Problem Set 1

2) Hamburgers and french fries are complements in consumption, and both are normal goods. Which of the following will lead to an increase in the equilibrium quantity of french fries consumed? (a) Decrease in consumer income. (b) A baby boom in the cow population. (c) The sudden outbreak of mad cow disease (a brain disorder in adult cattle that may be spread to humans through diseased meat). (d) Successful advertising campaign on the health risks of high fat diet.

Answer B

6) Which of the following would cause a rightward shift in the demand curve for Nike shoes? (I) The maker of Adidas shoes lowers their price. (II) Michael Jordan goes on television and states that all of his success is due to Nike. People actually believe him. (III) The rubber used in Nikes becomes more expensive. (a) I only (b) II only (c) I and II (d) I and III (e) II and III (f) I, II, and III (g) III only

Answer B

1) Normally, to the extent that a government control mechanism succeeds in affecting price, it can be expected to lead to a corresponding (a) Reduction in the volume of sales only if the price is forced down. (b) Reduction in the volume of sales if the price is forced down and an increase in the volume of sales if the price is forced up. (c) Decrease in the volume of sales whether the price is forced up or down. (d) Increase in the volume of sales whether the price is forced up or down.

Answer C

5) Assume that the market for coal is well characterized by our supply and demand model. Decreases in wage rates of coal miners and decreases in the price of natural gas (which is a substitute source of energy for coal) would cause the price of coal to: (a) rise, but the quantity of coal bought and sold would rise or fall depending on the magnitude of the changes. (b) rise, but the quantity of coal bought and sold would fall. (c) fall, but the quantity of coal bought and sold would rise or fall depending on the magnitude of the changes. (d) fall, but the quantity of coal bought and sold would fall. (e) rise or fall depending on the magnitude of the changes, but the quantity of coal bought and sold would fall.

Answer C

3) Under a binding price ceiling, what does the change in consumer surplus represent? (a) The loss in surplus for those buyers who previously purchased some units of the good at the higher price. (b) The gain in surplus for those buyers who can still purchase the product at the lower price. (c) The loss in surplus for those buyers who would like to purchase the excess demand created by the price ceiling policy. (d) Both a & b are correct. (e) Both a & c are correct

Answer D

4. Which of the following will cause the demand for kerosene heaters to increase? (I) A decrease in the price of kerosene. (II) An increase in the price of kerosene heaters. (III) An increase in the price of oil heaters. (a) I only (b) II only (c) III only (d) I&II (e) II and III (f) I & III (g) All of the above

Answer F

1) Identify each of the following as either a change in demand or a change in quantity demanded in the market for apples. Explain your answer briefly. (c) A drought shrinks the apple crop to one-third its normal size.

Answer: A change (decrease) in the quantity demanded. Explanation: Since the apple crop shrinks, there will be a decrease in supply which will result in a change (decrease) in the quantity demanded. In this case, the supply curve will shift but the demand curve will not shift.

1) Identify each of the following as either a change in demand or a change in quantity demanded in the market for apples. Explain your answer briefly. (d) Thousands of college students abandon the academic life to become apple pickers.

Answer: An increase in the quantity demanded Explanation: Since the number of apple pickers increases, there will be an increase in the supply of apples. This increase will shift the supply curve to the right which will result in an increase in the quantity demanded. Again, there will be a shift in the supply curve but not the demand curve.

1) Identify each of the following as either a change in demand or a change in quantity demanded in the market for apples. Explain your answer briefly. (b) The price of oranges triples.

Answer: Change in demand Explanation: As the price of oranges increases, individuals will consume fewer oranges and will increase the demand for other fruits (including apples) which are substitutes. This is a change in demand.

1) Identify each of the following as either a change in demand or a change in quantity demanded in the market for apples. Explain your answer briefly. (a) Scientists and that an apple a day does indeed keep the doctor away.

Answer: Change in demand Explanation: A change in demand due to a change in preferences.