Microeconomics Chapter 3

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What is a market?

an institution that brings together buyers and sellers.

Markets explained on the basis of supply and demand assume what?

assume many buyers and many sellers of a standardized product.

What does the law of demand state?

states that price and quantity demanded are inversely related.

Graphically, the market demand curve is:

the horizontal sum of individual demand curves.

The demand curve shows the relationship between what?

price and quantity demanded.

Economists use the term "demand" to refer to what?

a schedule of various combinations of market prices and amounts demanded.

The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____.

direct, inverse

When the price of a product increases, a consumer is able to buy less of it with a given money income. This describes:

the income effect.

A demand curve indicates what?

indicates the quantity demanded at each price in a series of prices.

In presenting the idea of a demand curve, economists presume that the most important variable in determining the quantity demanded is:

the price of the product itself.

Why will an increase in the price of a product will reduce the amount of it purchased?

consumers will substitute other products for the one whose price has risen.

What do the income and substitution effects account for?

the downward sloping demand curve.

What will not cause a shift in the demand curve?

Change in Price of the product itself

When the price of a product rises, consumers shift their purchases to other products whose prices are now relatively lower. This statement describes:

the substitution effect.

When the price of a product falls, the purchasing power of our money income rises and thus permits consumers to purchase more of the product. This statement describes:

the income effect.

When product prices change, consumers are inclined to purchase larger amounts of the now cheaper products and less of the now more expensive products. This describes:

the substitution effect.

The construction of demand and supply curves assumes that the primary variable influencing decisions to produce and purchase goods is:

price.

One reason that the quantity demanded of a good increases when its price falls is that the:

lower price increases the real incomes of buyers, enabling them to buy more.

When the price of Nike soccer balls fell, Ronaldo purchased more Nike soccer balls, and fewer Adidas soccer balls. Which of the following best explains Ronaldo's decision to buy more Nike soccer balls?

The substitution effect.

Steve went to his favorite hamburger restaurant with $3, expecting to buy a $2 hamburger and a $1 soda. When he arrived he discovered that hamburgers were on sale for $1, so Steve bought two hamburgers and a soda. Steve's response to the decrease in the price of hamburgers is best explained by:

the income effect.

In the past few years, the demand for donuts has greatly increased. This increase in demand might best be explained by:

a change in buyer tastes.

Which of the following will not cause the demand for product K to change?

A change in the price of K.

Which of the following would not shift the demand curve for beef?

a reduction in the price of cattle feed

An economist for a bicycle company predicts that, other things equal, a rise in consumer incomes will increase the demand for bicycles. This prediction is based on the assumption that:

bicycles are normal goods.

A rightward shift in the demand curve for product C might be caused by:

a decrease in the price of a product that is complementary to C.

If two goods are complements:

a decrease in the price of one will increase the demand for the other.

DVD players and DVDs are:

complementary goods.

If the demand curve for product B shifts to the right as the price of product A declines, then:

A and B are complementary goods.

If the price of product L increases, the demand curve for close-substitute product J will:

shift to the right

If the price of K declines, the demand curve for the complementary product J will:

shift to the right.

Which of the following is most likely to be an inferior good?
A. fur coats
B. ocean cruises
C. used clothing
D. steak

C. used clothing

Which of the following statements is correct?
A. An increase in the price of C will decrease the demand for complementary product D.
B. A decrease in income will decrease the demand for an inferior good.
C. An increase in income will reduce the demand for a normal good.
D. A decline in the price of X will increase the demand for substitute product Y.

A. An increase in the price of C will decrease the demand for complementary product D.

A shift to the right in the demand curve for product A can be most reasonably explained by saying that:

consumer preferences have changed in favor of A so that they now want to buy more at each possible price.

If L and M are complementary goods, an increase in the price of L will result in:

a decrease in the sales of M.

Which of the following will cause the demand curve for product A to shift to the left?

an increase in money income if A is an inferior good.

If X is a normal good, a rise in money income will shift the:

demand curve for X to the right.

If Z is an inferior good, an increase in money income will shift the:

demand curve for Z to the left.

An increase in consumer incomes will:

increase the demand for a normal good.

Tennis rackets and ballpoint pens are:

independent goods.

The demand for most products varies directly with changes in consumer incomes. Such products are known as:

normal goods.

Assume the demand curve for product X shifts to the right. This might be caused by:

a decline in income if X is an inferior good.

