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Test Bank for Microeconomics, 21st Edition

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    Exam Name___________________________________ ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) What are some of the characteristics of a market that can be described by a demand and supply model? Answer: A market that can be represented by a demand and supply curve is an institution or mechanism which brings together large numbers of independent ly acting buyers and sellers who want to exchange some standardized product . Examples of such markets are a central grain exchange, a stock market or a market for foreign currencies. 2) Define "demand." Answer: Demand is a schedule or curve that shows the various amounts of a product buyers are willing and able to purchase at each price in a series of possible prices during a specified period of time. Demand portrays alternative price/quantity possibilities which can be set down in a table. The key point to be recognized is that demand is more than a statement of quantity purchased at a certain price; it is a schedule of quantities which will be demanded at various prices, other things being equal, for a specified period of time. 3) State the law of demand and explain why the other-things-equal assumption is critical to it. Answer: The law states that, other things being equal, as price increases, the corresponding quantity demanded falls. Restated, there is an inverse relationship between price and quantity demanded with everything else held constant. The other-things-equal assumption refers to constant prices of related goods, income, tastes, and other things that affect demand besides price. The law of demand only looks at the relationship between price and quantity demanded. 4) Give two explanations for the law of demand. Answer: First, there is diminishing marginal utility: a decrease in satisfaction that results with an increase in the amounts of a good or service. The second unit of a good yields less satisfaction (or utility) than the first. Second, there are income and substitution effects. With an income effect, a lower price increases the purchasing power of money income, enabling you to buy more at lower price. With a substitution effect, a lower price for good X gives an incentive to substitute away from the now relatively high-priced good Y and replace it with the low-priced good X. 5) Suppose that a decrease in the price of feed grain leads to a dramatic decrease in the price of beef. Use the income effect and the substitution effect to explain why there was an increase in the quantity of beef purchased. Answer: The income effect predicts that the quantity of beef purchased will rise when beef prices fall because people will now be able to afford more. The purchasing power of their income rises when prices fall, assuming other things remain the same. The substitution effect predicts that the lower price of beef will lead consumers of substitute foods such as chicken and pork to buy more of the relatively less expensive beef and to buy less chicken or pork or other beef substitutes whose prices have not fallen. 1

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    6) The demand schedules of three individuals (Tom, Dick, and Harry) are shown. If they are the only three buyers of CDs, complete the market demand schedule for CDs. Graphically, is the market demand for a product the horizontal or vertical sum of the individual demand schedules? The market demand is the horizontal sum of the individual schedules. Answer: 7) List five basic determinants of market demand that could cause demand to decrease. Answer: (a) Consumers' tastes become less favourable toward the item. (b) The number of buyers decreases. (c) Incomes fall and the item is a normal good or incomes rise and the item is an inferior good. (d) A decrease in the price of a substitute product or an increase in the price of a complementary product. (e) Consumers expect lower prices in the future. 8) Differentiate between a normal (superior) and an inferior good. Answer: A normal (superior) good is one whose demand varies directly with income as is true for most goods and services the more income one earns, the more one is willing and able to buy. However, there are exceptions, called inferior goods, whose demand varies inversely with income. Inferior goods are those whose demand increases when incomes fall and vice versa. 9) Explain how the prices of related goods also affect demand. Answer: Substitute goods are those that can be used in place of each other. The price of the substitute and demand for the other good are directly related. If the price of Coke rises, demand for Pepsi should increase. Complementary goods are those that are used together like tennis balls and rackets. When goods are complements, there is an inverse relationship between the price of one and the demand for the other. Some goods are not related to each other and are independent goods. In these cases, a change in price of one will not affect the demand for the other. 2

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    10) Give examples of two substitute goods and two complementary goods. In each case explain why the goods are substitutes or complements. Answer: The pair of substitute goods given should correspond to the explanation that they are substitutes because when the price of one changes, the demand for the other changes in the same direction. When the price of butter rises, one expects the demand for margarine to increase; when the price of butter falls, one expects the demand for margarine to fall as butter lovers switch back to butter consumption. The pair of complementary goods should fit the explanation that they are complements because when the price of one changes, the demand for the other is inversely related. When the price of tennis equipment rises, the demand for tennis-club memberships should fall (if tennis playing is a normal good). 11) What is the difference between a change in demand and a change in quantity demanded? Answer: A change in demand is a shift in the entire demand curve either to the left (a decrease in demand) or to the right (an increase in demand). "Demand" refers to the entire schedule or curve. By contrast, a change in quantity demanded is a movement along an existing demand curve or schedule from one price-quantity combination to another. A change in product price causes the change in quantity demanded. 12) Suppose a producer sells 1,000 units of a product at $5 per unit one year, 2,000 units at $8 the next year, and 3,000 units at $10 the third year. Is this evidence that the law of demand is violated? Explain. Answer: No. The law of demand shows the relationship between price and quantity demanded. In general, as price falls the quantity demanded will increase. One of the assumptions, however, is that all other things are equal or held constant. In this case, this assumption may have been violated and that is why it seems there is a positive relationship between price and quantity. The most likely explanation for the set of events is that demand for the product increased from one year to the next. If that was true, then price would rise and the equilibrium quantity would increase. 3

