher prices. As prices increase, some consumers pull out of the market and the quantity demanded is reduced. This continues until the quantity demanded equals the quantity supplied. A new equilibrium is created with a higher quantity supplied and higher price.)

Suppose that a change in U.S. attitudes toward goods made abroad reduces the quantity demanded at each price by a half-million computers per year. What is the new equilibrium price? A $5 B $9 C $11 D $13 E $15

B ($9) (This question introduces a change in demand. This changes one of the schedules and it means that the equilibrium price and quantity also change. By subtracting .5 from all the quantity demanded values, you find equilibrium at $9.)

Expectations of rising prices in the near future (Indicate which of the following will cause a movement along a demand curve. Which will shift the demand curve to the left? Which will shift the demand curve to the right? Will demand increase or decrease?)

Shift the demand curve to the right and an increase in demand now

price of the good sold by a firm

quantity supplied changes

a decrease in the price of an input, such as wages for labor (Indicate which of the following will cause a movement along a supply curve. Which will shift the supply curve to the left? Which will shift the supply curve to the right? Will supply increase or decrease?)

shift the supply curve to the right, an increase in supply

a decrease in the price of another goods firms in the industry could produce (Indicate which of the following will cause a movement along a supply curve. Which will shift the supply curve to the left? Which will shift the supply curve to the right? Will supply increase or decrease?)

shift the supply to the right, an increase in supply

Suppose the U.S. supply and demand schedules for computers manufactured in Japan are in the table below. What is the equilibrium price? SEE DOC A $5 B $9 C $11 D $13 E $15

C ($11) (A market is in equilibrium when the quantity demanded equals the quantity supplied. $11 has to be right because it is the only selection where the quantity demanded and the quantity supplied are equal.)

Oprah Winfrey made comments about the possibility of contracting mad-cow disease from eating beef. Some observers said that those comments had negative effects on the beef market. In the same period of time, changes in rate of production may have been the real culprit. If only Oprah's comments affected the market, then the equilibrium price would have ______________ and the equilibrium quantity would have ______________. A Decreased; decreased B Increased; increased C Decreased; increased D Increased; decreased

A (Decreased; decreased) (If Oprah's comments are the only thing that caused a disturbance in the market, then she would have caused demand to decrease. If people listened to her and decided not to buy any meat, then the demand curve would shift to the left causing a surplus of meat. Suppliers inventories would increase and prices would have to go down to sell off the excess meat. This would result in a new equilibrium of lower prices and lower quantity supplied.)

"Many Coca-Cola bottlers increased the price of Coke because the price of corn syrup (an important ingredient in Coke production) has increased." Other things constant, this most recent change in the market for Coca-Cola can best be explained as which of the following? A A decrease in demand with supply relatively unchanged B A decrease in supply with demand relatively unchanged C An increase in supply with demand relatively unchanged D An increase in demand with supply relatively unchanged

B (A decrease in supply with demand relatively unchanged) (Corn syrup is an input that, when more expensive, decreases supply.)

How will a decrease in the price of DVDs affect the demand for DVD players? Why? A Quantity demanded of DVD players increases B Demand for DVD players increases C Quantity demanded of DVD players decreases D Demand for DVD players decreases

B (Demand for DVD players increases) (DVDs and DVD players are complementary goods. If the price of one decreases, an individual is more likely to want the other.)

If (1) the cost of manufacturing computers decreases and (2) at the same time the quality improves, making computers more useful for households, which of the following is most likely to happen? A Equilibrium price will increase, equilibrium quantity will increase B Equilibrium price may increase or decrease; equilibrium quantity will increase C Equilibrium price will decrease; equilibrium quantity will decrease D Equilibrium price may increase or decrease; equilibrium quantity will decrease

B (Equilibrium price may increase or decrease; equilibrium quantity will increase)

Oprah Winfrey made comments about the possibility of contracting mad-cow disease from eating beef. Some observers said that those comments had negative effects on the beef market. In the same period of time, changes in rate of production may have been the real culprit. If the "over-production" affected the market, then the equilibrium price would have ______________ and the equilibrium quantity would have ______________. A Decreased; decreased B Increased; increased C Decreased; increased D Increased; decreased

C (Decreased; increased) (If the change in the market was driven by supply, then the situation changes. If overproduction became a factor, then farmers would have a larger supply than they needed and their supply curve would shift to the right. This would also cause a surplus. Prices would drop and the quantity supplied would be larger at the new equilibrium.)

