Question 1

Which of the following statements is correct?

Accepted Answer

If price is above equilibrium, it means there is a surplus of the good. In order to eliminate the surplus, suppliers will lower their prices to encourage more sales and consumers will increase their purchases. As a result, the quantity supplied will decrease and the quantity demanded will increase until the price settles back at equilibrium.

Question 2

Assume declining profits in the market for Internet service force several firms in the area to drop out of the market.Which of the following best describes the effect of the reduction in the number of service providers and the subsequent adjustment of the market to the new equilibrium price and quantity?

Accepted Answer

The reduction in the number of service providers will decrease the supply of Internet service in the market. This will create excess demand at the initial equilibrium price. As there are fewer service providers, the remaining firms will have some market power, which they will use to increase the price. The higher price will cause quantity demanded to decrease and quantity supplied to increase until a new equilibrium is reached. Therefore, the new equilibrium price will be higher, and the new equilibrium quantity will be lower.

Question 3

Assume the income of consumers of good X (a normal good)increases.What occurs at the initial equilibrium price for X that signals market participants that the equilibrium price must change?

Accepted Answer

An increase in income of consumers of good X will lead to an increase in demand for the product, shifting the demand curve to the right. This creates a shortage at the initial equilibrium price, as the increased demand cannot be met by the previous quantity supplied. Market participants will observe this shortage, and adjust the price upwards to reach a new equilibrium where quantity supplied equals the new higher quantity demanded.

Question 4

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.According to this equation:

Accepted Answer

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

Question 5

Assume declining profits in the market for Internet service force several firms in the area to drop out of the market.All else constant, this would cause the:

Accepted Answer

When firms drop out of the market, the supply of Internet service decreases, causing a leftward shift of the supply curve. This results in a higher equilibrium price and a lower equilibrium quantity. Therefore, the correct answer is C.

Question 6

Referring to the previous question, all else constant, a 5 unit increase in the wage index would cause:

Accepted Answer

The answer of Referring to the previous question, all else...

Question 7

As the price of milk increases, what happens at the original equilibrium in the market for cereal that signals market participants that the original equilibrium must change? (Milk and cereal are complements.)

Accepted Answer

When the price of milk increases, demand for its complement, cereal, decreases because consumers are less likely to buy milk, thereby reducing their consumption of cereal as well. This decrease in demand for cereal, at the original equilibrium price, creates a surplus as the quantity supplied exceeds the quantity demanded.

Question 8

All else constant, an increase in the number of buyers in the market for cell phone service would cause:

Accepted Answer

An increase in the number of buyers in the market for cell phone service will cause an increase in demand for cell phone service. This increased demand, with all else constant, will lead to an increase in both equilibrium price and quantity.

Question 9

Assume the auto market is initially in equilibrium with imports from Japan taking up a significant share of the market.Now assume a quota on imports of Japanese cars is established.What will occur at the initial equilibrium price to signal market participants regarding the change that has taken place?

Accepted Answer

When a quota on imports of Japanese cars is established, the supply of Japanese cars is restricted. This leads to a decrease in supply, which will cause a shortage of Japanese cars in the market at the initial equilibrium price. Therefore, choice D is the correct answer.

Question 10

Which of the following would cause a change in supply, as opposed to a change in quantity supplied, in the market for used homes?

Accepted Answer

A decrease in the price of rental housing would cause landlords to decrease their supply of rental housing and instead sell their properties as used homes, thus decreasing the supply of used homes in the market. The other options listed would only cause a change in quantity supplied (movement along the supply curve) rather than a shift in the supply curve.

Question 11

All else constant, a large decrease in the number of people who want to own sport utility vehicles (SUVs)because of their poor fuel efficiency could be expected to cause:

Accepted Answer

A large decrease in the demand for SUVs, which are known for poor fuel efficiency, would likely lead to a decrease in gasoline consumption. This reduced demand for gasoline could lead to a decrease in its equilibrium price, as less gasoline would be needed to meet the diminished demand.

Question 12

Assume wages paid by a firm to its workers decrease.What will be the reaction of consumers as the market moves to its new equilibrium?

Accepted Answer

The answer of Assume wages paid by a firm to...

Question 13

Referring to the previous question, which of the following best describes the adjustment to the new market equilibrium?

Accepted Answer

When demand increases, it leads to a higher price because consumers are willing to pay more. This higher price incentivizes producers to increase the quantity supplied to the market, moving towards a new equilibrium with both higher price and quantity.

Question 14

As the price of milk increases, what would reasonably be expected to happen to the equilibrium price and equilibrium quantity of cereal? (Milk and cereal are complements.)

Accepted Answer

When the price of milk increases, demand for its complement, cereal, would decrease because they are often consumed together. This decrease in demand for cereal would lead to a lower equilibrium price and quantity for cereal.

Question 15

Assume there is an improvement in the technology used to produce Blu-ray disc players.What could be expected to happen to the equilibrium price and quantity in the market for Blu-ray disc players?

Accepted Answer

An improvement in technology would lead to a decrease in the cost of production for Blu-ray disc players. This would shift the supply curve to the right, leading to a decrease in equilibrium price and an increase in equilibrium quantity. Therefore, choice C is the correct answer.

Question 16

Referring to the previous question, what will happen to the equilibrium price and quantity of cars?

Accepted Answer

The decrease in imports will lead to a shortage of cars in the domestic market, which, according to the law of supply and demand, will result in an increase in equilibrium price and a decrease in equilibrium quantity.

Question 17

Assume an auto firm's factories are capable of producing both large and small cars and are operating at full capacity.Assume the price of large cars increases due to a shift in consumers' preferences toward large cars and away from smaller cars.What would reasonably be expected to happen to the equilibrium price and quantity of the firm's small cars?

Accepted Answer

Given the firm's factories are at full capacity and there's a shift in consumer preference towards large cars, the firm would likely allocate more resources to produce more large cars, reducing the production of small cars. This decrease in supply of small cars, with demand shifting away from them, would lead to both a decrease in equilibrium price and quantity.

Question 18

Assume that in the market for plasma TVs there is an increase in supply.The result will be:

Accepted Answer

An increase in supply would shift the supply curve to the right, causing a decrease in equilibrium price and an increase in equilibrium quantity.

Question 19

In the market for a normal good, what is the ultimate market reaction of suppliers to an increase in the incomes of consumers?

Accepted Answer

An increase in the income of consumers leads to an increase in the demand for normal goods, resulting in a rightward shift of the demand curve. As the demand increases, the equilibrium price and quantity both rise, leading to an increase in the quantity supplied along the existing supply curve. Therefore, suppliers respond to the increase in consumer income by increasing the quantity supplied.

Question 20

Assume the Congress approves increased drilling for oil in the U.S.to address the current energy shortage.People who are in favor of this policy argue that, ceteris paribus, this would cause:

Accepted Answer

Increased drilling for oil would lead to a higher supply of oil in the market. According to the law of supply and demand, an increase in supply, with demand remaining constant (ceteris paribus), would lead to a decrease in the equilibrium price and an increase in the equilibrium quantity of oil.

Quiz 2: Demand, Supply, and Equilibrium Prices