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    13) What effect should each of the following have upon the demand for MP3 players? Explain your reasoning in each case. (a) the development of reasonably-priced smart phones that compete with MP3 players (b) an increase in population and incomes (c) a substantial increase in the number and quality free downloadable MP3s (d) consumer expectations of substantial price increases in MP3 players (e) a decrease in the price of MP3 players Answer: (a) Would cause a decrease in demand for MP3 players as the smart phone can substitute as an MP3 player. (b) Would cause an increase in demand because there are more consumers and they have more income to spend. This assumes that MP3 players are a normal good and more would be bought with higher incomes. (c) Would increase demand as with more songs available people will want more MP3 players to hear their music. (d) Would increase current demand as consumers will want to beat the future price increase. (e) Would not change demand for MP3 players N a different quantity will be demanded, but the demand schedule/curve would not move. 14) Define "supply." Answer: Supply is a schedule or curve that shows the various amounts of a product sellers are willing and able to produce and offer for sale at each price in a series of possible prices during a specified period, other things being equal. 15) Describe and give a reason for the law of supply. Answer: The law of supply indicates that, other things being equal, producers will produce and be willing to sell more of their product at a high price than at a low price. This means that there is a direct relationship between price and quantity supplied. The basic explanation is that, given product costs, a higher price means greater profits and thus more incentive for business to increase the quantity supplied. 16) List six basic determinants of market supply that could cause supply to increase. Answer: (a) Resource prices decrease. (b) Production technology advances. (c) Lower taxes or higher subsidies reduce production costs. (d) Prices of other related goods decrease. (e) In many types of manufacturing industries, newly formed expectations that price will increase may induce firms to add another shift of workers or to expand their production facilities, causing current supply to increase. (f) The number of sellers increases. 4

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    17) The Federal government is considering passing an excise tax that would increase the price of a pack of cigarettes by $1.00. What would be the likely effect of this change on the demand and supply of cigarettes? What is likely to happen to cigarette prices and the quantity consumed if the tax bill is enacted? Answer: In the short run, the excise tax would decrease the supply of cigarettes because in essence it increases the cost of production. The decrease in supply would increase the price of cigarettes and decrease the quantity of cigarettes consumed. The demand for cigarettes would not change, but the quantity demanded would decrease. 18) What is the difference between a change in supply and a change in quantity supplied? Answer: A change in supply is a shift in the entire supply curve either to the left (a decrease in supply) or to the right (an increase in supply). A change in supply, therefore, is a change in the entire supply schedule or curve. In contrast, a change in quantity supplied is a movement along an existing supply curve or schedule from one price-quantity combination to another. A change in product price causes the change in quantity supplied. 19) Newspaper item: "Due to lower grain prices, consumers can expect retail prices of choice beef to begin dropping slightly this spring with pork becoming cheaper after midsummer," the Agriculture Department predicted. "This reflects increasing supply," the department said. Is the term "supply" used correctly? What effects might this announcement have on consumer demand? Explain. Answer: The announcement does use the term "supply" correctly because the drop in price predicted is a result of lower resource (grain) prices. This means that producers of beef and pork will lower prices for each quantity on the existing supply schedule assuming "all other things remain equal." Consumer demand at present might decrease as consumers wait to make big purchases of beef and pork in the future when prices are predicted to drop. By spring, if beef prices drop, there should be an increase in the quantity of beef demanded and probably a decrease in the demand for pork, which is a substitute for beef. By midsummer, if pork prices drop, there will be an increase in the quantity of pork demanded, and depending on what is then happening with beef prices, a decline in the demand for beef. If beef prices had continued to fall, it is hard to say whether there would be much of a change in demand due to the price of the substitute pork falling. More likely, there would be only a movement along the curve for beef if the price continued to fall. 5

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    20) What effect will each of the following have upon the supply of television sets? Explain your reasoning in each case. (a) an increase in the price of electronic equipment used in producing television sets (b) a decline in the number of firms producing television sets (c) a large new tariff on imported Japanese TV sets (d) new inexpensive satellite dishes which make televisions more popular among consumers Answer: (a) This should decrease the supply because a higher price must be charged for each quantity due to the rising price of resources. The supply curve will shift to the left. (b) The outcome is indeterminate because we don't know why the firms left the industry. Perhaps remaining firms are more efficient and will produce more. On the other hand, there may be just a few firms remaining and the resulting decline in competition could lead to higher prices for each quantity, or a decrease in supply. (c) A higher tariff will cause a decrease in the supply of imported television sets because costs, i.e., taxes, have risen. Because the supply of Japanese TV sets is part of the total market supply, the effect is to decrease the market supply. (d) New inexpensive satellite dishes should have no effect on the supply schedule. However, demand should increase resulting in a higher equilibrium price and greater quantity supplied. Note that supply does not shift, but that the quantity supplied changes. 21) Economist Jones defines an increase in supply as a decrease in the prices needed to ensure various amounts of a good being offered for sale. Economist Brown defines an increase in supply as an increase in the amounts that producers will offer at various possible prices. Economist Cole defines an increase in supply as an increase in the amount firms will offer in the market which is caused by an increase in the price of the product. Which, if any, of these is defining an increase in supply correctly? Explain. Answer: Economists Brown and Jones are both correct. Brown recognizes that a shift in supply means greater quantities will be supplied at each of the various prices given for the original supply schedule. In other words, more will be supplied at each of the prices on the original schedule. Jones recognizes that a shift in supply means sellers are willing to accept a lower price at each of the various amounts of a good being offered for sale. It is an equivalent statement to Brown's. Cole is not correct. Cole is defining a change in the quantity supplied, or a movement along the supply curve, not an increase in supply. 22) Assuming no government intervention, describe the market behaviour that should result if the price of a product is below its equilibrium price; then describe the behaviour that should occur if the price is above its equilibrium price. Answer: If the price of a product is below its equilibrium price, the quantity demanded will be greater than the quantity supplied and the price will be bid up as buyers compete to obtain the product and sellers realize that they can raise the price. As the price rises, the quantity supplied will increase and the quantity demanded decrease until the two are equal at the so-called equilibrium or market-clearing price. If the price of a product is above its equilibrium price, the quantity supplied will be greater than the quantity demanded and a temporary surplus exists. As sellers compete, the price will fall. In response, the quantity demanded will increase and the quantity supplied will decrease until the two are equal at the equilibrium or market-clearing price. 6

