ECON 301-Chapter 5—Bringing Supply and Demand Together. QUESTIONS and ANSWERS

ECON 301-Chapter 5—Bringing Supply and Demand Together. QUESTIONS and ANSWERS TRUE/FALSE 1. If the market for Rolex watches is in equilibrium, the quantity of Rolex watches demanded will equal the quantity of Rolex watches supplied. ANS: T PTS: 1 2. Price reductions will usually result whenever the quantity supplied exceeds the quantity demanded at the current price. ANS: T PTS: 1 3. If the soccer ball market is in equilibrium at a price of $22 per ball, an increase in the supply of soccer balls will cause a shortage at that price. ANS: F PTS: 1 4. If the demand for apples increases at the same time the supply of apples falls, the price of apples will tend to fall. ANS: F PTS: 1 5. An increase in the equilibrium price and the equilibrium quantity would be caused by an increase in supply. ANS: F PTS: 1 6. When both supply and demand shift in the same direction, the change in the equilibrium quantity traded will be in the same direction as the shifting curves. ANS: T PTS: 1 7. The main purpose of government price controls is to keep prices from rising above their equilibrium levels. ANS: F PTS: 1 8. Price floors get their name from the fact that they represent a minimum price below which the legal price cannot fall. ANS: T PTS: 1 9. Price ceilings cause surpluses. ANS: F PTS: 1 10. Either a price floor or a price ceiling will result in a smaller quantity exchanged than if the price was at its equilibrium level. ANS: T PTS: 1 11. An increase in the expected future price of a good may act to increase the present price of the good. ANS: T PTS: 1 12. If there is a ceiling price below the equilibrium level, a decrease in demand will worsen the shortage. ANS: F PTS: 1 13. When a demand curve shifts, both the equilibrium price and quantity traded will change in the same direction as a result. ANS: T PTS: 1 14. When a supply curve shifts, the equilibrium price will change in the opposite direction from the shift in supply and the quantity traded will change in the same direction as the shift in supply. ANS: T PTS: 1 15. An increase in both the equilibrium price and the equilibrium quantity of a good could not have been caused by a shift in supply. ANS: T PTS: 1 16. Either a price floor or a price ceiling above the equilibrium price would cause a surplus. ANS: F PTS: 1 17. For the price in a market to remain the same, while the quantity traded fell, both supply and demand would have to shift to the left. ANS: T PTS: 1 18. When supply shifts to the left, it would make the surplus from a price floor smaller, other things equal. ANS: T PTS: 1 19. For a normal good, if incomes rise, we would expect that the equilibrium price will increase and that the equilibrium quantity will increase. ANS: T PTS: 1 20. If both buyers and sellers of a good expect its price to fall in the near future, we would expect that to cause the current price and the quantity traded to increase as a result. ANS: F PTS: 1 MULTIPLE CHOICE 1. Suppose the United States steps up efforts to combat drug trafficking and, with the aid of the Colombian military, destroys a significant percentage of cocaine crops. Predict the impact of increased drug interdiction on the market for cocaine in Los Angeles. a. The supply of cocaine will increase causing the price of cocaine to increase. b. The demand for cocaine will increase causing the price of cocaine to increase. c. The supply of cocaine will decrease causing the price of cocaine to increase. d. There will be a movement up along the supply curve of cocaine. e. The demand for cocaine will decrease causing the price of cocaine to decrease. ANS: C PTS: 1 2. Ceteris paribus, if negotiations lead to lower wages for airline employees, what will be the result in the market for air travel? a. an increase in equilibrium price and an increase in equilibrium quantity b. an increase in equilibrium price and a decrease in equilibrium quantity c. a decrease in equilibrium price and an increase in equilibrium quantity d. a decrease in equilibrium price and a decrease in equilibrium quantity e. an increase in equilibrium price and an indeterminate change in equilibrium quantity ANS: C PTS: 1 3. A more efficient means of processing tree bark to produce an anticancer drug is discovered. As a result, the supply curve for the drug will: a. shift to the right, increasing the price of the drug. b. shift to the left, increasing the price of the drug. c. shift to the right, decreasing the price of the drug. d. shift to the left, decreasing the price of the drug. e. remain stationary, but movement along the supply curve will occur. ANS: C PTS: 1 4. Which of the following would increase the quantity of LCD TVs demanded but would not increase the demand for LCD TVs? a. an increase in the price of plasma TVs, a substitute b. an increase in incomes assuming that LCD TVs are normal goods c. an increase in the expected future price of LCD TVs d. a decrease in the current price of LCD TVs e. an increase in the current price of LCD TVs ANS: D PTS: 1 5. Assume that coffee and tea are substitutes for each other. If weather conditions cause a substantial portion of the available coffee crop to be destroyed, then most probably: a. the price of tea will decrease. b. the price of coffee will decrease. c. the demand for tea will increase. d. the supply of tea will increase. e. both c. and d. are correct. ANS: C PTS: 1 6. You notice that the price of orange juice at your local grocery store has increased. Which of the following statements is not a possible explanation for the rise in the price of orange juice? a. Frosty weather destroys oranges causing the price of oranges to increase. b. As a result of an increase in income, consumers wish to purchase more orange juice at every price level. c. A recent scientific study is reported in the press that suggests that apple juice may be contaminated with pesticides. d. Due to the bioengineering of orange trees, the domestic supply of oranges increases. e. The supply curve for grapefruits shifts to the left. ANS: D PTS: 1 7. Coca-Cola bottlers increased their prices as the price of sugar (an important ingredient in producing Coke) rose sharply in the late 1980s. Under these circumstances, the increase in the price of Coke occurs as a result of a(n): a. decrease in supply. b. decrease in demand. c. increase in supply. d. increase in demand. e. increase in both demand and supply. ANS: A PTS: 1 8. In 1975 a pocket calculator cost more than $50; in 1990 a calculator of the same quality cost less than $10. Which of the following explanations is most consistent with these facts? a. Intense competition in the calculator industry caused the supply curve for calculators to shift to the left, depressing the price. b. An increase in the demand for calculators led to the price drop. c. An improvement in technology caused the supply of calculators to increase, depressing their price. d. As the population grew, fewer expensive calculators were needed, causing prices to fall. ANS: C PTS: 1 9. Which of the following would most likely increase the price of chicken, a normal good? a. a reduction in the price of grains used to produce chicken feed b. a reduction in the price of beef, a substitute for chicken c. unusually hot weather that kills millions of chickens before they are ready for market d. a decrease in consumer income ANS: C PTS: 1 10. In an effort to reduce the surplus of dairy products, agricultural legislation paid dairy farmers to slaughter their herds and sell them to packinghouses (meat producers) in . How did this influence the market for beef? a. demand increased, leading to higher beef prices b. demand decreased, leading to lower beef prices c. supply increased, leading to lower beef prices d. supply decreased, leading to higher beef prices ANS: C PTS: 1 11. Are markets always in equilibrium? a. Yes, they are always at the equilibri