Question 1

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 2

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 may initially keep prices under control, but in the long run, they can have negative effects on the housing market, including reduced supply of rental properties and deterioration of existing units. This can lead to a lack of affordable housing options for lower income people.

Question 3

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

Accepted Answer

The market demand curve is determined by horizontally adding up individual demand curves at each price point.

Question 4

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 5

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 6

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

Accepted Answer

If people's incomes decrease, they would have less disposable income to spend on recreational activities such as canoeing. As a result, they would be less likely to buy canoes, leading to a decrease in demand.

Question 7

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

Accepted Answer

According to the law of supply, if the price of a good increases, producers are willing to supply more of it to the market, hence the quantity supplied increases.

Question 8

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 increases, it would make the cost of production for corn higher. This would in turn reduce profits for farmers, and they would be less likely to increase corn production. They may even reduce production or switch to a different crop that may be more profitable.

Question 9

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 negative coefficient of Py (-2) in the demand function indicates that as the price of good Y increases, the quantity demanded of good X decreases, suggesting that X and Y are complements.

Question 10

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, it means that there is more of the good available to sell. This typically results in a shift of the supply curve to the right, indicating that at any given price level, sellers are willing and able to supply a greater quantity of the good. Therefore, the quantity supplied at each price level will increase.

Question 11

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 the Py variable indicates that as the price of Y increases, the supply of good X will increase, suggesting that they are substitutes in production.

Question 12

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

This statement accurately describes the process of market adjustment when there is an increase in supply in a cell phone service market. As there is now an excess of supply, suppliers may lower their prices to increase demand while consumers may also reduce their consumption leading to a decrease in quantity supplied and an increase in quantity demanded until a new equilibrium is reached.

Question 13

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

This equation implies that X and Y are substitutes in production, as the supply of X decreases with an increase in Py. Complements in production would mean that the supply of X increases with an increase in Py.

Question 14

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

Accepted Answer

When the government provides subsidies to farmers, it can encourage overproduction of certain crops, which leads to a surplus in the market. This surplus can drive down prices and hurt farmers who were not able to sell their crops at a profitable price.

Question 15

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 16

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, its demand will decrease as income increases. Therefore, the statement is false as demand for X will not increase but decrease as income increases.

Question 17

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 the incomes of consumers in the market for diamonds would generally cause an increase in demand for diamonds as consumers would have more disposable income to spend on luxury goods like diamonds. This would not necessarily lead to an increase in supply of diamonds, as the supply of diamonds is determined by factors such as mining output and the availability of diamond reserves. If the supply of diamonds did not increase in response to higher demand, then the result would likely be an increase in diamond prices rather than an increase in the quantity of diamonds supplied.

Question 18

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 19

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 20

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 taxes on sellers of gasoline, it lowers the cost for them to produce and sell gasoline. This causes an increase in supply because sellers are now willing and able to supply more at any given price. As a result, the equilibrium price will decrease as the market adjusts to the new supply-demand balance.

Quiz 2: Demand, supply, and Equilibrium Prices