Textbook Reading Comprehension Questions: Unit II (sections 5-9)

1. If travelers consider rail travel and air travel to be substitutes, then a reduction in the price of rail travel will likely result in: 1. A shift to the left of the air travel demand curve. 2. A shift to the right of the air travel demand curve. 3. A shift to the left of the air travel supply curve. 4. A shift to the right of the air travel supply curve. 5. A movement to a higher point on the air travel demand curve and to a lower point on the air travel supply curve. 2. If the quantity demanded of a product exceeds the quantity supplied: 1. We know that consumer and producer expectations of costs and benefits are not equal. 2. We know that there will be an excess supply (surplus) of the product. 3. We know that there will be an excess demand (shortage) of the product. 4. We know that we will be in market equilibrium. 5. We know that firms will respond by lowering price. 3. According to the demand and supply model, which of the following would we predict would be the result of the following market shocks? 1. A simultaneous increase in both demand and supply of a product will lead to a higher market equilibrium price for the product. 2. A simultaneous reduction in both demand and supply of a product will lead to a lower market equilibrium quantity bought and sold of the product. 3. An increase in supply along with a simultaneous reduction in demand will lead to a lower market equilibrium quantity bought and sold of the product. 4. A decrease in supply along with a simultaneous increase in demand will lead to a lower market equilibrium price for the product. 5. None of the above 4. If consumers and producers are responsive to price changes, then what can we expect to happen to the market equilibrium price and quantity bought and sold if a market is hit by a simultaneous increase in both demand and supply? 1. Both Pe and Qe increase 2. Pe decreases and Qe increases 3. Pe increases but we cannot predict the change in Qe 4. We cannot predict the change in Pe, but Qe increases 5. None of the above 5. If consumer income rises, we can expect a change in _________. If market price rises, we can expect a change in ________. 1. Demand; quantity demanded 2. Quantity demanded; demand 3. Demand; demand 4. Demand; supply 5. Supply; quantity supplied

6. How are we able to determine the market demand for a product? 1. Consult government statistics 2. Find individual consumer demand curves and multiply them together. 3. Find individual consumer demand curves and add them together. 4. Use economic models. 5. None of the above 7. A decrease in the supply of a product is always represented by: 1. A movement upwards on the supply curve. 2. A movement downwards on the supply curve. 3. A shift to the right in the supply curve 4. A shift to the left in the supply curve 5. None of the above 8. According to the textbook, which of the following statements is false? 1. An increase in demand shifts the demand curve to the right. 2. A decrease in demand shifts the demand curve to the left. 3. An increase in supply shifts the supply curve to the right. 4. A decrease in supply shifts the supply curve to the left. 5. An increase in demand shifts the demand curve vertically up and an increase in supply also shifts the supply curve vertically up. 9. According to the textbook, what is the summation of all of the individual consumer demand curves? 1. Equilibrium price 2. Equilibrium quantity. 3. Market demand. 4. Market supply. 5. None of the above. 10. According to the textbook, which factor can cause a supply curve to shift? 1. A change in production cost 2. A reduction in the number of producers 3. Advanced technology that can increase worker productivity 4. All of the above 5. None of the above 11. According to the textbook, which of the following market shocks can result in a change in the demand for a product? 1. A decrease in consumer income 2. A change in consumer preferences 3. A change in the price of related goods 4. All of above 5. None of above