Digital cameras and memory cards are:

complementary goods.

A decrease in the price of digital cameras will:

shift the demand curve for memory cards to the right.

A normal good is one that:

the consumption of which varies directly with incomes.

If the demand for steak (a normal good) shifts to the left, the most likely reason is that:

consumer incomes have fallen.

If consumer incomes increase, the demand for product X:

may shift either to the left or right.

If products A and B are complements and the price of B decreases the:

demand for A will increase and the amount of B demanded will increase.

If products C and D are close substitutes, an increase in the price of C will:

shift the demand curve of D to the right.

In constructing a stable demand curve for product X:

the prices of other goods are assumed constant.

The demand curve for a product might shift as the result of a change in:
A. consumer tastes.
B. consumer incomes.
C. the prices of related goods.
D. all of these.

D. all of these.

An inferior good is:
A. one whose demand curve will shift rightward as incomes rise.
B. one whose price and quantity demanded vary directly.
C. one which has not been approved by the Federal Food and Drug Administration.
D. not accurately defined by any of the above statements.

D. not accurately defined by any of the above statements.

An increase in the price of product A will:

increase the demand for substitute product B.

Which of the following would mostly likely increase the demand for gasoline?
A. the expectation by consumers that gasoline prices will be higher in the future.
B. the expectation by consumers that gasoline prices will be lower in the future.
C. a widespread shift in car ownership from SUVs to hybrid sedans.
D. a decrease in the price of public transportation.

A. the expectation by consumers that gasoline prices will be higher in the future.

Suppose that tacos and pizza are substitutes, and that soda and pizza are complements. We would expect an increase in the price of pizza to:

reduce the demand for soda and increase the demand for tacos.

54. Refer to the above diagram. A decrease in demand is depicted by a:
A. move from point x to point y.
B. shift from D1 to D2.
C. shift from D2 to D1.
D. move from point y to point x.

C. shift from D2 to D1.

55. Refer to the above diagram. A decrease in quantity demanded is depicted by a:
A. move from point x to point y.
B. shift from D1 to D2.
C. shift from D2 to D1.
D. move from point y to point x.

D. move from point y to point x.

When an economist says that the demand for a product has increased, this means that:

consumers are now willing to purchase more of this product at each possible price.

By an increase in demand we mean that :

the quantity demanded at each price in a set of prices is greater.

The quantity demanded of a product increases as its price declines because the:

demand curve is downsloping.

An increase in demand means that:

the demand curve has shifted to the right.

Assume that the demand schedule for product C is downsloping. If the price of C falls from $2.00 to $1.75:

a larger quantity of C will be demanded.

An increase in the quantity demanded means that:

price has declined and consumers therefore want to purchase more of the product.

An increase in product price will cause:

quantity demanded to decrease.

In moving along a stable demand curve which of the following is not held constant?
A. the price of the product for which the demand curve is relevant.
B. price expectations.
C. consumer incomes.
D. the prices of complementary goods

A. the price of the product for which the demand curve is relevant.

In which of the following statements are the terms "demand" and "quantity demanded" used correctly?
A. When the price of ice cream rose, the demand for both ice cream and ice cream toppings fell.
B. When the price of ice cream rose, the quantity demanded of ice cream fell, and the demand for ice cream toppings fell.
C. When the price of ice cream rose, the demand for ice fell, and the quantity demanded of ice cream toppings fell.
D. None of these statements use the terms correctly.

B. When the price of ice cream rose, the quantity demanded of ice cream fell, and the demand for ice cream toppings fell.

65. Refer to the above diagram. A decrease in supply is depicted by a:
A. move from point x to point y.
B. shift from S1 to S2.
C. shift from S2 to S1.
D. move from point y to point x.

C. shift from S2 to S1.

66. Refer to the above diagram. An increase in quantity supplied is depicted by a:
A. move from point y to point x.
B. shift from S1 to S2.
C. shift from S2 to S1.
D. move from point x to point y.

A. move from point y to point x.

The law of supply indicates that:

producers will offer more of a product at high prices than they will at low prices.

The upward slope of the supply curve reflects the:

law of supply.

The supply curve shows the relationship between:

price and quantity supplied.

