Question 1

Assume the supply function for good X can be written as
Qs = -100 + 27Px - 5Py - 1.8W
where Px = the price of X,
Py = the price of good Y, and
W = Wage index for workers in industry X.
This equation implies that X and Y are complements in production.

Accepted Answer

The supply function shows that the quantity supplied of good X depends negatively on the price of good Y (Py) and is not affected by the price of X (Px). This suggests that X and Y are substitutes in production, not complements.

Question 2

Assume the supply function for good X can be written as
Qs = -100 + 27Px - 5Py - 1.8W
where Px = the price of X,
Py = the price of good Y, and
W = Wage index for workers in industry X.
This equation implies that X and Y are substitutes in production.

Accepted Answer

The negative coefficient for Py suggests that as the price of Y increases, the supply of X will increase, indicating that X and Y are substitutes in production.

Question 3

A decrease in the incomes of people who buy canoes would cause the demand for canoes to decrease.

Accepted Answer

When people's incomes decrease, they have less money to spend on leisure activities such as canoeing, so the demand for canoes will decrease.

Question 4

The supply of a good is a function of price and the demand for the good.

Accepted Answer

The supply of a good is determined by factors such as production costs, technology, and availability of resources, and is not directly dependent on the demand for the good. However, the price of the good may affect the quantity supplied.

Question 5

All else constant, an increase in the incomes of consumers in the market for diamonds would cause the supply of diamonds to increase.

Accepted Answer

An increase in consumer incomes would result in an increase in the demand for diamonds, not the supply. The supply of diamonds is determined by factors such as mining production and availability, not consumer incomes.

Question 6

Assume that in an effort to help consumers, the government decides to reduce the amount of taxes it imposes on sellers of gasoline, that is, sellers are required to pay the government a smaller fee for each gallon of gas they sell.In the market for gas, this would have the effect of causing an increase in the supply of gas and a decrease in equilibrium price.

Accepted Answer

When the government reduces the amount of taxes imposed on sellers of gasoline, the cost of production for sellers decreases. Therefore, sellers can offer a larger quantity of gas for sale at the same price as before, or the same quantity of gas at a lower price than before. This would shift the supply curve to the right, causing an increase in supply and a decrease in equilibrium price.

Question 7

When the supply of a good increases, the quantity supplied at each price is increasing as well.

Accepted Answer

When the supply of a good increases, producers are willing and able to supply more of it at each price, leading to an increase in the quantity supplied.

Question 8

Prices of related goods are a determinant of demand but not supply.

Accepted Answer

Prices of related goods can affect both the demand and supply of a product. For demand, the prices of substitutes or complements can influence consumers' choices. For supply, the prices of related goods can affect producers' decisions on what to produce based on profitability.

Question 9

When price is greater than the market equilibrium price, a shortage is created.

Accepted Answer

When the price is greater than the market equilibrium price, a surplus is created because the quantity supplied exceeds the quantity demanded.

Question 10

Assume the demand function for good X can be written as
Qd = 80 - 3Px - 2Py + 10I
where Px = the price of X,
Py = the price of good Y, and
I = Consumer income.
This equation implies that X and Y are complements.

Accepted Answer

The answer of Assume the demand function for good X...

Question 11

An increase in the price of fuel and fertilizer used for corn would cause farmers to increase corn production in an effort to make up for lost profits.

Accepted Answer

If the price of fuel and fertilizer used for corn goes up, it would increase the cost of production for farmers, which would lead to a decrease in corn production and lower profits.

Question 12

Assume the market for used single-family homes is initially in equilibrium.All else constant, an increase in home foreclosures would cause equilibrium price and quantity to decrease.

Accepted Answer

An increase in home foreclosures increases the supply of homes on the market. While this would typically decrease the price (due to higher supply), the effect on quantity is ambiguous without knowing how demand reacts. If demand is elastic, quantity could actually increase as lower prices attract more buyers.

Question 13

Assume X is an inferior good.If the incomes of people who buy X increase, demand for X will increase as well, but by a smaller percentage than the increase in income.

Accepted Answer

If X is an inferior good, as income increases, people will switch to a superior good, resulting in a decrease in demand for X. Therefore, demand for X will not increase even if incomes increase.

Question 14

Consider the market for air travel.A simultaneous increase in the price of fuel and another terrorist attack on United States soil would cause the equilibrium quantity of air travel to go down, but have an uncertain effect on equilibrium price.

Accepted Answer

An increase in the price of fuel would increase the cost of air travel, causing the demand for air travel to decrease. A terrorist attack would also decrease the demand for air travel due to safety concerns. Both of these factors would shift the demand curve to the left, decreasing the equilibrium quantity of air travel. However, the effect on equilibrium price is uncertain because an increase in cost from higher fuel prices could lead to airlines raising prices to maintain profits, while a decrease in demand due to a terrorist attack could lead to airlines lowering prices to attract customers. Thus, the effect on equilibrium price is ambiguous.

Question 15

The market demand for a good is determined by horizontally summing the demand curves of individual consumers.

Accepted Answer

The market demand curve represents the total amount of a product that all consumers are willing and able to purchase at different prices. This is achieved by horizontally summing the individual demand curves of all consumers in the market.

Question 16

When market price is higher than the equilibrium price, a surplus is created.This will put downward pressure on price, causing quantity demanded to increase and quantity supplied to decrease until equilibrium is reestablished.

Accepted Answer

When the market price is above the equilibrium price, it means that the quantity supplied exceeds the quantity demanded, creating a surplus. This surplus puts downward pressure on the price, as sellers try to sell their excess inventory, leading to an increase in quantity demanded and a decrease in quantity supplied until the market reaches equilibrium again.

Question 17

Federal subsidies to farmers can have the effect of creating a surplus in the market for certain crops.

Accepted Answer

Federal subsidies provide financial assistance to farmers, which can result in increased production and a surplus in the market for certain crops.

Question 18

Rent controls have the effect of keeping prices under control and maintaining an adequate supply of affordable housing for lower income people.

Accepted Answer

Rent controls can actually lead to a decrease in the supply of housing, as landlords may not have an incentive to build or maintain their properties if they are unable to charge market rates. Additionally, rent controls can lead to shortages in available housing as existing tenants may be more likely to hoard their apartments, due to the lack of comparable alternatives available on the market. Finally, rent controls may only benefit certain tenants at the expense of others, as landlords may choose to discriminate against low income tenants and instead prefer those who are able to pay higher monthly rents.

Question 19

All else constant, an increase in the price of a good will cause the quantity supplied to increase.

Accepted Answer

This statement is false. According to the law of supply, all else constant, an increase in the price of a good will cause the quantity supplied to decrease, as producers will be willing to sell more of the good at the higher price.

Question 20

Assume the market for cell phone service is initially in equilibrium.An increase in supply would cause a surplus at the initial equilibrium price.The market adjustment would then involve a decrease in price which would in turn cause quantity demanded to increase and quantity supplied to decrease until equilibrium is reestablished.

Accepted Answer

An increase in supply would cause a surplus at the initial equilibrium price, which would lead to a decrease in price to reach a new equilibrium point where quantity supplied equals quantity demanded again.

Quiz 2: Demand, Supply, and Equilibrium Prices

Assume the supply function for good X can be written as Qs = -100 + 27Px - 5Py - 1.8W where Px = the price of X, Py = the price of good Y, and W = Wage index for workers in industry X. This equation implies that X and Y are complements in production.

Assume the supply function for good X can be written as Qs = -100 + 27Px - 5Py - 1.8W where Px = the price of X, Py = the price of good Y, and W = Wage index for workers in industry X. This equation implies that X and Y are substitutes in production.