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    23) Describe in words how one can recognize the market equilibrium point in a graph of a demand schedule and a supply schedule. Answer: The market equilibrium point is the point where the demand curve intersects the supply curve. The quantity vertically below this point is the equilibrium quantity and the price horizontally opposite this point is the equilibrium price. 24) Using the schedules given, plot the demand curve and the supply curve on the below graph. Label the axes and indicate for each axis the units being used to measure price and quantity. Then answer the questions. (a) Give the equilibrium price and quantity for oats. (b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the supply and demand curves to the price and quantity axes. (c) If the Federal government decided to support the price of oats at $1.40 per ton, tell whether there would be a surplus or shortage and how much it would be. (d) Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as the shortage or surplus. 7

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    Answer: (a) The equilibrium price and quantity for oats will be $1.20 and 25,000 tons. (b) The equilibrium price and quantity on the graph are labelled P e and Q e . (c) If the Federal government decided to support the price of oats at $1.40 per ton, there would be a surplus of 35,000 - 15,000 = 20,000 tons. (d) See surplus labelled on above figure. 8

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    25) Using the schedules given, plot the demand curve and the supply curve on the below graph. Label the axes and indicate for each axis the units being used to measure price and quantity. Then answer the questions. (a) Give the equilibrium price and quantity for wheat. (b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the supply and demand curves to the price and quantity axes. (c) If the Federal government decided to support the price of wheat at $4.00 per ton, tell whether there would be a surplus or shortage and how much it would be. (d) Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as the shortage or surplus. 9

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    Answer: (a) The equilibrium price and quantity for wheat will be $3.60 and 200,000 tons. (b) The equilibrium price and quantity on the graph are labelled P e and Q e . (c) If the Federal government decided to support the price of wheat at $4.00 per ton, there would be a surplus of 220,000 - 150,000 = 70,000 tons. (d) See surplus labelled on figure. 26) Evaluate. An increase in demand causes price to rise which, in turn, causes demand to fall. Therefore, an increase in demand will not have lasting effects. Answer: While an increase in demand, which causes the demand curve to shift to the right, does lead to an increase in price, the resulting increase in price does not cause demand to fall. A change in price affects the quantity demanded and is represented by a movement along the demand curve. The higher price reduces the quantity demanded until a new equilibrium is established. Therefore, the statement is not correct. 27) Evaluate. A decrease in supply causes price to rise which, in turn, causes supply to rise. Therefore, a decrease in supply will not have lasting effects. Answer: While a decrease in supply, which causes the supply curve to shift to the left, does lead an increase in price, the resulting increase in price does not cause supply to rise. A change in price affects the quantity supplied and is represented by a movement along the supply curve. The higher price increases the quantity supplied until a new equilibrium is established. Therefore, the statement is not correct. 10

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    28) In the space below each of the following, indicate the effect [ increase (+), decrease (-)] on equilibrium price ( P ) and equilibrium quantity ( Q ) of each of these changes in demand and/or supply. Answer: (a) +, +; (b) -, +; (c) -, -; (d) +, - 29) In the spaces below each of the following, indicate the [ increase (+), decrease (-), or indeterminate (ind)] on equilibrium price ( P ) and equilibrium quantity ( Q) of each of these changes in demand and/or supply. Answer: (a) ind, +; (b) +, ind; (c) ind, -; (d) -, ind; 30) In each case below, indicate the effect [i ncrease (+); d ecrease (-); i ndeterminate (ind)] upon equilibrium price ( P ) and equilibrium quantity ( Q ) and illustrate the change graphically. Where you believe the effect is indeterminate, two graphical illustrations may be necessary to demonstrate your point. 11

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    Answer: 12

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    Answer: 31) The price of gold is lower today than several decades ago. Yet, the production of gold is greater than in the past. How is this possible without violating the law of supply? Answer: The supply of gold has increased and as a result, the price of gold has fallen and the quantity of gold has risen. The main reason for the increase in the supply of gold is improvement in technology that allows producers to lower production costs by using fewer resources. 13

