EC 101.

03

Exercises for Chapter 4

FALL 2010

1. Which of the following might cause the demand curve for an inferior good to shift to the left?
a.
b.
c.
d.
ANS: C

a decrease in income
an increase in the price of a substitute
an increase in the price of a complement
None of the above is correct.

2.

An increase in the price of rubber coincides with an advance in the technology of tire production.
As a result of these two events,
a. the demand for tires decreases and the supply of tires increases.
b. the demand for tires is unaffected and the supply of tires decreases.
c. the demand for tires is unaffected and the supply of tires increases.
d. None of the above is necessarily correct.
ANS: D
3.

Which of the following is not a characteristic of a perfectly competitive market?

a. Different sellers sell identical products.
b. There are many sellers.
c. Sellers must accept the price the market determines.
d. All of the above are characteristics of a perfectly competitive market.
ANS: D
4.

Which of the following would not shift the demand curve for mp3 players?
a. a decrease in the price of mp3 players
b. a fad that makes mp3 players more popular among 12-25 year olds
c. an increase in the price of CDs, a complement for mp3 players
d. a decrease in the price of satellite radio, a substitute for mp3 players
ANS: A
5.

You lose your job and, as a result, you buy fewer romance novels. This shows that you consider
romance novels to be a(n)
a. luxury good.
b. inferior good.
c. normal good.
d. complementary good.
ANS: C
6.

Currently you purchase 6 packages of hot dogs a month. You will graduate from college in
December, and you will start a new job in January. You have no plans to purchase hot dogs in
January. For you, hot dogs are
a. a substitute good.
b. a normal good.
c. an inferior good.
d. a complementary good.
ANS: C
7.

Ford Motor Company announces that next month it will offer $3,000 rebates on new Mustangs.
As a result of this information, todays demand curve for Mustangs
a. shifts to the right.
b. shifts to the left.
c. shifts either to the right or to the left, but we cannot determine the direction of the shift from
the given information.
d. will not shift; rather, the demand curve for Mustangs will shift to the right next month.

ANS: B
8.

The supply curve for coffee

a. shifts when the price of coffee changes because the price of coffee is measured on the
vertical axis of the graph.
b. shifts when the price of coffee changes because the quantity supplied of coffee is measured
on the horizontal axis of the graph.
c. does not shift when the price of coffee changes because the price of coffee is measured on
the vertical axis of the graph.
d. does not shift when the price of coffee changes because the quantity supplied of coffee is
measured on the horizontal axis of the graph.
ANS: C
9.

Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If the federal
government increases the minimum wage by $1.00 per hour, then it is likely that the
a. demand for bicycle assembly workers will increase.
b. supply of bicycles will shift to the right.
c. supply of bicycles will shift to the left.
d. firm must increase output to maintain profit levels.
ANS: C
10.

Funsters, Inc., the largest toy company in the country, sells its most popular doll for $15. It has
just learned that its leading competitor, Toysorama, is mass-producing an excellent copy and
plans to flood the market with their $5 doll in 6 weeks. Funsters should
a. fight fire with fire by decreasing supply of its doll for 6 weeks and then increasing the
supply.
b. increase the supply of their doll now before the other doll hits the market.
c. increase the price of their doll now.
d. discontinue their doll.
ANS: B
11.
a.

Price
$5
$4
$3
$2
$1
b.
c.
d.

Given the table below, graph the demand and supply curves for flashlights. Make certain to
label the equilibrium price and equilibrium quantity.
Quantity Demanded
Per Month
6,000
8,000
10,000
12,000
14,000

Quantity Supplied
Per Month
10,000
8,000
6,000
4,000
2,000

What is the equilibrium price and the equilibrium quantity?

Suppose the price is currently $5. What problem would exist in the market? What would you
expect to happen to price? Show this on your graph.
Suppose the price is currently $2. What problem would exist in the market? What would you
expect to happen to price? Show this on your graph.

