Deck 3: Where Prices Come From: The Interaction of Demand and Supply

Question 1

Although it is a popular product, Apple makes little profit from each song downloaded through iTunes. Why does Apple charge only US$0.99 to download a song?

A) The low price makes it more likely that consumers will buy iPods, which are relatively expensive.
B) Apple cannot raise the price above US$0.99 per song because consumers can download songs at even lower prices from Apple's competitors.
C) Although Apple makes a small amount of profit per song, total profit is large because the quantity sold is large.
D) Apple plans to increase the price of downloading songs after it sells a large enough number of iPods.

Answer 1

The low price makes it more likely that consumers will buy iPods, which are relatively expensive.

Question 2

To compete with the iPod from Apple, Microsoft began marketing its own digital music player, called Zune. The textbook mentioned one strategy Microsoft could use to overcome the advantages Apple has from selling the most popular brand of music player. What was this strategy?

A) Microsoft could spend some of its large advertising budget to run television and magazine ads for Zune.
B) Microsoft is considering suing Apple for copyright infringement; Microsoft was the first company to develop the technology used to produce digital music players.
C) Microsoft could advertise Zune by sending emails to the many consumers who use the company's software.
D) Microsoft could try to sell Zune or downloaded songs at prices lower than those charged by Apple.

Answer 2

Microsoft could try to sell Zune or downloaded songs at prices lower than those charged by Apple.

Question 3

Supermarkets should not necessarily remove goods from their shelves even if they are not selling well. Which of the following explains this reasoning?

A) If a slow -selling product is a complement of another product, removing the slow -seller would reduce sales of both products.
B) Removing slow -selling products will force consumers to buy these products at other stores.
C) If a slow -selling product is a new product it may become a best -seller in the future.
D) A profit can be made from a slow -selling good if it sells at a high price.

Answer 3

If a slow -selling product is a complement of another product, removing the slow -seller would reduce sales of both products.

Question 4

Research suggests that supermarkets should consider which of the following when deciding whether to remove slow -selling goods from their shelves?

A) whether the goods removed are popular with affluent consumers
B) whether the goods removed have high profit margins
C) whether the goods removed are likely to be subject to shortages in the future
D) whether the goods removed are substitutes or complements with the remaining goods

Question 5

Google launched Ahlan Online

A) in response to the growing Arab world demand for internet navigation.
B) to meet the needs of the Arab culture.
C) to facilitate on -line shopping.
D) to attract more Arab youth to use Google.

Question 6

In 2002, Apple decided not to develop and sell a "tablet PC" N a laptop with a special screen that can convert handwriting into text. Which of the following is a reason why Apple chose not to develop a tablet PC?

A) Microsoft had a patent on the technology used to make tablet PCs and was not willing to sell the rights to this technology to Apple.
B) The price of the tablet PC would have been too high to sell many units.
C) Apple would not be able to produce enough tablet PC units to meet the demand for them.
D) The technology was considered too complex for the average computer user.

Question 7

In 2002, Apple decided not to develop and sell a "tablet PC" N a laptop with a special screen that can convert handwriting into text. According to one Apple executive, the tablet PC project was not consistent with Apple's theory for success. What is this theory?

A) Apple markets products that it can sell for high prices. The tablet PC would have sold for a low price.
B) Apple believes its success will come from selling many inexpensive items rather than relatively few expensive items.
C) Apple only sells items that it can build a successful advertising campaign around.
D) Apple markets only products that it has patented. This prevents other companies from competing with Apple.

Question 8

What is the difference between an "increase in supply" and an "increase in quantity supplied"?

A) An "increase in supply" means the supply curve has shifted to the right while an "increase in quantity supplied" means at any given price supply has increased.
B) There is no difference between the two terms; they both refer to a shift of the supply curve.
C) An "increase in supply" means the supply curve has shifted to the right while an "increase in quantity supplied" refers to a movement along a given supply curve in response to an increase in price.
D) There is no difference between the two terms; they both refer to a movement along a given supply curve.

Question 9

Mazin subscribes to a monthly pest control service for his home. Last week the owner of the service informed Mazin that he will have to raise his monthly service fee because of increases in the price of gasoline used by his workers on their service trips. How is the market for pest control services affected by this?

A) There is a decrease in the quantity supplied of pest control services.
B) There is a decrease in the supply of pest control services.
C) There is an increase in the supply of pest control services.
D) There is a decrease in the demand for pest control services.