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    32) Given the products below and the events that affect them, indicate what happens to demand or supply, and the equilibrium price and quantity. Identify the determinant of demand or supply that causes the shift. (a) Blue jeans. The wearing of blue jeans becomes less fashionable among consumers. (b) Computers. Parts for making computers fall in price because of improvements in technology. (c) Lettuce. El Nino produces heavy rains that destroy a significant portion of the lettuce crop. (d) Chicken. Beef prices rise because severe winter weather reduces cattle herds. Answer: (a) Demand for blue jeans decreases because of a decline in buyer tastes for blue jeans, thus decreasing the equilibrium price and quantity. (b) Supply of computers increases because of an improvement in technology, thus decreasing the equilibrium price and increasing the equilibrium quantity. (c) Supply of lettuce decreases because of a fall in the number of suppliers, thus increasing the equilibrium price and decreasing the equilibrium quantity. (d) Demand for chicken increases because of an increase in the price of a substitute food (beef prices rose because of a supply decrease), thus increasing the equilibrium price and quantity. 33) Given the products below and the events that affect them, indicate what happens to demand, supply, equilibrium quantity, and equilibrium price. Identify the determinant of demand and supply that causes the shifts. (a) Calculators. More schools require students to buy and use calculators; improved productivity shortens the time it takes to make calculators. (b) Gasoline. Oil production declines due to a crisis in the Middle East; people take more car vacations and drive more. (c) New homes. The average incomes fall as the economy moves into recession; the productivity of home construction workers and builders increases. (d) Tobacco. The government cut its subsidy to tobacco farmers; more people quit smoking. Answer: (a) The demand for calculators increases because of an increase in the number of buyers. The supply of calculators increases because of a fall in resource prices (productivity reduces resource costs). The equilibrium quantity increases, but what happens to the equilibrium price is indeterminate and depends on the magnitudes of the shifts. (b) The supply of gasoline decreases because of a rise in resource price (oil prices increase due to a cutback in production). The demand for gasoline increases due to an increase in the taste for taking driving vacations. The equilibrium price increases, but what happens to the equilibrium quantity is indeterminate and depends on the magnitudes of the shifts. (c) The demand for new homes decreases because of a decline in consumer incomes. The supply of new homes increases because of a fall in the price of labour resources (productivity increases reduce resource costs). The equilibrium price decreases, but what happens to the equilibrium quantity is indeterminate and depends on the magnitudes of the shifts. (d) The supply of tobacco decreases because of a cut in government subsidies for tobacco. The demand for tobacco decreases due to a decline in the taste for smoking tobacco. The equilibrium quantity decreases, but what happens to the equilibrium price is indeterminate and depends on the magnitudes of the shifts. 14

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    34) What is a price ceiling and what are its economic effects? Answer: A price ceiling means that the price is not allowed to rise above the maximum price set by government. If the price ceiling is set below the equilibrium price in a market, then there will be a shortage of the product at the government-set price. A price ceiling interferes with the rationing function of price that serves to balance the decisions of suppliers and demanders. The shortage indicates that resources are being underallocated to the production of this product and that there is economic inefficiency. Less output is being produced than consumers want. This output is not being produced because some producers cannot make a profit at the price ceiling level. 35) Use the data in the following table to explain the economic effects of a price ceiling at $6, at $5, and at $4. Answer: A price ceiling means that the price will not be permitted to rise above a maximum price. If the price ceiling is below the competitive equilibrium price of $7, it would produce a shortage of the product. For example, if the price ceiling was set at $6, the quantity demanded would be 5,000 units and the quantity supplied would be 3,500 for a shortage of 1,500 units. With a price ceiling set at $5, the shortage would be 3,000 units, and with a price ceiling of $4, the shortage would be 4,500 units. A price ceiling interferes with the rationing function of price that serves to balance the decisions of demanders and suppliers. The price ceiling produces a shortage that indicates that resources are being underallocated; output is not being produced because some producers cannot make a profit at the price ceiling level. 36) Use the data in the following table to explain the economic effects of a price ceiling at $9. Answer: A price ceiling is a maximum price above which the price is not allowed to exceed. To be effective, a price ceiling must be set below the equilibrium price. Since the price ceiling of $9 exceeds the equilibrium price, it is not binding. The price ceiling has no effect. The market remains at equilibrium where the price and quantity are $7 and 4,500 units. 15

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    37) What is a price floor and what are its economic effects? Answer: A price floor means that the price is not allowed to fall below a minimum price set by government. If the price floor is set above the equilibrium price in a market, then there will a surplus of the product. A price floor interferes with the rationing function of price that serves to balance the decisions of suppliers and demanders. The surplus indicates that resources are being overallocated to the production of this product and that there is economic inefficiency; output is being produced which consumers do not want to purchase at the price floor. 38) Use the data in the following table to explain the economic effects of a price floor at $8, at $9, and at $10. Explain the economic effects. Answer: A price floor means that the price is not allowed to fall below a minimum price set by government. If the price floor is above the competitive equilibrium price of $7, a surplus of the product would result. If the price floor was set at $8, the quantity demanded would be 4,000 units but the quantity supplied would be 5,500 units for a surplus of 1,500 units. At a price floor of $9, the surplus would be 3,000 units, and with a price floor of $10, the surplus would be 4,500 units. A price floor interferes with the rationing function of price that serves to balance the decisions of suppliers and demanders. The price floor that produces a surplus indicates that resources are being overallocated and that there is economic inefficiency; output is being produced which consumers do not want to purchase at the price floor. 39) Use the data in the following table to explain the economic effects of a price floor at $6. Answer: A price floor is a minimum price below which the price is not allowed to fall. To be effective, a price floor must be set above the equilibrium price. Since the equilibrium price exceeds the floor price of $6, the price floor is not binding. The price floor has no effect. The market remains at equilibrium where the price and quantity are $7 and 4,500 units. 16

