Question 1

In a perfectly competitive market no individual producer or consumer can change the market price.

Accepted Answer

In a perfectly competitive market, there are many buyers and sellers, and no single buyer or seller can influence the market price because the market determines the price based on overall supply and demand. Each participant is a "price taker."

Question 2

Assume that consumers who shop for single-family homes do not consider condos. Also assume that consumers who wish to purchase condos do not look at single-family homes. Based on these assumptions we can argue that these are two different markets.

Accepted Answer

Given the distinct preferences and non-overlapping consumer bases, single-family homes and condos cater to different segments, thus constituting separate markets.

Question 3

Consumer financing has become a common factor in the retail auto market; thus, any increases in the interest rate on car loans would cause the demand for cars to decline.

Accepted Answer

Higher interest rates on car loans increase the cost of financing for consumers, making car purchases more expensive and likely reducing demand.

Question 4

A downward-sloped demand curve is consistent with the law of demand.

Accepted Answer

The law of demand states that, ceteris paribus, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa. This relationship is graphically represented by a downward-sloping demand curve.

Question 5

Commodities play an integral role in many production processes. If the global economy experiences a rapid expansion, then, all else held constant, commodity prices should be expected to increase.

Accepted Answer

When the global economy expands rapidly, demand for commodities typically increases, leading to higher prices, assuming supply remains constant.

Question 6

When the supply curve shifts up (supply declines), the equilibrium quantity falls, which means the demand declines.

Accepted Answer

The equilibrium quantity falls due to a decrease in supply, not because of a decline in demand. Demand remains unchanged; it's the supply shift that causes the change in equilibrium.

Question 7

If consumers in country A purchase many imported-from-country-B goods, and these imported goods are perceived by country A consumers as normal goods, then a recession accompanied by a decline in consumer incomes in country A can spread into country B.

Accepted Answer

A recession in country A can lead to decreased demand for normal goods, including imports from country B, potentially impacting country B's economy.

Question 8

If consumers in country A purchase many imported-from-country-B goods, and these imported goods are perceived by country A consumers as inferior goods, then a recession (which in this case is defined as a decline in consumer incomes) in country A can spread into country B.

Accepted Answer

Inferior goods see an increase in demand when consumer incomes decline, so a recession in country A could actually increase demand for country B's goods, not spread the recession.

Question 9

If public transportation is a substitute to driving and downtown parking is a complementary service to driving, then a rise in the price of downtown parking will cause the supply of public transportation to increase.

Accepted Answer

A rise in the price of downtown parking would likely increase the demand for public transportation, not the supply. Supply is determined by factors like production costs and technology, not by changes in the price of complementary goods.

Question 10

International trade in the absence of restrictions and transportation costs leads to price equalization for internationally traded goods, meaning that the domestic price equalizes with the price abroad.

Accepted Answer

This is based on the theory of purchasing power parity (PPP) and the law of one price, which suggest that in the absence of transportation costs and barriers to trade (like tariffs and quotas), competitive markets will equalize the prices of identical goods and services in different countries when prices are expressed in a common currency.

Question 11

When costs of production of a product increase, the equilibrium level of output of that product decreases, assuming that the demand is consistent with the law of demand.

Accepted Answer

When production costs increase, the supply curve shifts leftward, leading to a higher equilibrium price and a lower equilibrium quantity if demand remains unchanged, consistent with the law of demand.

Question 12

Recently eBay started to introduce controls in some of its categories on what the sellers can charge in terms of shipping. This policy might be necessary to protect the buyers because the economic incidence of shipping charges is entirely on the buyer.

Accepted Answer

The economic incidence of shipping charges can be shared between buyers and sellers, depending on the price elasticity of demand and supply.

Question 13

If we assume that the demand for oil in oil importing countries is nearly vertical, then the economic incidence of oil export tariffs imposed by oil exporting countries mainly falls onto oil consumers in oil importing countries.

Accepted Answer

When the demand for oil in importing countries is inelastic (nearly vertical), consumers are relatively unresponsive to price changes. Therefore, if oil exporting countries impose export tariffs, it will primarily raise the price of oil for consumers in importing countries, as they will absorb most of the cost increase.

Question 14

A minimum wage set below the market equilibrium wage will result in higher unemployment.

Accepted Answer

A minimum wage set below the market equilibrium wage would not result in higher unemployment because it does not interfere with the wage that the market naturally sets for labor; employers would continue to pay at least the market rate.

Question 15

An excess supply occurs at prices below the equilibrium price.

Accepted Answer

An excess supply occurs at prices above the equilibrium price, as suppliers are willing to sell more than consumers are willing to buy.

Question 16

If we define unemployment as a surplus of labor, then a minimum wage set above the market-clearing wage will increase the level of unemployment.

Accepted Answer

Setting a minimum wage above the market-clearing wage creates a situation where the quantity of labor supplied by workers exceeds the quantity of labor demanded by employers, leading to unemployment.

Question 17

A positive excess demand can only be observed at prices above the market equilibrium price.

Accepted Answer

A positive excess demand occurs when the quantity demanded exceeds the quantity supplied, which typically happens at prices below the market equilibrium price, not above it.

Question 18

The cost of protection of domestic jobs from foreign competition is usually paid by domestic consumers in the form of higher prices on imported goods.

Accepted Answer

When tariffs or other trade barriers are used to protect domestic jobs from foreign competition, the cost of imported goods typically increases. Domestic consumers bear this cost through higher prices, as importers pass on the added expenses of tariffs to consumers.

Question 19

Non-clearing markets often have spillover effects into related markets. For example, when a concert promoter deliberately sets the ticket price below the market equilibrium price, this may result in greater sales of the performer's recordings.

Accepted Answer

By setting ticket prices below market equilibrium, demand exceeds supply, leading to excess demand or a shortage of tickets. This can increase the performer's popularity and visibility, potentially boosting sales of their recordings as fans seek other ways to connect with the artist.

Question 20

Selling a product below its equilibrium price may be a profit maximizing strategy for a firm if it leads to a desired spillover effect in another market where the firm operates.

Accepted Answer

Selling a product below its equilibrium price can attract more customers or increase market share in a related market, leading to higher overall profits through spillover effects, such as increased sales of complementary goods or services.

Quiz 2: Demand, Supply, and Equilibrium Analysis