12. According to the demand and supply model, if supply of gasoline increases and demand for gasoline decreases, what is likely to happen to the market equilibrium quantity and price of gasoline? 1. Both market equilibrium price and market equilibrium quantity will increase. 2. Both market equilibrium price and market equilibrium quantity will decrease. 3. Market equilibrium price will increase and market equilibrium quantity will decrease. 4. Market equilibrium price will decrease and change in market equilibrium quantity is unknown (ambiguous). 5. Change in both market equilibrium price and market equilibrium quantity is unknown (ambiguous). 13. Assuming buyers and sellers are price responsive, which of the following pairs of simultaneous market shocks will definitely result in a higher equilibrium price? 1. An increase in demand and an increase in supply. 2. An increase in demand and a decrease in supply. 3. A decrease in demand and an increase in supply. 4. A decrease in demand and a decrease in supply. 5. For each of the above, we need to know the relative sizes of the market shocks to be able to determine whether the new equilibrium price is higher or lower than the original equilibrium price. 14. Assuming buyers and sellers are price responsive, what will be the impact of a simultaneous demand decrease and a supply increase on equilibrium price and equilibrium quantity? 1. Equilibrium price decreases and equilibrium quantity decreases. 2. Equilibrium price decreases and equilibrium quantity increases. 3. Equilibrium price may either increase or decrease and equilibrium quantity may either increase or decrease. 4. Equilibrium price decreases and equilibrium quantity may either increase or decrease. 5. Equilibrium price may either increase or decrease, and equilibrium quantity decreases. 15. Which of the following is true regarding price elasticity of demand? 1. If |Ed| is larger than 1, then the good is price elastic and consumers are less price responsive. 2. If |Ed| is larger than 1, the good is price inelastic and consumers are more price responsive. 3. If |Ed| is larger than 1, the good is price elastic and consumers are more price responsive. 4. Goods that consumers consider to be necessities have larger |Ed| while goods that consumers consider to be luxuries have smaller |Ed|. 5. None of the above. 16. Suppose that consumers plan to buy 20% fewer oranges when the price of oranges rises by 10%. According to this information, we can say that the demand for oranges is 1. Price elastic. 2. Price inelastic. 3. Perfectly price elastic. 4. Perfectly price inelastic. 5. Unit price elastic.

17. According to the textbook, if Ed=0.75 for a good, then the good is ______; if Ed=1 for a good, then the good is _____; but if Ed=1.75 for a good, then the good is _____. 1. Price inelastic; price elastic; price inelastic. 2. Price inelastic; unit price elastic; price inelastic. 3. Price elastic; unit price elastic; price inelastic. 4. Price elastic; unit price elastic; price elastic. 5. Price inelastic; unit price elastic; price elastic. 18. Suppose that income of consumers in China increases and they buy more cars. According to the textbook, we would expect a shift to the _____ of the demand curve for gasoline and will therefore likely observe _____ Pe and _____ Qe as a result. 1. Right; lower; lower. 2. Left; lower; lower. 3. Right; higher; higher. 4. Left; higher; higher. 5. Right; lower; higher. 19. According to the revenue maximizing rule if the absolute value of the price elasticity of demand for a product is less than 1 then the firm should 1. Lower the price. 2. Raise the price. 3. Dont change the price. 4. Leave the market. 5. None of the above.

20. The revenue maximizing pricing rule states that firms will maximize revenue at a price where 1. The absolute value of the price elasticity of demand is greater than 1. 2. The absolute value of the price elasticity of demand is equal to 1. 3. The absolute value of the price elasticity of demand is less than 1. 4. The absolute value of the price elasticity of demand is equal to 0. 5. None of the above. 21. A producer will raise price to maximize profit if 1. He realizes that his consumers are price inelastic. 2. He realizes that his consumers are price elastic. 3. He realizes that his consumers are unit price elastic. 4. He realizes that his consumers are infinitely price elastic. 5. He realizes that his consumers are perfectly price elastic. 22. According to the textbook, at higher prices consumers are more responsive to price changes. Consequently, in absolute value, the price elasticity of demand must be _____ at the higher price, and we say that the demand at this price is _____. 1. <0; price inelastic. 2. >0; price inelastic. 3. =1; unit price elastic. 4. <1; price elastic. 5. >1; price elastic.

Reading Comprehension for Articles 23. According to the article Asian Demand Helps Drive Up the Price of Dairy, what factors contributed to the rising price of milk? Growing appetite for dairy in Asia. Shrinking European production of milk. Rising cost of animal feed. Longstanding drought in Australia and New Zealand, the worlds largest milk exporting regions. 5. All of the above. 24. According to the article Asian Demand Helps Drive Up the Price of Dairy, what factors contributed to the rising consumption of milk in China? 1. Rising income of Chinese consumers 2. Increasing familiarity with taste for nonnative foods among young Chinese urbanites. 3. Shrinking dairy industry in China. 4. All of the above. 5. Only (1) and (2). 25. According to the article Hog Prices Wallow Near 2Year Low, which of the following events has had an impact on hog prices? 1. Recent flooding in Florida and Louisiana as a result of Hurricane Isaac. 2. The erosion on corn and soybean crops this summer as a result of the drought in the U.S. 3. Flooding in Louisiana in 2005 as a result of Hurricane Katrina. 4. The destruction of hundreds of homes in Colorado Springs as a result of wildfires. 5. Destruction to farms in the Philippines this year as a result of Tropical storm Doksuri. 26. According to the article Hog Prices Wallow Near 2Year Low, why are hog prices declining to their lowest level in nearly two years? 1. Farmers are not waiting for hogs to get as large as usual before slaughtering them and offering them to the market. Even smaller hogs, in addition to the usual supply of larger hogs, are being offered for supply. 2. Farmers are thinning their herds to reduce animal feed costs. 3. The eroded corn and soybean crops triggered record high prices for the corn and soybean meal that hog farmers feed their swine causing hog farmers to slaughter and supply to the market more hogs than usual. 4. Prices are being pressured by weak domestic demand for pork. 5. All of the above. 1. 2. 3. 4.