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    40) "Government-set prices undermine the rationing function of competitive prices." Explain carefully in terms of both price ceilings and price floors. Answer: A ceiling price means that the government may hold prices at a level that is below the market equilibrium price. Since the market equilibrium is where the quantity demanded is equal to the quantity supplied, any price below that would find an excess quantity demanded over that supplied. In other words, a shortage would develop and the market would fail to ration ( Q D > Q S ). In unregulated competition, this situation could not persist because competition would drive up the price until the equilibrium quantity and price were reached. A price floor means that the government may hold prices above the market equilibrium price by agreeing to pay that price for any unsold surplus. The rationing function of the competitive price system will not work because sellers will have no competitive pressure to lower prices to get rid of the surplus, if they can sell it to the government at the supported price there will be a persistent product surplus ( Q S > Q D ). 41) Despite a lower price for its product, the widget industry is selling fewer units. How is this possible if the law of demand has not been violated? Give and explain two distinct reasons. Answer: One reason that can explain the lower sales despite the lower price is a decrease in demand. A leftward shift of the demand curve leads to both a lower equilibrium price and a lower equilibrium quantity. The lower demand could be the result of an unfavourable change in tastes, a decrease in the number of buyers, a decrease in income if widgets are normal goods, an increase in income if widgets are an inferior good, a decrease in the price of a substitute, an increase in the price of a complement, or newly formed expectations of a lower price. A second explanation for the lower sales is the imposition of a price ceiling which lowers the price below the equilibrium price and reduces the quantity supplied to a level below the equilibrium quantity. Although buyers wish to purchase more units at the price ceiling, sellers have reduced the quantity supplied and therefore fewer units are sold. 42) Despite a higher price for widgets, buyers are purchasing more units. How is this possible if the law of demand has not been violated? Give and explain two distinct reasons. Answer: One reason that can explain the higher sales despite the higher price is an increase in demand. The rightward shift of the demand curve leads to a lower equilibrium price and a lower equilibrium quantity. The higher demand could be the result of an favourable change in tastes, an increase in the number of buyers, an increase in consumer income if widgets are normal goods, a decrease in consumer income if widgets are an inferior good, an increase in the price of a substitute, a decrease in the price of a complement, or newly formed expectations of a higher price. A second explanation for the higher sales is the removal of a price ceiling, which raises the price to its equilibrium level. Although buyers wish to purchase fewer units, actual sales are higher since sellers are willing to increase the quantity supplied. When the price ceiling was in place, a shortage existed and buyers could not purchase all of the units they desired. 43) What are the consequences of reduced supply of lettuce for equilibrium price and quantity? Answer: The decrease in the supply of lettuce increases the equilibrium price of lettuce and reduces the equilibrium quantity. 17

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    44) What are the consequences of an increase in the demand for Euros on the equilibrium price and quantity of Euros? Does the Canadian dollar appreciate or depreciate as a result? Explain. Answer: The increase in the demand for Euros, increases the equilibrium price of Euros and increases the equilibrium quantity of Euros. The Canadian dollar depreciates since it takes more Canadian currency to buy one Euro. 45) What are the consequences for equilibrium price and quantity if the supply of pink salmon has increased and the demand for pink salmon has decreased? Assume that supply has increased more than demand has decreased Answer: The equilibrium price of pink salmon has declined. Because supply has increased more than demand has decreased, the equilibrium quantity of pink salmon has increased 46) What are the consequences for equilibrium price and quantity if the supply of gasoline has decreased and the demand for gasoline has increased? Assume that the increase in demand outweighs the decrease in supply. Answer: The equilibrium price rises. In this case, equilibrium quantity increases because the increase in demand outweighs the decrease in supply. 47) What are the consequences for equilibrium price and quantity if there is an equal increase in the supply and demand for sushi? Answer: The equilibrium quantity of sushi increases but the equilibrium price of sushi is unchanged. 48) Explain the consequences on the primary and secondary markets for pre-setting below equilibrium prices for the popular women's figure skating event at the Olympic games? Answer: The preset price being below the equilibrium price that would equate quantity demanded and quantity supplied leads to a severe shortage of tickets in the primary market N the market involving the official ticket office. The shortage, in turn, creates a secondary market in which buyers bid for tickets held by initial purchasers rather than the original seller. This leads to the scalping of tickets which is selling them above the original ticket price. 18

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    49) (a) Using the schedules given, determine the demand equation and the supply equation. (b) What is the intercept of the demand equation? What is the slope of the demand equation? (c) What is the intercept of the supply equation? What is the slope of the supply equation? (d) What is the equilibrium price and quantity? Answer: (a) The demand equation is P = 20 - 0.2Q D and the supply equation is P = 6 + 0.2Q S . (b) The intercept of the demand equation is $20. The slope of the demand equation is -0.2. (c) The intercept of the supply equation is $6. The slope of the supply equation is 0.2. (d) The equilibrium price and quantity are $13 and 35 units. 50) Demand is represented by the equation, P = 80 - 0.3Q D and supply by the equation P = 30 + 0.2Q S . (a) Determine the equilibrium price and quantity. (b) What are the economic effects of a price ceiling at $41? (c) What are the economic effects of a price ceiling at $72? (d) What are the economic effects of a price floor at $62? (e) What are the economic effects of a price floor at $37? Answer: (a) The equilibrium price and quantity are $50 and 100 units. (b) The price ceiling prevents the price from exceeding $41. At $41, the quantity demanded is 130 units and the quantity supplied is 55 units. Therefore, a shortage of 75 units exists. The price ceiling interferes with the rationing function of price and causes an underallocation of resources to this market. Not enough output is being produced to satisfy the desires of buyers because some producers cannot make a profit at this price level. Allocative efficiency is not achieved at the current level of output because the marginal benefit exceeds the marginal cost. (c) A price ceiling set above the equilibrium price is not effective. Therefore, a price ceiling at this level has no economic effect and the market remains at equilibrium. (d) The price floor prevents the price from falling below $62. At $62, the quantity demanded is 60 units and the quantity supplied is 160 units. Therefore, a surplus of 100 units exists. The price floor interferes with the rationing function of price and causes an overallocation of resources to this market. Output is being produced that buyers do not wish to purchase at this price. Allocative efficiency is not achieved at the current level of output because the marginal cost exceeds the marginal benefit. (e) A price floor set below the equilibrium price is not effective. Therefore, a price floor at this level has no economic effect and the market remains at equilibrium. 19