A decrease in the price of a complementary good will cause its complement's equilibrium price to ______________ and the equilibrium quantity to ______________. A Decrease; decrease B Increase; decrease C Increase; increase D Decrease; increase

C (Increase; increase) (This leads to an increase in demand for its complement.)

What does a single point on the supply curve represent? SEE DOC A The cost of producing the given quantity of film B The amount of profit the producer hopes to receive C The cost, at the current level of production, of producing one more roll of film D The price the consumers are willing to pay for a roll of film

C (The cost, at the current level of production, of producing one more roll of film) (Each price represented on the supply curve is the minimum price that is necessary to convince businesses to produce the corresponding quantity supplied. Any market price below that price will cause businesses to reduce production. At any single point, the price is the cost of producing one more unit of a good. The cost of producing the given quantity of film is close. Except that it is the cost of producing only the marginal unit, not the entire quantity. Profit is not shown on the supply curve and the price consumers are willing to pay is represented on the demand curve.)

Assume that the price in a market is currently below the equilibrium price. Explain exactly why that situation will change by putting the steps in the correct order. 1 B There is a shortage since quantity demanded is greater than quantity supplied 2 D Prices begin to rise 3 E The shortage becomes smaller 4 F Quantity demanded begins to decrease and quantity supplied increases 5 G Some buyers are willing to pay more for a good and sellers can raise prices while still selling all of their supply 6 A The steps repeat until there is a new equilibrium 7

in order (Normal supply and demand implies that as price falls below equilibrium the quantity demanded increases and the quantity supplied decreases. Because the quantities demanded and supplied are equal at equilibrium, there must therefore now be a shortage. A shortage means that some buyers are willing and able to pay more to get the good and that sellers can raise their prices and still sell all they are willing to supply. Prices begin to rise as a result. As prices rise, quantities demanded decrease and the quantities supplied increase. This process continues as long as there is a shortage. The shortage gets smaller and is eventually eliminated. A new equilibrium quantity is reached where the quantity demanded equals the quantity supplied. At that point the price stops rising, because there are no longer any pressures to cause increases.)

Indicate how a decrease in the cost of producing oranges (a substitute for apples) will affect the equilibrium price and the equilibrium quantity in the market for apples. A Increase; increase B Increase; decrease C Decrease; decrease D Decrease; increase

A (Increase; increase) (Since the lower price of the substitute good, oranges, will attract consumers, the demand for apples will decrease. Apple suppliers will still have all of their apples and inventories will grow since suppliers cannot sell all they want at the going market price. To sell off the excess goods, suppliers will begin to lower prices and some consumers will offer lower prices. As the price drops, the quantity demanded will increase as the quantity supplied decreases, since farmers will produce less for the lower price. This will continue until the surplus does not exist and a new equilibrium price is reached. This equilibrium is a lower price and a lower quantity, therefore the correct answer is decrease/decrease. The best way to work through these is to suggest examples, to draw the graphs, and to explain why the prices and quantities adjust.)

Consider the markets for ball-point pens and "rollerball" pens. Suppose that, due to an increased cost of the metal that is used in "rollerball" pens, the prices of "rollerball" pens increase. There are no other changes. What would happen to the demand schedules of both products? The demand curve for ball-point pens would ______________ ; the demand curve for "rollerball" pens would ______________. A Increase; not change B Increase; increase C Decrease; not change D Decrease; increase E Not change; decrease

A (Increase; not change) (The rule with substitute goods is that when the price of one increases, the demand for the substitute good increases. This happens as people buy the substitute good instead of the now more expensive good. This describes what will happen with the two different types of pens. The demand schedules show the relationship between prices and quantities demanded. The price of rollerball pens increases. The demand for rollerball pens does not change. Consequently, the demand for ball-point pens, the substitute good, increases and the curve shifts rights.)