ANS:
a.

price

Surplus of 4000

4.5

Pe

4
3.5
3
2.5
2

Shortage of 8000

1.5

1
0.5
1000

2000

3000

4000

5000

6000

7000

8000

9000

10000 11000 12000

quantity

Qe

b. The equilibrium price (Pe) is $4 and the equilibrium quantity (Qe) is 8,000.
c. A surplus of 4,000 flashlights would be the problem in the market, and we would expect the
price to fall.
d. A shortage of 8,000 flashlights would be the problem in the market, and we would expect the
price to rise.
12.

Suppose we are analyzing the market for hot chocolate. Graphically illustrate the impact each of
the following would have on demand or supply. Also show how equilibrium price and
equilibrium quantity would change.
a. Winter starts and the weather turns sharply colder.
b. The price of tea, a substitute for hot chocolate, falls.
c. The price of cocoa beans decreases.
d. The price of whipped cream falls.
e. A better method of harvesting cocoa beans is introduced.
f. The Surgeon General of the U.S. announces that hot chocolate cures acne.
g. Protesting farmers dump millions of gallons of milk, causing the price of milk to rise.
h. Consumer income falls because of a recession, and hot chocolate is considered a normal
good.
i. Producers expect the price of hot chocolate to increase next month.
j. Currently, the price of hot chocolate is $0.50 per cup above equilibrium.

ANS:
(a)

(b)

price

price

Pe'

Pe

Pe

Pe'

Qe

Qe'

D'

D'

Qe'

quantity

(c)

Qe

D
quantity

(d)

price

price

S'

Pe'
Pe

Pe

Pe'
D

Qe

Qe'

Qe

quantity

(e)

Qe'

D'
quantity

(f)

price

price

S'

Pe'
Pe

Pe

Pe'
D

Qe

Qe'

Qe

quantity

(g)

Qe'

(h)

D'
quantity

price

price

S'

Pe
Pe'

Pe'

Pe
D

Qe'

Qe

D'

Qe'

quantity

(i)

Qe

quantity

(j)

price

price

S'

Pe'

Pe+
$0.50

Pe

Pe

Surplus

Qe'

Qe

Qd

quantity

Qe

Qs

quantity

In (j), a price above equilibrium will affect both quantity demanded and quantity supplied and will
cause a surplus in the market. It will not cause either demand or supply to shift.
Table 4-7
The demand schedule below pertains to sandwiches demanded per week.
Price
$3
$5
13.

Charlies
Quantity
Demanded
3
1

Maxines
Quantity
Demanded
4
2

Quinns
Quantity
Demanded
3
x

Refer to Table 4-7. Regarding Charlie and Maxine, whose demand for sandwiches conforms to
the law of demand?
a. only Charlies
b. only Maxines
c. both Charlies and Maxines
d. neither Charlies nor Maxines

ANS: C
14.

Refer to Table 4-7. Regarding Charlie and Maxine, for whom are sandwiches a normal good?
a. only for Charlie
b. only for Maxine
c. for Charlie and for Maxine
d. This cannot be determined from the given information.

ANS: D
15.

Refer to Table 4-7. Suppose x = 1. Then it must be true that

a. Charlie and Quinn have the same income, which is lower than Maxines income.
b. if sandwiches and potato chips are complements for Charlie, then those two goods are also
complements for Quinn.
c. Charlies demand curve is identical to Quinns demand curve.
d. All of the above are correct.

ANS: C
16.

Refer to Table 4-7. Suppose x = 1. Then the slope of the market demand curve is
a. -3.
b. -1/3.
c. 1/3.
d. 3.

ANS: B
17.

Refer to Table 4-7. Suppose Charlie, Maxine, and Quinn are the only demanders of sandwiches.
Also suppose x = 2. Then
a. the slope of Quinns demand curve is -1/2 and the slope of the market demand curve is -5/2.
b. the slope of Quinns demand curve is -1/2 and the slope of the market demand curve is -2/5.
c. the slope of Quinns demand curve is -2 and the slope of the market demand curve is -5/2.
d. the slope of Quinns demand curve is -2 and the slope of the market demand curve is -2/5.