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    51) Determine the equilibrium price and quantity in each of the following. (a) Demand is represented by the equation, P = 28 - .2Q D and supply by the equation P = 8 + .3Q S . (b) Demand is represented by the equation, P = 30 - .5Q D and supply by the equation P = 5 + .5Q S . (c) Demand is represented by the equation, P = 20 - .3Q D and supply by the equation P = 4 + .2Q S . Answer: (a) The equilibrium price and quantity are $20 and 40 units. (b) The equilibrium price and quantity are $17.50 and 25 units. (c) The equilibrium price and quantity are $10.40 and 32 units. 52) (a) Determine the equilibrium price and quantity if demand is represented by the equation, P = 40 - .2Q D and supply by the equation P = 10 + .4Q S . (b) Suppose demand changes and is now represented by the equation P = 52 - .2Q D . Has demand increased or decreased? What is the new equilibrium price and quantity? (c) Suppose instead supply changes and is now represented by the equation P = 16 + .4Q S . Has supply increased or decreased? What is the new equilibrium price and quantity? Answer: (a) The equilibrium price and quantity are $30 and 50 units. (b) Demand has increased since buyers are willing to pay a higher price at each level of quantity demanded. The new equilibrium price and quantity are $38 and 70 units. (c) Supply has decreased since sellers require a higher price at each level of quantity supplied. The new equilibrium price and quantity are $32 and 40 units. 20

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    Exam Name___________________________________ MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The economic concept that serves as the basis for the study of economics is: 1) A) inflation. B) money. C) unemployment. D) scarcity. Answer: D 2) As a consequence of the condition of scarcity: 2) A) things which are plentiful have relatively high prices. B) production has to be centrally planned. C) there is always enough of everything. D) individuals and communities have to make choices among alternatives. Answer: D 3) In every economic system, choices must be made because resources are: 3) A) finite, but economic wants are insatiable. B) limited, and so are economic wants. C) infinite, but economic wants are finite. D) unlimited, but economic wants are limited. Answer: A 4) Opportunity cost is best defined as: 4) A) marginal cost minus marginal benefit. B) the value of the best foregone alternative. C) the time spent on an economic activity. D) the money cost of an economic decision. Answer: B 5) Tammie makes $150 a day as a bank clerk. She takes off two days of work without pay to fly to another city to attend the concert of her favourite music group. The cost of transportation for the trip is $250. The cost of the concert ticket is $50. The opportunity cost of Tammie's trip to the concert is: 5) A) $300 B) $450 C) $600 D) $500 Answer: C 6) When a provincial government chooses to build more roads, the required resources are no longer available for spending on public education. This dilemma illustrates the concept of: 6) A) marginal analysis. B) opportunity cost. C) full production. D) full employment. Answer: B 1

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    7) Specialization and trade are beneficial to society because: 7) A) scarce resources are utilized more efficiently. B) the output of economic goods may be increased with no increase in resources. C) a division of labour lowers prices for products. D) all of the above are correct. Answer: D 8) When economists describe "a market," they mean: 8) A) information networks that allow individuals to keep in touch with each other. B) a place where stocks and bonds are traded. C) a hypothetical place where the production of goods and services takes place. D) a mechanism which coordinates actions of consumers and producers to establish equilibrium prices and quantities. Answer: D 9) The institution that coordinates actions of consumers and producers to establish prices for goods and services is known as: 9) A) a market. B) a production possibilities curve. C) a monopoly. D) consumer sovereignty. Answer: A 10) A major argument for economic growth is that it: 10) A) reduces the amount of taxation. B) creates an equal distribution of income. C) protects common property resources. D) leads to a higher standard of living. Answer: D 11) One of the basic economic defences of economic growth rests on the conclusion that: 11) A) growth reduces the cost of "common property" resources to society. B) growth makes the gap between unlimited wants and scarce resources less acute. C) a growth-oriented society has a relatively equitable income distribution. D) growth makes workers less obsolete and more secure in employment. Answer: B 12) Concern about the general level of prices in an economy is primarily a concern about the economic goal of: 12) A) economic efficiency. B) equity. C) economic security. D) price-level stability. Answer: D 2

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    13) Assume that a tradeoff exists in the short run between inflation and unemployment. This relationship means that: 13) A) a low rate of unemployment causes a low rate of inflation. B) less unemployment can be achieved with more inflation. C) the unemployment rate always equals the inflation rate. D) less unemployment can be achieved with less inflation. Answer: B 14) The study of economics is primarily concerned with: 14) A) keeping private businesses from losing money. B) demonstrating that capitalistic economies are superior to socialistic economies. C) determining the most equitable distribution of society's output. D) choices which are made in seeking to use scarce resources efficiently. Answer: D 15) The assertion that "There is no free lunch" means: 15) A) marginal analysis is not used in economic reasoning. B) choices do not need be made if behaviour is rational. C) there are always tradeoffs between economic goals. D) all production involves the use of scarce resources and thus the sacrifice of alternative goods. Answer: D 16) The study of economics exists because: 16) A) resources are scarce in relation to human material wants. B) government interferes with the efficient allocation of scarce resources. C) the market system is an obstacle to the efficient use of plentiful resources to satisfy constrained wants. D) resources are overly abundant as compared to wants; thus, an allocation problem exists. Answer: A 17) Economics may best be defined as: 17) A) the empirical testing of value judgments through the use of induction and deduction. B) the study of the behaviour of people and institutions in the production, distribution, and consumption of scarce goods. C) the interaction between macro and micro considerations. D) the use of policy to refute facts and hypotheses. Answer: B 18) Purposeful behaviour suggests that: 18) A) individuals make decisions with some desired outcome in mind. B) resource availability exceeds material wants. C) everyone will make identical choices. D) an individual's economic goals cannot involve tradeoffs. Answer: A 3