What would be the initial change in the market for beer if a city suddenly restricted the number of bar licenses they permitted? (Note: A bar requires a licenses to operate.) A Supply would decrease and there would be a shortage B Supply would decrease and there would be a surplus C Demand would increase and there would be a shortage D Demand would increase and there would be a surplus

A (Supply would decrease and there would be a shortage) (The reduced number of licenses would reduce the number of sellers of beer, leading to a decrease in supply. Since demand has remained constant and supply has decreased, quantity supplied is smaller than quantity demanded and there is a shortage.)

A decrease in income will cause which of the following to happen to the demand for used cars? Assume used cars are inferior goods. A The demand for used cars will increase. B The demand for used cars will decrease. C The quantity demanded for used cars will increase. D The quantity demanded for used cars will decrease.

A (The demand for used cars will increase.) (Used cars may be inferior goods for many individuals. As their incomes increase, they will likely buy fewer used cars and more new cars. However, if their incomes decrease, they will be more likely to buy a used car instead of a new automobile. If used cars were classified as normal goods, the answer would be a decrease in demand.)

If income decreases and, at the same time, a new technology is discovered that lowers the cost of producing the good, which of the following will happen? A The equilibrium quantity will increase. The equilibrium price will increase. B Cannot tell the change in equilibrium quantity. The equilibrium price will decrease. C The equilibrium quantity will decrease. The equilibrium price will increase. D Cannot tell the change in equilibrium quantity. Cannot tell the change in equilibrium price.

B (Cannot tell the change in equilibrium quantity. The equilibrium price will decrease.) (A decrease in income will cause a decrease in demand of a normal good. The invention of a new technology will cause supply to increase. If demand decreases the equilibrium quantity will decrease, but an increase in supply leads to an increase in the equilibrium quantity. Without knowing the relative change in the supply and demand curves, one cannot tell the direction of the change in quantity in the new equilibrium. A decrease in demand will lower the equilibrium price and an increase in supply will decreases the equilibrium price. Since both changes move price in the same direction, the new equilibrium price will be lower.)

Consider the market for peaches. Suppose that the conditions for growing peaches in the southeast become unfavorable, and many of the southeastern peach farmers decide to leave the industry and look for other jobs. With this migration of farmers, what will happen to the supply of peaches from the southeast? A Increase B Decrease C Not change

B (Decrease) (In this question, the farmers are the firms producing the peaches. When the farmers move from peach farming, the number of firms decreases in the southeast. When the number of firms decreases, the supply decreases.)

Assume that tastes change so that tennis is no longer as desirable to play as it is now. What would happen to the market for tennis balls? A Demand increases, the equilibrium quantity is larger, and the price is higher. B Demand decreases, the equilibrium quantity is smaller, and the price is lower. C Demand increases, the equilibrium quantity is smaller, and the price is lower. D Demand decreases, the equilibrium quantity is larger, and the price is higher.

B (Demand decreases, the equilibrium quantity is smaller, and the price is lower.) (The change in tastes causes the demand for tennis balls to decrease. The quantity demanded is now less than quantity supplied. There is a surplus. Given the surplus, sellers will lower their prices to get rid of extra product. As prices fall, the quantity demanded will begin to increase and the quantity supplied to decrease and thus the surplus gets smaller. This downward pressure will continue until there is no longer a surplus and a new lower equilibrium price and lower equilibrium quantity are reached.)

