Managerial Economics (Froeb) - Ch 8 MC Solutions Understanding Markets and Industry Changes

Shift of the demand curve

a change in demand caused by any variable except price. If demand increases (shifts up and to the right), consumers demand larger quantities of the good at the same price. If demand decreases (shifts down and to the left), consumers demand lower quantities of the good at the same price. Shifts are caused by factors like advertising, changes in consumer tastes, and product quality changes.

The price of peanuts increases. At the same time, we see the price of jelly rise. How does this affect the market for peanut butter? (regarding demand and supply curves) a) demand curve will shift to the left: the supply curve will shift to the left b) demand curve will shift to the left; the supply curve will shift to the right c) demand curve will shift to the right: the supply curve will shift to the left d) demand curve will shift to the right; the supply curve will shift to the right

a. The demand curve will shift to the left; the supply curve will shift to the left [correct; the price of peanuts leads to higher peanut butter production costs meaning supply will shift left; a rise in the price of jelly, a complement to peanut butter, will cause peanut butter demand to shift left]

Suppose there are nine sellers and nine buyers, each willing to buy or sell one unit of a good with values {$10, 9, 8, 7, 6, 5, 4, 3, 2}. Assuming there are no transaction costs, what is the equilibrium price in this market? a) $5 b) $6 c) $7 d) $8

b. $6 [correct; at a price of $6, five suppliers are willing to sell and five buyers are willing to buy]

When demand for a product falls which of the following events would you NOT expect to occur? a) decrease in quantity of the product supplied b) decrease in its price c) decrease in supply of the product d) leftward shift of the demand curve

c. A decrease in the supply of the product. [correct; while a decrease in demand will be associated with a decrease in the quantity supplied at equilibrium, it will not cause a shift in the supply curve]

If the market for a certain product experiences an increase in supply and a decrease in demand, which of the following results is expected to occur? a) both equilibrium price and equilibrium quantity could rise or fall b) the equilibrium price would rise and the equilibrium quantity could rise or fall c) the equilibrium price would fall and the equilibrium quantity could rise or fall d) the equilibrium price would fall and the equilibrium quantity would fall

c. The equilibrium price would fall, and the equilibrium quantity could rise or fall. [correct; increase in supply and decrease in demand both lead to lower price; net quantity change is unknown because the increase in supply would lead to higher quantity while the decrease in demand would lead to lower quantity]

Suppose a recent and widely circulated medical article has reported new benefits of cycling for exercise. Simultaneously, the price of the parts needed to make bikes falls. If the change in supply is greater than the change in demand, the price will _________ and the quantity will _________. a) rise, rise b) rise, fall c) fall, rise d) fall, fall

c. fall, rise [correct; demand will increase because of the article while supply will also increase because of lower costs; if the supply shift (leading to lower prices) is greater than the change in demand (leading to higher prices), the net effect should be a fall in price while both shifts lead to a rise in quantity]

Movement along the demand curve

change in quantity demanded (increase or decrease) in response to change in price

Say the average price of a new home in Lampard City is $160,000. The local government has just passed a new licensing requirement for housing contractors. Based on possibly shifts in demand or supply and assuming the licensing changes don't affect the quality of new houses, which of the following is a reasonable prediction for the average price of a new home in the future? a) $140,000 b) 150,000 c) 160,000 d) 170,000

d. $170,000 [correct; the new licensing requirements lead to a reduction in supply, which will lead to a higher equilibrium price]

Changes in prices of a good causes a) movement along the demand curve b) movement along the supply curve c) no movement along either curve d) both a and b

d. Both a and b [correct; it causes movement along both curves]

Suppose a new employer is also relocating to Lampard City and will be attracting many new people who will want to buy new houses. What will happen to the equilibrium quantity of new homes bought and sold? a) decrease substantially b) decrease but not by much c) increase d) not enough information

d. Not enough information [correct; the decrease in supply from the prior question will be associated with a lower quantity while the increase in demand mentioned here will be associated with higher quantity. Without knowing the magnitude of the shifts, it's not possible to know the net effect (there is not enough information).]

If the government imposes a price floor at $9 in the above market, how many goods will be traded? a) Five b) Four c) Three d) Two

d. Two [correct; at a price of $9, eight suppliers are willing to sell but only two buyers are willing to buy]

Holding other factors constant, a decrease in the tax for producing coffee causes what to happen to the supply curve and price? a) the supply curve to shift to left, causing the prices of coffee to rise b) the supply curve to shift to the right, causing the prices of coffee to rise c) the supply curve to shift to the left, causing the prices of coffee to fall d) the supply curve to shift to the right, causing the prices of coffee to fall

d. the supply curve to shift to the right, causing the prices of coffee to fall [correct; a decrease in tax lowers coffee production costs, leading to an increase (shift right) in supply which means price will fall]

Market demand

describes buyer behavior

Market supply

describes seller behavior in a competitive market

Controllable factor

something that affects demand that a company can change. Examples include price, advertising, warranties and product quality.

Market equilibrium

the price at which quantity supplied equals quantity demanded. If price is above equilibrium there are too many sellers, which forces price down.