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    19) Consumers spend their incomes to get the maximum benefit or satisfaction from the goods and services they purchase. This is a reflection of: 19) A) the tradeoff problem which exists between competing goals. B) marginal costs which exceed marginal benefits. C) purposeful behaviour. D) resource scarcity and the necessity of choice. Answer: C 20) The "economic perspective" refers to: 20) A) the making of rational decisions in a context of marginal costs and marginal benefits. B) macroeconomic phenomena, but not microeconomic phenomena. C) microeconomic phenomena, but not macroeconomic phenomena. D) unlimited resources in a context of limited material wants. Answer: A 21) The "economic perspective" entails: 21) A) the altering of behaviour when marginal benefits and marginal costs change. B) rational behaviour by individuals and institutions. C) a comparison of marginal benefits and marginal costs in decision making. D) all of the above. Answer: D 22) The economic perspective used in customer decision making at fast-food restaurants is reflected in: 22) A) customers leaving rather than waiting if all lines are long. B) all customer lines tending to be of equal length. C) customers selecting the shortest line. D) all of the above. Answer: D 23) How is the economic perspective reflected in lines for fast food? 23) A) Customers select the shortest line because they believe it will reduce their time cost of obtaining food. B) Lines will typically be of unequal length because of the inefficiencies in counter service. C) Customers select the shortest line because they have perfect information. D) The set of food choices is often too complex for most customers and thus creates long lines. Answer: A 4

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    24) From an economic perspective, when consumers leave a fast-food restaurant because the lines to be served are too long, they have concluded that the: 24) A) management is exhibiting irrational behaviour by not maximizing profits. B) marginal cost of waiting is less than the marginal benefit of being served. C) management is making an assumption that other things are equal. D) marginal cost of waiting is greater than the marginal benefit of being served. Answer: D 25) Consumers might leave a fast-food restaurant without being served because: 25) A) they conclude that the marginal cost (monetary plus time costs) exceeds the marginal benefit. B) the lines waiting for service are not of equal length. C) the environment is not conducive to a rational choice. D) they are misinformed about the marginal cost and marginal benefits of the food being served. Answer: A 26) At fast-food restaurants: 26) A) decisions are usually made by trial and error. B) decisions entail comparisons of marginal costs and marginal benefits. C) consumers enjoy complete and accurate information. D) benefits always exceed costs. Answer: B 27) Economics involves "marginal analysis" because: 27) A) much economic behaviour is irrational. B) most decisions involve changes in the status quo. C) marginal benefits always exceed marginal costs. D) marginal costs always exceed marginal benefits. Answer: B 28) You should decide to go to a movie: 28) A) if your income will allow you to buy a ticket B) because movies are inherently good products. C) if the marginal benefit of the movie exceeds its marginal cost. D) if the marginal cost of the movie exceeds its marginal benefit. Answer: C 29) Marginal costs exist because: 29) A) most decisions do not involve sacrifices or tradeoffs. B) wants are scarce relative to resources. C) households and businesses make rational decisions. D) the decision to produce more of some product means the sacrifice of other products. Answer: D 5

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    30) Even though local newspapers are very inexpensive, people rarely buy more than one of them each day. This fact: 30) A) is an example of irrational behaviour. B) implies that reading should be taught through phonics rather than the whole language method. C) implies that, for most people, the marginal benefit of reading a second newspaper is less than the marginal cost. D) contradicts the economic perspective. Answer: C 31) The process of developing hypotheses, testing them against facts, and using the results to construct theories is called: 31) A) microeconomics. B) the scientific method. C) opportunity cost calculation. D) marginal analysis. Answer: B 32) A "hypothesis" is: 32) A) always the result of induction. B) a fundamental truth which all economists accept. C) the same as a normative statement. D) a tentative, untested principle. Answer: D 33) From the perspective of economists, which term provides the highest degree of confidence for explaining economic behaviour? 33) A) a fact B) an economic principle or a law C) a hypothesis D) an assumption Answer: B 34) In constructing models, economists: 34) A) make simplifying assumptions. B) must use mathematical equations. C) attempt to duplicate the real world. D) include all available information. Answer: A 35) Economic models: 35) A) are limited to variables which are directly related to one another. B) emphasize basic economic relationships by abstracting from the complexities of the real world. C) are unrealistic and therefore of no practical consequence. D) are of limited use because they cannot be tested empirically. Answer: B 36) An economic model is: 36) A) built using theory. B) built on correlations. C) a fact. D) a value judgment. Answer: A 6

