Question 1

What combination of changes in supply and demand would most likely increase the equilibrium quantity?

Accepted Answer

When both supply and demand increase, the equilibrium quantity will increase. This is because there are more goods available (due to increase in supply) and more people willing to buy them (due to increase in demand), resulting in a higher equilibrium quantity.

Question 2

Refer to the above graph, which shows the supply and demand for rental housing in a city.Given the demand D₁ and the supply S₁ for rental housing, if the government established rent controls in the city at below the equilibrium, then the price of housing would most likely be at:

Accepted Answer

With rent controls set below the equilibrium, the price of housing would be at P₁, causing a shortage of rental housing as demand exceeds supply at that price level.

Question 3

If a legal ceiling price for gasoline is set above the equilibrium price:

Accepted Answer

When a legal ceiling price is set above the equilibrium price, it does not restrict the market from reaching its equilibrium. Therefore, neither the equilibrium price nor the equilibrium quantity will be affected, as the market can naturally adjust to its equilibrium without interference.

Question 4

A decrease in demand and an increase in supply will:

Accepted Answer

A decrease in demand leads to a lower price and lower quantity demanded. An increase in supply also leads to a lower price but increases the quantity supplied. The net effect on quantity is indeterminate because the decrease in demand and increase in supply have opposite effects on quantity. However, both actions contribute to a decrease in price.

Question 5

Students at Informed University pay $40 per year for a parking permit but many complain that they are unable to find a parking place in University lots.In terms of equilibrium, this suggests that:

Accepted Answer

The fact that students are unable to find parking spaces suggests that demand for parking permits exceeds the available supply, indicating that the current price is too low (i.e. underpriced). If the University were to increase the price of parking permits, this would decrease demand and ultimately result in less congestion in University lots. Making parking free (option D) would likely exacerbate the problem, leading to even more competition for limited spaces.

Question 6

An increase in demand and an increase in supply will:

Accepted Answer

When both demand and supply increase, the equilibrium quantity will definitely increase because more is being supplied and more is being demanded. However, the effect on price is indeterminate without knowing the relative magnitudes of the shifts in demand and supply.

Question 7

An effective ceiling price will:

Accepted Answer

An effective ceiling price, which is a price ceiling set below the market equilibrium price, will result in a product shortage because the quantity demanded will exceed the quantity supplied at that price. This is because demand is higher than supply at the artificially lowered price, causing some consumers to be unable to obtain the product they want. As a result, sellers may have to ration the product or introduce non-price mechanisms such as waiting lists or lottery systems to distribute it fairly. However, if the ceiling price is set too high, it may not have much impact on market outcomes and may not clear the market. Inducing new firms to enter the industry or resulting in a product surplus is not necessarily the aim of a price ceiling.

Question 8

If the supply and demand curves for a product both decrease, we can say that equilibrium:

Accepted Answer

When both the supply and demand curves for a product decrease, it means that there is a decrease in both the quantity supplied and the quantity demanded. This leads to a decrease in the equilibrium quantity. However, the effect on the equilibrium price is uncertain. If the decrease in supply is relatively larger than the decrease in demand, then the equilibrium price will rise. On the other hand, if the decrease in demand is relatively larger than the decrease in supply, then the equilibrium price will fall. However, if the decrease in supply and demand is equal, then the equilibrium price will remain unchanged. Hence, we can say that the quantity must decline, but equilibrium price may either rise, fall, or remain unchanged.

Question 9

Which statement is not correct?

Accepted Answer

If demand remains constant and supply declines, the quantity exchanged will fall, not rise as stated in statement C. When supply declines, there is less of the product available to meet current demand, resulting in a decrease in quantity exchanged. The price will rise, however, as the market is willing to pay more for the limited supply.

Question 10

What combination of changes would most likely decrease the equilibrium price?

Accepted Answer

When supply increases and demand decreases, there is more supply than demand for the product, which leads to a surplus. In order to sell their products, suppliers will need to lower their prices, leading to a decrease in the equilibrium price.