What will happen to current purchases if people expect lower prices in the future? What will happen with expectations of higher incomes? A Demand increases; demand increases B Demand decreases; demand increases C Demand increases; demand decreases D Demand decreases; demand decreases

B (Demand decreases; demand increases) (If individuals expect lower prices, they will wait to purchase items (this leads to a decrease in demand now). If individuals expect a higher wage, they are more likely to buy more now (leading to an increase in demand).)

Okra was $13.00 per bushel in 2015, and 1.5 million bushels were sold. Okra was $14.00 per bushel in 2016, and 2.0 million bushels were sold. "If in both cases the okra market was in equilibrium, this must be an example of an exception to the law of demand." A True B False

B (False) (The quote is incorrect. Increasing demand for okra from 2015 to 2016 would cause an increase in price and equilibrium quantity. The law of demand holds only if everything else remains the same. The results in the okra market must represent a shift in demand rather than a movement along a demand curve. An increase in demand will cause an increase in the equilibrium quantity and price.)

Expectations of lower prices in the near future may cause some producers to do what? A Increase the quantity supplied of the good now B Increase the supply of the good now C Decrease the supply of the good now D Decrease the quantity supplied of the good now

B (Increase the supply of the good now) (If producers expect lower prices in the future they will increase supply now if they can.)

Suppose that a tariff is established on computers made abroad. The equilibrium price will ______________ and the equilibrium quantity will ______________. A Increase; increase B Increase; decrease C Decrease; increase D Decrease; decrease

B (Increase; decrease) (A tariff will cause a change in the quantity supplied of a foreign good. This question asks what will happen to the market for foreign computers with the tariff. A tariff will increase costs for a foreign producer for each product produced for the US. That is like an increase in the prices of inputs, and it means that the quantity supplied will decrease at every price. Since supply is going to decrease, that means that the new equilibrium point, where the quantity supplied equals the quantity demanded, will have a higher price and smaller quantity.)

An increase in the prices of inputs will cause the equilibrium price to ______________ and the equilibrium quantity to ______________. A Increase; increase B Increase; decrease C Decrease; decrease D Decrease; increase

B (Increase; decrease) (An increase in the price of inputs decreases supply. This leads to a price increase and a quantity decrease in the new equilibrium.)

Recently, stores have been reporting increased sales of DVD players and a reduction in their prices. In accordance with this trend, one might predict that there has been a(n) ______________ in demand and a(n) ______________ in supply. A Increase; no change B No change; increase C Decrease; no change D No change; decrease

B (No change; increase) (If the equilibrium quantity increases and the price decreases, there are a variety of combination of changes that could be the cause. The possible answers listed in the question describe only one curve shifting. The only possible change to result in lower prices and higher quantities is an increase in supply. A decrease in demand would lower prices and quantities. An increase in demand would raise prices. A decrease in supply would raise prices and lower quantities.)

Consider the markets for ball-point pens and the market for "rollerball" pens. Suppose that, due to an increased cost of the metal that is used in "rollerball" pens, the prices of "rollerball" pens and ball-point pens increase. There are no other changes. This is true because the two products have a unique relationship. What is the likely relationship between "rollerball" pens and ball-point pens? What are they? A Complementary goods B Substitute goods C Normal goods D Inferior goods

B (Substitute goods) (Substitute goods are goods that can replace one another and still achieve the same purpose. Complementary goods are goods that must be used together, so when the price of one changes the demand for the other is also effected. Normal and inferior goods refer to the consumers' reactions depending on changes of income.)

What does a single point on the demand curve represent? SEE DOC A The value of film to the consumer as judged by the producer B The value of consuming one more roll of film C The amount of film the consumer demands D The cost of producing film at that quantity

B (The value of consuming one more roll of film) (A single point on the demand curve represents what consumers are willing to pay for one more unit of a good. Thus, it is the value to the consumer who is willing to pay that price. The value to the consumer as judged by the producer is incorrect, as the producer is not directly reflected in the demand curve. The amount of film the consumer demands is partially correct, but each point shows how much a consumer demands, at each price. The cost of producing film at that quantity is reflected in the supply curve.)