A firm's supply curve is upsloping because:
A. the expansion of production necessitates the use of qualitatively inferior inputs.
B. mass production economies are associated with larger levels of output.
C. consumers envision a positive relationship between price and quality.
D. beyond some point the production costs of additional units of output will rise.

D. beyond some point the production costs of additional units of output will rise.

Increasing marginal cost of production explains:
A. the law of demand.
B. the income effect.
C. why the supply curve is upsloping.
D. why the demand curve is downsloping.

C. why the supply curve is upsloping.

A leftward shift of a product supply curve might be caused by:
A. an improvement in the relevant technique of production.
B. a decline in the prices of needed inputs.
C. an increase in consumer incomes.
D. some firms leaving an industry.

D. some firms leaving an industry.

The location of the product supply curve depends on:

production technology.

An improvement in production technology will:
A. increase equilibrium price.
B. shift the supply curve to the left.
C. shift the supply curve to the right.
D. shift the demand curve to the left.

C. shift the supply curve to the right.

Because of unseasonably cold weather, the supply of oranges has substantially decreased. This statement indicates that:

the amount of oranges that will be available at various prices has declined.

If producers must obtain higher prices than previously to produce various levels of output, the following has occurred:

a decrease in supply.

In moving along a stable supply curve which of the following is not held constant?

the price of the product for which the supply curve is relevant

The location of the supply curve of a product depends on:
A. the technology used to produce it.
B. the prices of resources used in its production.
C. the number of sellers in the market.
D. all of these.

D. all of these.

Other things equal, if the price of a key resource used to produce product X falls, the:
A. product supply curve of X will shift to the right.
B. product demand curve of X will shift to the right.
C. product supply curve of X will shift to the left.
D. product demand curve of X will shift to the left.

A. product supply curve of X will shift to the right.

When the price of oil declines significantly, the price of gasoline also declines. The latter occurs because of a(n):

increase in the supply of gasoline.

An increase in the excise tax on cigarettes raises the price of cigarettes by shifting the:
A. demand curve for cigarettes rightward.
B. demand curve for cigarettes leftward.
C. supply curve for cigarettes rightward.
D. supply curve for cigarettes leftward.

D. supply curve for cigarettes leftward.

A government subsidy to the producers of a product:

increases product supply.

Suppose that corn prices rise significantly. If farmers expect the price of corn to continue rising relative to other crops, then we would expect:
A. the supply of ethanol, a corn-based product, to increase.
B. consumer demand for wheat to fall.
C. the supply to increase as farmers plant more corn.
D. the supply to fall as farmers plant more of other crops.

C. the supply to increase as farmers plant more corn.

84. Refer to the above data. Equilibrium price will be:
A. $4.
B. $3.
C. $2.
D. $1.

C. $2.

85. Refer to the above data. If the price in this market was $4:
A. the market would clear; quantity demanded would equal quantity supplied.
B. buyers would want to purchase more wheat than is currently being supplied.
C. farmers would not be able to sell all their wheat.
D. there would be a shortage of wheat.

C. farmers would not be able to sell all their wheat.

86. Refer to the above data. If price was initially $4 and free to fluctuate, we would expect:
A. quantity supplied to continue to exceed quantity demanded.
B. the quantity of wheat supplied to decline as a result of the subsequent price change.
C. the quantity of wheat demanded to fall as a result of the subsequent price change.
D. the price of wheat to rise.

B. the quantity of wheat supplied to decline as a result of the subsequent price change.

87. Refer to the above diagram. The equilibrium price and quantity in this market will be:
A. $1.00 and 200.
B. $1.60 and 130.
C. $.50 and 130.
D. $1.60 and 290.

A. $1.00 and 200.

88. Refer to the above diagram. A surplus of 160 units would be encountered if price was:
A. $1.10, that is, $1.60 minus $.50.
B. $1.60.
C. $1.00.
D. $.50.

B. $1.60.

89. Refer to the above diagram. A shortage of 160 units would be encountered if price was:
A. $1.10, that is, $1.60 minus $.50.
B. $1.60.
C. $1.00.
D. $.50.

D. $.50.

If a product is in surplus supply, its price:
A. is below the equilibrium level.
B. is above the equilibrium level.
C. will rise in the near future.
D. is in equilibrium.

B. is above the equilibrium level.

A market is in equilibrium if:

if the amount producers want to sell is equal to the amount consumers want to buy.