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    37) The term "ceteris paribus" means: 37) A) that if event A precedes event B, A has caused B. B) prosperity inevitably follows recession. C) that economics deals with facts, not values. D) other things equal. Answer: D 38) Suppose an economist says that "Other things equal, the lower the price of bananas, the greater the amount of bananas purchased." This statement indicates that: 38) A) all factors other than the price of bananas (for example, consumer tastes and incomes) are assumed to be constant. B) the quantity of bananas purchased determines the price of bananas. C) one cannot generalize about the relationship between the price of bananas and the quantity purchased. D) economists can conduct controlled laboratory experiments. Answer: A 39) The term "other things equal" means that: 39) A) when variable X increases so does related variable Y. B) many variables affect the variable under consideration. C) the associated statement is normative. D) the assumption that factors other than those being considered do not change. Answer: D 40) The basic purpose of the "other things equal" assumption is to: 40) A) allow one to focus upon macro variables by ignoring micro variables. B) allow one to focus upon micro variables by ignoring macro variables. C) allow one to reason about the relationship between variables X and Y without the intrusion of variable Z. D) determine whether X causes Y or vice versa. Answer: C 41) Microeconomics is concerned with: 41) A) a detailed examination of specific economic units which comprise the economic system. B) the establishing of an overall view of the operation of the economic system. C) the concealing of detailed information about specific segments of the economy. D) the aggregate or total levels of income, employment, and output. Answer: A 42) Microeconomics: 42) A) is concerned with the aggregate or total levels of income, employment, and output. B) is not concerned with details, but only with the overall "big picture" of the economy. C) describes the aggregate flows of output and income. D) is concerned with individual economic units and specific markets. Answer: D 7

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    43) Which of the following is a microeconomic statement? 43) A) The real domestic output increased by 2.5 percent last year. B) The general price level increased by 4 percent last year. C) Unemployment was 8.3 percent of the labour force last year. D) The price of personal computers declined last year. Answer: D 44) Macroeconomics approaches the study of economics from the viewpoint of: 44) A) the entire economy. B) individual firms. C) governmental units. D) the operation of specific product and resource markets. Answer: A 45) Which of the following is associated with macroeconomics? 45) A) an examination of the incomes of the University of Toronto Business School graduates B) a case study of pricing and production in the textbook industry C) a study of the trend of pecan prices since World War II D) an empirical investigation of the general price level and unemployment rates in the 2000s Answer: D 46) The problems of aggregate inflation and unemployment are: 46) A) major topics of microeconomics. B) major topics of macroeconomics. C) not relevant to the Canadian economy. D) peculiar to socialistic economies. Answer: B 47) Which of the following statements pertains to macroeconomics? 47) A) The national productivity rate grew by 1.4 percent last year. B) The Pumpkin Center Chartered Bank increased its interest rate on consumer loans by 1 percent. C) Because the minimum wage was raised, Mrs. Beepath decided to enter the labour force. D) A decline in the price of soybeans caused farmer Wanek to plant more land in wheat. Answer: A 48) Macroeconomics can best be described as the: 48) A) study of the large aggregates of the economy or the economy as a whole. B) analysis of how firms attempt to maximize their profits. C) analysis of how a consumer tries to spend income. D) study of how supply and demand determine prices in individual markets. Answer: A 8

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    49) Which of the following is a macroeconomic statement? 49) A) The productivity of steelworkers increased by 1 percent in 2012. B) General Motors' profits increased in 2012. C) The gross profits of all Canadian businesses were $70 billion last year. D) The price of beef declined by 3 percent last year. Answer: C 50) A positive statement is one which is: 50) A) objective and is based on facts. B) subjective and is based on a value judgment. C) derived by an abstract generalization. D) suggestive of what should be done. Answer: A 51) Which of the following is a positive statement? 51) A) It is too hot to jog today. B) The temperature is 30 degrees today. C) The humidity is too high today. D) I enjoy summer evenings when it cools off. Answer: B 52) A positive statement is concerned with: 52) A) what is. B) some goal which is desirable to society. C) the formulation of economic policy. D) what should be. Answer: A 53) A normative statement is one which: 53) A) pertains only to microeconomics. B) pertains only to macroeconomics. C) is based on the law of averages. D) is based upon value judgments. Answer: D 54) Which of the following is a normative statement? 54) A) It is too hot to play tennis today. B) It will cool off later this evening. C) The humidity is high today. D) The temperature is high today. Answer: A 55) Normative statements are concerned with: 55) A) what is. B) rational choice involving costs and benefits. C) facts and theories. D) what ought to be. Answer: D 9

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    56) Most of the disagreement among economists involves: 56) A) theories. B) positive statements. C) normative statements. D) facts. Answer: C 57) Economics is concerned with using scarce productive resources efficiently in attempting to satisfy society's material wants. This statement is: 57) A) positive, but incorrect. B) normative and correct. C) normative, but incorrect. D) positive and correct. Answer: D 58) Ben says that "An increase in the tax on beer will raise its price." Holly argues that "Taxes should be increased on beer because college students drink too much." We can conclude that: 58) A) Holly's statement is normative, but Ben's is positive. B) Both statements are normative. C) Ben's statement is normative, but Holly's is positive. D) Both statements are positive. Answer: A 59) The global financial crisis that spread to Canada in late 2008 has been dubbed: 59) A) The great recession. B) The great depression. C) The great financial crisis. D) The housing bubble crash. Answer: A 60) The individuals and society both face an economic problem. This problem arises from the fact that: 60) A) resources are scarce relative to individual's wants. B) individuals and institutions behave only in their self-interest. C) both wants and resources are unlimited. D) wants are limited but the resources are not. Answer: A 61) The individual's limited income problem: 61) A) persists only because countries have failed to achieve continuous full employment. B) has been eliminated in affluent societies such as Canada and the United States. C) has been solved in all industrialized nations. D) exists because material wants are limited. Answer: D 10

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