"Falling oil prices have caused a sharp decrease in the supply of oil." Speaking precisely, this quotation is _______. A Correct; a decrease in price always causes a decrease in supply. B Incorrect; a decrease in price causes an increase in supply, not a decrease in supply. C Incorrect; a decrease in price causes an increase in the quantity supplied, not a decrease in supply. D Incorrect; a decrease in price causes a decrease in the quantity supplied, not a decrease in supply.

D (Incorrect; a decrease in price causes a decrease in the quantity supplied, not a decrease in supply.)

Health insurance makes medical care more affordable for individuals. What will happen to the equilibrium price of medical care as a result of better health care coverage and why? A Price decreases because demand increases B Price decreases because supply increases C Price increases because supply decreases D Price increases because demand increases

D (Price increases because demand increases) (Because health insurance makes medical care cheaper for the consumer at every price level, demand increases. Because of this increase in demand, the equilibrium price increases.)

Which of the following does not cause a change in demand? A Tastes and preferences B Income C Prices of related goods - substitutes and complements D Price of the good E The number of potential buyers

D (Price of the good) (Price changes the quantity demanded of a good, not demand. In order to have a change in demand, the quantity demanded at every price level must change.)

How does an increase in input costs affect suppliers? A Demand increases B Demand decreases C Supply increases D Supply decreases

D (Supply decreases) (The answer is very similar to the reasoning about firm behavior in response to changes in prices. A decrease in costs (whether it is due to changes in the methods used to manufacture goods or changes in prices of inputs) will increase profits and increase incentives to produce more of the good. Thus a typical business will respond by producing more at each price. An increase in costs on the other hand would have the opposite effect on profits and on the production decision, hence resulting in a lower supply.)

Six months ago, the cost of an important input in an industry increased. Then, three months later another change occurred. Production engineers invented a new method that uses fewer raw materials for the same level of production. If these were the only two events that influenced production in the last six months, what has been the influence on the supply? A Six months ago the supply curve shifted to the left, and then three months ago the quantity supplied at each price fell. B The first event caused production to decrease and supply to drop, but the second event increased supply above what it had been originally. C The influences of both events had equal effects on the supply, only one was negative and the other positive so that they perfectly balanced out. D The event of six months ago caused added costs to production and then lowered supply. The event of three months ago allowed more to be produced at each price, so the supply increased.

D (The event of six months ago caused added costs to production and then lowered supply. The event of three months ago allowed more to be produced at each price, so the supply increased.) (When the cost of an input increases, the cost of production increases. This increase leads to a decrease in the amount businesses are willing to produce at each price; thus supply falls. So, the first event that occurred six months ago caused a decrease in supply. Technology is another important influence on supply. When enhanced technology allows each worker to produce more, the labor cost per unit produced decreases. If fewer resources are needed, costs will fall, and supply will increase. The overall effect cannot be determined without knowing the magnitude of each effect.)

"The winds of the recent hurricanes in Florida are bringing significant financial gain to California orange growers. Due to the extensive damage to the Florida orange crop, many oranges were destroyed. The ones remaining were just as good as the previous oranges. California oranges are commanding their highest prices ever." If Florida and California oranges are substitute goods, which of the following statements best explains the economics of the quotation? A The demand for Florida oranges has been reduced, causing their prices to fall and therefore increasing the demand for the substitute California oranges. B The supply of Florida oranges has decreased, causing the supply of California oranges to increase and their prices to rise. C The demand for Florida oranges has been reduced by the hurricanes, causing a greater demand for the California oranges and an increase in their price. D The supply of Florida oranges has decreased, causing their price to increase and the demand for the California oranges to increase also.

D (The supply of Florida oranges has decreased, causing their price to increase and the demand for the California oranges to increase also.) (California and Florida oranges are perfect substitutes. The reduction in supply of Florida oranges causes a shortage for Florida oranges which raises their price. Since the price of a substitutes good increases, demand for California oranges increases, which raises their price.)