At the equilibrium price:
A. quantity supplied may exceed quantity demanded or vice versa.
B. there are no pressures on price to either rise or fall.
C. there are forces that cause price to rise.
D. there are forces that cause price to fall.

B. there are no pressures on price to either rise or fall.

93. Refer to the above diagram. A price of $60 in this market will result in:
A. equilibrium.
B. a shortage of 50 units.
C. a surplus of 50 units.
D. a surplus of 100 units.

D. a surplus of 100 units.

94. Refer to the above diagram. A price of $20 in this market will result in:
A. a shortage of 50 units.
B. a surplus of 50 units.
C. a surplus of 100 units.
D. a shortage of 100 units.

D. a shortage of 100 units.

95. Refer to the above diagram. The highest price that buyers will be willing and able to pay for 100 units of this product is:
A. $30.
B. $60.
C. $40.
D. $20.

B. $60.

96. Refer to the above diagram. If this is a competitive market, price and quantity will move toward:
A. $60 and 100 respectively.
B. $60 and 200 respectively.
C. $40 and 150 respectively.
D. $20 and 150 respectively.

C. $40 and 150 respectively.

At the point where the demand and supply curves for a product intersect:

the quantity that consumers want to purchase and the amount producers choose to sell are the same.

The rationing function of prices refers to the:

capacity of a competitive market to equate the quantity demanded and the quantity supplied.

If there is a shortage of product X:
A. fewer resources will be allocated to the production of this good.
B. the price of the product will rise.
C. the price of the product will decline.
D. the supply curve will shift to the left and the demand curve to the right, eliminating the shortage.

B. the price of the product will rise.

At the point where the demand and supply curves intersect:
A. the buying and selling decisions of consumers and producers are inconsistent with one another.
B. the market is in disequilibrium.
C. there is neither a surplus nor a shortage of the product.
D. quantity demanded exceeds quantity supplied.

C. there is neither a surplus nor a shortage of the product.

At the current price there is a shortage of a product. We would expect price to:
A. increase, quantity demanded to increase, and quantity supplied to decrease.
B. increase, quantity demanded to decrease, and quantity supplied to increase.
C. increase, quantity demanded to increase, and quantity supplied to increase.
D. decrease, quantity demanded to increase, and quantity supplied to decrease.

B. increase, quantity demanded to decrease, and quantity supplied to increase.

A surplus of a product will arise when price is:

above equilibrium with the result that quantity supplied exceeds quantity demanded.

If price is above the equilibrium level, competition among sellers to reduce the resulting:

surplus will increase quantity demanded and decrease quantity supplied.

If we say that a price is too high to clear the market, we mean that:

quantity supplied exceeds quantity demanded.

Assume in a competitive market that price is initially above the equilibrium level. We can predict that price will:

decrease, quantity demanded will increase, and quantity supplied will decrease.

Assume in a competitive market that price is initially below the equilibrium level. We can predict that price will:

increase, quantity demanded will decrease, and quantity supplied will increase.

There will be a surplus of a product when:

consumers want to buy less than producers offer for sale.

Camille's Creations and Julia's Jewels both sell beads in a competitive market. If at the market price of $5, both are running out of beads to sell (they can't keep up with the quantity demanded at that price), then we would expect both Camille's and Julia's to:

raise their price and increase their quantity supplied.

Productive efficiency refers to:

the use of the least-cost method of production.

If an economy produces its most wanted goods but uses outdated production methods, it is:

not achieving productive efficiency.

Allocative efficiency is concerned with:

producing the combination of goods most desired by society.

Allocative efficiency involves determining:

the mix of output that will maximize society's satisfaction.

The equilibrium price and quantity in a market usually produces allocative efficiency because:

marginal benefit and marginal cost are equal at that point.

Allocative efficiency refers to:

the production of the product-mix most wanted by society.

Other things equal, an excise tax on a product will:

increase its price.

Assuming conventional supply and demand curves, changes in the determinants of supply and demand will:

in all likelihood alter both equilibrium price and quantity.

Which of the following will cause a decrease in market equilibrium price and an increase in equilibrium quantity?
A. an increase in supply.
B. an increase in demand.
C. a decrease in supply.
D. a decrease in demand.

A. an increase in supply.

Other things equal, the provision of a per unit subsidy for a product will:

increase its supply.