27. According to the article How to Keep the Public Shopping, which of the following statements is true? 1. People who are feeling sad are more likely to reduce selling price of a good than emotionally neutral people. 2. People who are feeling sad are willing to pay more for a good than emotionally neutral people. 3. Disgust reduces both selling and buying prices. 4. Happy people are willing to pay more only when buying a good but not when selling a good. 5. Only (1), (2) and (3). 28. According to the article How to Keep the Public Shopping, which of the following statements is true about the Carnegie Mellon University study? 1. The study concentrated on the effects of happiness on economic decision making. 2. The study concentrated on the effects of sadness on economic decision making. 3. The study concentrated on the effects of disgust on economic decision making. 4. All of the above. 5. Only (2) and (3). 29. According to the article How to Keep the Public Shopping, people who are depressed or having a bad day may go on shopping sprees because: 1. Sadness results in an inability to understand the value of money. 2. Sadness results in an inability to control behavior. 3. Depression results in an Endowment Effect. 4. Sadness reverses the Endowment Effect. 5. None of the above 30. According to the article How to Keep the Public Shopping, 1. Anger makes people assess situations more optimistically. 2. Fear makes people exaggerate risks. 3. Fear makes people minimize benefits. 4. Disgust makes people want to get rid of things. 5. All of the above 31. According to the article Asian Demand Helps Drive Up the Price of Dairy, 1. Chinese consumers have historically had a high demand for dairy products. 2. China tries to insulate its domestic market from international price changes. 3. The U.S., Canada and the European Union try to insulate their domestic markets from international price changes. 4. All of the above 5. None of the above 32. According to the article Asian Demand Helps Drive Up the Price of Dairy, 1. Chinese consumers, as a result of rising income and increased taste for dairy products, are helping to drive up milk prices around the world. 2. Drought in the U.S. is leading to higher dairy prices around the world. 3. German producers and retailers are causing higher dairy prices as a result of their price fixing agreements. 4. All of the above 5. None of the above

 33. According to the article Hog Prices Wallow Near 2Year Low, the recent drought in the U.S. has led to: 1. Higher prices for corn and soybeans which are often used to feed hogs. 2. A reduction in the price of hogs. 3. Farmers thinning their herds of hogs. 4. All of the above 5. None of the above 34. According to the article Hog Prices Wallow Near 2Year Low, which of the following is the cause of hog farmers losing money on the sale of their hogs? 1. A reduction in the supply of hogs. 2. Weak domestic demand for pork. 3. Increased slaughter prices. 4. All of the above 5. None of the above