Question 10

-Refer to Figure 3 -1. The figure above shows the supply and demand curves for two markets: the market for original Picasso paintings, and the market for designer jeans. Which graph most likely represents which market?

A) Graph B represents the market for original Picasso paintings and Graph A represents the market for designer jeans.
B) Graph B represents both the market for original Picasso paintings and designer jeans.
C) Graph A represents the market for original Picasso paintings and Graph B represents the market for designer jeans.
D) Graph A represents both the market for original Picasso paintings and designer jeans.

Question 11

Assume there is a shortage in the market for digital music players. Which of the following statements correctly describes this situation?

A) the shortage will cause an increase in the equilibrium price of digital music players.
B) The price of digital music players will rise in response to the shortage; as the price rises the quantity demanded will increase and the quantity supplied will decrease.
C) Some consumers will be unable to obtain digital music players at the market price and will have an incentive to offer to buy the product at a higher price.
D) The demand for digital music players is greater than the supply of digital music players.

Question 12

-Refer to Figure 3 -4. The figure above represents the market for canvas tote bags. Assume that the market price is US$35. Which of the following statement is true?

A) There is a surplus that will cause the price to decrease; quantity supplied will then increase and quantity demanded will decrease until the price equals US$25.
B) There is a surplus that will cause the price to decrease; quantity demanded will then increase and quantity supplied will decrease until the price equals US$25.
C) There is a surplus that will cause the price to increase; quantity demanded will then decrease and quantity supplied will increase until the price equals US$25.
D) There will be a surplus that will cause the price to decrease; demand will then increase and supply will decrease until the price equals US$25.

Question 13

-Refer to Figure 3 -4. The figure above represents the market for canvas bags. Assume that the price o bags is US$15. At this price

A) the quantity demanded exceeds the quantity supplied of bags by 75. The price will eventually rise to US$25 where quantity demanded will equal quantity supplied.
B) the demand exceeds the supply of bags by 55. Some consumers will have an incentive to offer to buy tote bags at a higher price.
C) there is a shortage, equal to 55 bags, that will be eliminated when the price rises to US$25.
D) there is a shortage, equal to 55 bags; the price of tote bags will rise until demand is equal to supply.

Question 14

Even when the demand for one good is high, the price of the good is also affected by supply. The textbook illustrates this by comparing the price of two items that are both used in the jewellery industry. Which of the following describes the prices of the two materials?

A) Platinum is sold for a higher price than diamonds.
B) Platinum is sold for a higher price than gold.
C) Gold is sold for a higher price than platinum.
D) Gold is sold for a higher price than diamonds.

Question 15

Consider the collectors' market for first editions of two popular children's books, Harry Potter and the Order of the Phoenix by J. K. Rowling and Ruby in the Smoke by Philip Pullman. Sales of the Harry Potter novel are much greater than sales of Ruby in the Smoke yet the price of the Harry Potter novel is much lower than the price of Pullman's novel.
a. On one large diagram, draw a demand and supply graph for first editions of Harry Potter and the Order of the Phoenix and another demand and supply graph for first editions of Ruby in the Smoke.
b. Show how it is possible for the price of the Harry Potter novel to be much lower than the price of Pullman's novel, even though the demand for the Harry Potter novel is much greater than the demand for Ruby in the Smoke.
c. Provide a written explanation to accompany your graphical illustration.

Question 16

Wheat is an important part of the Arab diet. Wheat farmers in Saudi Arabia industry have almost been put out of business by water shortages. How will this affect the equilibrium price and quantity of wheat?

Question 17

-Refer to Table 3 -2. The table contains information about the wheat market. Use the table to answer the following questions.
a. What are the equilibrium price and quantity of wheat?
b. Suppose the prevailing price is US$6 per bushel. Is there a shortage or a surplus in the market?
c. What is the quantity of the shortage or surplus?
d. How many bushels will be sold if the market price is US$6 per bushel?
e. If the market price is US$6 per bushel, what must happen to restore equilibrium in the market?
f. At what price will suppliers be able to sell 36,000 bushels of wheat?
g. Suppose the market price is US$14 per bushel. Is there a shortage or a surplus in the market?
h. What is the quantity of the shortage or surplus?
i. How many bushels will be sold if the market price is US$14 per bushel?
j. If the market price is US$14 per bushel, what must happen to restore equilibrium in the market?

Question 18

"The price of digital cameras fell because of improvements in production technology. As a result, the demand for non-digital cameras decreased. This caused the price of non-digital cameras to fall; as the price of non-digital cameras fell the demand for non-digital cameras decreased even further." Evaluate this statement.