ANS: D
18.

Refer to Table 4-7. Suppose Charlie, Maxine, and Quinn are the only demanders of sandwiches
and that the market demand violates the law of demand. Then, in the table,
a. x 5.
b. x 5.
c. x 7.
d. x 10.

ANS: C
19.

Then

Refer to Table 4-7. Suppose Charlie, Maxine, and Quinn are the only demanders of sandwiches.
Also suppose the following:
x=2
the current price of a sandwich is $5.00
the market quantity supplied of sandwiches is 10
the law of supply applies to the supply of sandwiches
a.
b.
c.
d.

there is a shortage of 5 sandwiches and the price would be expected to rise from its current
level of $5.00.
there is a shortage of 5 sandwiches and the price would be expected to fall from its current
level of $5.00.
there is a surplus of 5 sandwiches and the price would be expected to rise from its current
level of $5.00.
there is a surplus of 5 sandwiches and the price would be expected to fall from its current
level of $5.00.

ANS: D
20.

Then

Refer to Table 4-7. Suppose Charlie, Maxine, and Quinn are the only demanders of sandwiches.
Also suppose the following:
x=2
the current price of a sandwich is $3.00
the market quantity supplied of sandwiches is 4
the slope of the supply curve is 2
a.
b.
c.
d.

there is currently a shortage of 6 sandwiches and the equilibrium price of a sandwich is less
than $3.00.
there is currently a shortage of 6 sandwiches and the equilibrium price of a sandwich is
$5.00.
there is currently a surplus of 6 sandwiches and the equilibrium price of a sandwich is less
than $3.00.
there is currently a surplus of 6 sandwiches and the equilibrium price of a sandwich is $5.00.

ANS: B
21.

Then

Refer to Table 4-7. Suppose Charlie, Maxine, and Quinn are the only demanders of sandwiches.
Also suppose the following:
x=2
the current price of a sandwich is $3.00
the market quantity supplied of sandwiches is 5
the slope of the supply curve is 1
a.
b.
c.

d.
ANS: A

there is currently a shortage of 5 sandwiches and the equilibrium price of a sandwich is

between $3.00 and $5.00.
there is currently a shortage of 5 sandwiches and the equilibrium price of a sandwich is
$5.00.
there is currently a surplus of 5 sandwiches and the equilibrium price of a sandwich is
between $3.00 and $5.00.
there is currently a surplus of 5 sandwiches and the equilibrium price of a sandwich is $5.00.

22.

Saddle shoes are not popular right now, so very few are being produced. If saddle shoes become
popular, then how will this affect the market for saddle shoes?
a. The supply curve for saddle shoes will shift right, which will create a shortage at the current
price. That will increase price, which will decrease quantity demanded and increase quantity
supplied. The new market equilibrium will be at a higher price and higher quantity.
b. The supply curve for saddle shoes will shift right, which will create a surplus at the current
price. That will decrease price, which will increase quantity demanded and decrease quantity
supplied. The new market equilibrium will be at a lower price and higher quantity.
c. The demand curve for saddle shoes will shift right, which will create a shortage at the current
price. That will increase price, which will decrease quantity demanded and increase quantity
supplied. The new market equilibrium will be at a higher price and higher quantity.
d. The demand curve for saddle shoes will shift right, which will create a surplus at the current
price. That will decrease price, which will increase quantity demanded and decrease quantity
supplied. The new market equilibrium will be at a lower price and higher quantity.
ANS: C
23.

What will happen to the equilibrium price and quantity of new cars if the price of gasoline rises,
the price of steel rises, public transportation becomes cheaper and more comfortable, and autoworkers negotiate higher wages?
a. Price will fall and the effect on quantity is ambiguous.
b. Price will rise and the effect on quantity is ambiguous.
c. Quantity will fall and the effect on price is ambiguous.
d. Quantity will rise and the effect on price is ambiguous.
ANS: C