Analytical Questions
35. You are analyzing the market for snow shovels in Columbia and find that through an average winter, the equilibrium price of snow shovels in Columbia is $10 and the equilibrium quantity bought and sold is 20,000. However, this winter we are expecting much more snow than usual, which will mean people will need to shovel their driveways more often. In addition, more snow makes it much more costly for shovel companies to ship the shovels to Columbia in shipping trucks. Which of the following is a possible market outcome for shovels this winter? 1. P = $10, Q = 25,000 2. P = $8, Q = 20,000 3. P = $12, Q = 20,000 4. P = $5, Q = 30,000 5. None of the above 36. Charlie, Dee, Dennis, and Frank all run a small bar in Philadelphia. They hear from a reliable source that as a result of a recent economic recession, people are beginning to reduce their visits to bars, and that this trend of fewer bar visits is going to continue. Their source also tells them that although their bar will remain open, many other bars in the Philadelphia area are going to shut down and will attempt to open a more profitable business instead. If their source is correct, and we can assume that these changes in the market will occur simultaneously, what can Charlie, Dee, Dennis, and Frank expect to happen to the price and sales of drinks in the Philadelphia area? 1. They will be forced to sell their drinks at a lower price to attract customers, and will sell fewer drinks. 2. They will sell their drinks at a higher price, since they have lost competition, but will have fewer customers since bars arent as popular. 3. They cant be sure what will happen to the price of their drinks, but they can be sure that fewer drinks will be sold in the city of Philadelphia. 4. Since many of the other bars will shut down, they will have less competition, and will sell their drinks at a higher price and to more customers, since customers from other bars will be more likely to visit their bar. 5. They really wont be able to make an accurate prediction as to how the price and quantity of their drinks will change until they actually experience the effects of the market shocks. 37. Suppose we have a good for which the demand is perfectly price elastic. If there is a market shock to the supply such that it increases, then we could predict that 1. The new equilibrium price will be higher while the new equilibrium quantity will be the same. 2. The new equilibrium price will be lower while the new equilibrium quantity will be the same. 3. The new equilibrium price will be the same while the new equilibrium quantity will be higher. 4. The new equilibrium price will be the same while the new equilibrium quantity will be lower. 5. We cannot make any prediction due to lack of information.

38. Suppose you are considering producing and selling a new product and you have surveyed all the potential consumers in your market. The following table represents the demand curve you have derived for your product along with your supply curve. Based on this information, which of the following statements is true? Price($) 310 320 330 340 350 1. 2. 3. 4. 5. Quantity Demanded 18,000 16,000 14,000 12,000 10,000 Quantity Supplied 12,000 13,000 14,000 15,000 16,000

Equilibrium price is $340. If price is $320, there exists excess supply in the amount of 3000 in this market. If price is $330, there exists excess supply in the amount of 1000 in this market. If price is $340, there exists excess supply in the amount of 3000 in this market. If price is $350, there exists excess demand in the amount of 6000 in this market.

39. The price of gasoline has increased significantly over the last year. However, suppliers still sell the same quantity of gasoline as last year. Which one of the following is a possible explanation for this market outcome? 1. The magnitude of a decrease in demand is greater than the magnitude of an increase in supply. 2. The magnitude of a decrease in demand is smaller than the magnitude of a decrease in supply. 3. An increase in demand and a decrease in supply are of the same magnitude. 4. An increase in demand and an increase in supply are of the same magnitude. 5. None of the above. 40. Due to a change in market supply equilibrium price changed from $1 to $2 and equilibrium quantity changed from 10 units to 5 units. Which of the following statement is correct about this market? 1. There was an increase in market supply; market demand is price elastic. 2. There was a decrease in market supply; market demand is price elastic. 3. There was an increase in market supply; market demand is price inelastic. 4. There was a decrease in market supply; market demand is price inelastic. 5. None of the above. 41. Suppose that gasoline price is $3/gallon and you buy 30 gallons of gasoline per month. When gas price has risen to $3.6/gallon, your gas consumption decreases to 27 gallon per month. What is the price elasticity of your gasoline demand? 1. 0.1 2. 0.25 3. 0.5 4. 0.75 5. 1

42. John is running a furniture retail shop. One day, He found good antique chairs at a wholesale store, and the price per chair was $120. He decided to buy 20 chairs at this price. However, the price went up to $160 in a few days because David, another retail shop owner, also wanted to buy them. As a result, John decided to buy only 14 chairs. What is John's price elasticity of demand for the antique chair? 1. 0.11 2. 0.90 3. 1.11 4. 1.72 5. None of the above 43. A fall in the price of lemons from $10.5 to $9.0 per bushel increases quantity demanded from 100 bushels to 170 bushels. What is the price elasticity of demand for lemons? 1. 4.9 2. 4.9 3. 46.7 4. 46.7 5. 0.2 44. According to the lecture, if demand for carrots is inelastic, then when the supply of carrots decreased due to drought last summer, we know that the percentage change in Pe was _______ the percentage change in Qe in the market for carrots. 1. Equal to 2. Less than 3. Greater than 4. We cant say because it depends on consumers income 5. We cant say because it depends on the price elasticity of all substitute goods

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