A) The statement is false because the demand for non -digital cameras would increase as the price of digital cameras fell.
B) The statement is false. A decrease in the price of digital cameras would decrease the demand for non -digital cameras, but a decrease in the price of non -digital cameras would not cause the demand for non -digital cameras to decrease.
C) The statement is false because it confuses the law of demand with the law of supply.
D) The statement is false because digital camera producers would not reduce their prices as a result of improvements in technology; doing so would reduce their profits.

Question 19

-Refer to Figure 3-6. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D₁ and S₁ (point A). If there is a shortage of apples how will the equilibrium point change?

A) the equilibrium point will move from A to E
B) the equilibrium point will move from A to B
C) the equilibrium point will move from A to C
D) there will be no change in the equilibrium point

Question 20

-Refer to Figure 3-6. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D₁ and S₁ (point A). If there is an increase in the wages of apple workers and an increase in the price of oranges, a substitute for apples, the equilibrium could move to which point?

A) E
B) B
C) None of the points shown.
D) C

Question 21

Starting in the 1960s researchers predicted that flat -screen televisions produced with liquid display crystal displays (LCD would be sold to the public. But technical problems delayed the manufacture and sale of LCD televisions until the late 1990s. What was this technical problem?

A) Until the 1990s only very small screens could be economically produced. These screens were not popular with consumers. New technology resulted in larger screens.
B) There was no way to make very thin, clean television screens until 1999 when Corning, Inc. finally developed a process to do this.
C) It was not until the 1990s that satellite television signals enabled consumers to watch programming from many countries. This led to a large increase in demand and made the sale of LCD televisions profitable.
D) Until the 1990s relatively few channels were available for consumers to watch. After cable and satellite television became popular consumers were able to watch many more stations; this led to an increase in the demand for LCD televisions.

Question 22

New technology developed in 1999 resulted in a reduction in the cost of manufacturing flat -screen televisions that used liquid crystal displays (LCD). How did this change in technology affect the market for flat -screen televisions?

A) The new technology caused an increase in the supply of flat -screen televisions and a decrease in price of flat -screen televisions.
B) The new technology caused an increase in the quantity of flat -screen televisions supplied.
C) The new technology caused an increase in the supply of flat -screen televisions and an increase in price of flat -screen televisions.
D) The new technology caused an increase in the demand for flat -screen televisions.

Question 23

Arabian styles and designs are steadily influencing Western fashion and many famous designers are integrating Arabic styles into their wardrobes

A) because more westerners now find Arabic styles exotic and intriguing.
B) because the west is getting more conservative.
C) because of the high potential of the Muslim emerging global market.
D) because of its simple and less costly designs.

Question 24

In Saudi Arabia, the price of chicken is typically lower in the winter than in the summer. Which of the following explanations for this difference is given in the textbook?

A) People who usually eat chicken in other seasons substitute less expensive meat when they go on vacation; this drives down the demand for chicken.
B) The supply of lobster is greater in the winter than in the summer.
C) Import restrictions are eased in the winter; as more chickens are imported the price of chicken falls.
D) Hot, humid weather usually increases the demand for chicken.

Question 25

In Saudi Arabia, the demand for chicken is lower in the summer than in the winter. If the price of chicken is higher in summer than in winter then:

A) There are more substitutes for chicken in winter than there are in summer.
B) There is a shortage of chicken in spring and a surplus of chicken in summer.
C) Consumers' tastes for chicken are greater in summer than in winter.
D) The supply of chicken is greater in winter than in summer.

Question 26

Fluctuations in the prices of oil are the result of two important forces:

A) The supply of oil in non -OPEC producing countries and Asian demand
B) Demand by the U.S. and Europe
C) Demand by China and the West
D) Global demand and Oil -exporting countries's, especially OPEC, behaviour in production

Question 27

According to the Australian Wool Innovation, severe drought conditions in Australia contributed to the lowest level of wool production in 50 years. This record low production has driven up prices sharply in Australian wool markets. Meanwhile, the price of raw cotton increased significantly for the first time in many years.
a. Illustrate this observation with one demand and supply graph for the market for Australian wool and another demand and supply graph for raw cotton.
b. Make sure that your graphs clearly show (1) the initial equilibrium before the decrease in the supply of Australian wool and (2) the final equilibrium.
c. Use arrows to indicate any shifts in the demand and supply curves for each market.
d. Label your graphs fully and write an explanation of your work.