Question 11

What is the likely effect on the market for wine of a simultaneous increase in both consumer incomes and producer taxes on wine?

Accepted Answer

The increase in consumer incomes would lead to an increase in demand for wine, thus increasing the price. However, the increase in producer taxes would increase the cost of production and potentially decrease the supply of wine, leading to an ambiguous effect on quantity. Therefore, there would be an increase in price, but the effect on quantity would be unclear.

Question 12

What combination of changes in supply and demand would most likely increase the equilibrium price?

Accepted Answer

When supply decreases and demand increases, the equilibrium price will increase. This is because there is less of a good available, but more people want to buy it, so the price will naturally rise to balance out the two factors.

Question 13

An increase in demand for oil and an increase in supply of oil will:

Accepted Answer

An increase in demand for oil will shift the demand curve to the right, leading to increased quantity. An increase in supply of oil will shift the supply curve to the right, again leading to increased quantity. However, whether there is an increase in price depends on how much each curve shifts. If the demand curve shifts more than the supply curve, there will be an increase in both price and quantity. If the supply curve shifts more than the demand curve, there will be a decrease in price and an increase in quantity. If the two curves shift by the same amount, there will be an increase in quantity but no change in price. Hence, option C is correct.

Question 14

If the supply of a product decreases and the demand for that product simultaneously increases, we can conclude that equilibrium:

Accepted Answer

When the supply of a product decreases and demand increases simultaneously, the price of the product will rise. However, we cannot determine the direction of change in equilibrium quantity as it depends on the extent of the changes in supply and demand. It may either rise if the increase in demand is greater than the decrease in supply or fall if the decrease in supply is greater than the increase in demand. Equilibrium quantity may remain unchanged if the changes in supply and demand are equal in magnitude. Therefore, the correct answer is A.

Question 15

One can say with certainty that equilibrium quantity will increase when supply:

Accepted Answer

When supply and demand both increase, it indicates that more goods are being produced and consumers are willing to buy more, leading to a higher equilibrium quantity.

Question 16

If an effective ceiling price is placed on gasoline then:

Accepted Answer

An effective ceiling price on gasoline would result in a quantity demanded that exceeds the quantity supplied because the price is artificially kept below the market-clearing level. This situation necessitates some form of rationing to allocate the scarce resource, as the market cannot reach equilibrium through price adjustments alone.

Question 17

Refer to the graph below, showing the market supply and demand for a product.Assume that the market is initially in equilibrium where D₁ and S₁ intersect.If consumer incomes decreased and production costs increased, then new equilibrium would be at:

Accepted Answer

If consumer incomes decrease, demand for the product will decrease, causing a shift to the left in the demand curve from D1 to D2. Additionally, if production costs increase, supply of the product will decrease, causing a shift to the left in the supply curve from S1 to S2. The new equilibrium point will be where the new supply and demand curves intersect, which is at point E (P₃ and Q₁). Therefore, the answer is C.

Question 18

A price ceiling means that:

Accepted Answer

A price ceiling is a legal maximum price set by the government, which is usually below the market equilibrium price. The purpose of this policy is to make the good or service more affordable and accessible to consumers, particularly those with lower incomes. A price ceiling can create a shortage of the relevant product if the market price is below the equilibrium price, leading to excess demand that cannot be met by supply.

Question 19

What combination of changes would most likely decrease the equilibrium quantity?

Accepted Answer

When both demand and supply decrease, the equilibrium quantity will most likely decrease because there is less demand for goods while also a decrease in the supply of goods.

Question 20

Superstar rock singers may set concert ticket prices below the equilibrium level because:

Accepted Answer

By setting ticket prices below the equilibrium level, superstar rock singers create a frenzy among fans trying to get tickets, which generates free publicity for the singer and the concert. Sold-out concerts also promote record sales, which can lead to higher overall profits for the singer even if they are selling tickets at a lower price.

Quiz 3: Part B: Demand, Supply, and Market Equilibrium