Which of the following statements is correct?
A. If demand increases and supply decreases, equilibrium price will fall.
B. If supply increases and demand decreases, equilibrium price will fall.
C. If demand decreases and supply increases, equilibrium price will rise.
D. If supply declines and demand remains constant, equilibrium price will fall.

B. If supply increases and demand decreases, equilibrium price will fall.

In which of the following instances will the effect on equilibrium price be dependent on the magnitude of the shifts in supply and demand?
A. demand rises and supply rises.
B. supply falls and demand remains constant.
C. demand rises and supply falls.
D. supply rises and demand falls.

A. demand rises and supply rises.

121. Refer to the above diagram, which shows demand and supply conditions in the competitive market for product X. If the initial demand and supply curves are D0 and S0, equilibrium price and quantity will be:
A. 0F and 0C respectively.
B. 0G and 0B respectively.
C. 0F and 0A respectively.
D. 0E and 0B respectively.

A. 0F and 0C respectively.

122. Refer to the above diagram, which shows demand and supply conditions in the competitive market for product X. Given D0, if the supply curve moved from S0 to S1, then:
A. supply has increased and equilibrium quantity has decreased.
B. supply has decreased and equilibrium quantity has decreased.
C. there has been an increase in the quantity supplied.
D. supply has increased and price has risen to 0G.

B. supply has decreased and equilibrium quantity has decreased.

123. Refer to the above diagram, which shows demand and supply conditions in the competitive market for product X. If supply is S1 and demand D0, then
A. at any price above 0G a shortage would occur.
B. 0F represents a price that would result in a surplus of AC.
C. a surplus of GH would occur.
D. 0F represents a price that would result in a shortage of AC.

D. 0F represents a price that would result in a shortage of AC.

124. Refer to the above diagram, which shows demand and supply conditions in the competitive market for product X. A shift in the demand curve from D0 to D1 might be caused by a(n):
A. decrease in income if X is an inferior good.
B. increase in the price of complementary good Y.
C. increase in money incomes if X is a normal good.
D. increase in the price of substitute product Y.

B. increase in the price of complementary good Y.

125. Refer to the above diagram, which shows demand and supply conditions in the competitive market for product X. Other things equal, a shift of the supply curve from S0 to S1 might be caused by a(n):
A. increase in the wage rates paid to laborers employed in the production of X.
B. government subsidy per unit of output paid to firms producing X.
C. decline in the price of the basic raw material used in producing X.
D. increase in the number of firms producing X.

A. increase in the wage rates paid to laborers employed in the production of X.

If the supply and demand curves for a product both decrease, then equilibrium:

quantity must decline, but equilibrium price may rise, fall, or remain unchanged.

If the supply of a product decreases and the demand for that product simultaneously increases, then equilibrium:

price must rise, but equilibrium price may rise, fall, or remain unchanged.

An unusually large crop of coffee beans might:
A. increase the supply of coffee.
B. increase the price of coffee.
C. decrease the quantity of coffee consumed.
D. increase the price of tea.

A. increase the supply of coffee.

One can say with certainty that equilibrium price will decline when supply:
A. and demand both decrease.
B. increases and demand decreases.
C. decreases and demand increases.
D. and demand both increase.

B. increases and demand decreases.

Suppose that in 2007 Ford sold 500,000 Mustangs at an average price of $18,800 per car; in 2008, 600,000 Mustangs were sold at an average price of $19,500 per car. These statements:
A. suggest that the demand for Mustangs decreased between 2007 and 2008.
B. suggest that the supply of Mustangs must have increased between 2007 and 2008.
C. suggest that the demand for Mustangs increased between 2007 and 2008.
D. constitute an exception to the law of demand in that they suggest an upsloping demand curve.

C. suggest that the demand for Mustangs increased between 2007 and 2008.

Since their introduction, prices of DVD players have fallen and the quantity purchased has increased. This statement:
A. suggests that the supply of DVD players has increased.
B. suggests that the demand for DVD players has increased.
C. constitutes an exception to the law of demand in that they suggest an upward sloping demand curve.
D. constitutes an exception to the law of supply in that they suggest a downward sloping supply curve.

A. suggests that the supply of DVD players has increased.

One can say with certainty that equilibrium quantity will increase when supply:
A. and demand both decrease.
B. increases and demand decreases.
C. decreases and demand increases.
D. and demand both increase.

D. and demand both increase.

With a downsloping demand curve and an upsloping supply curve for a product, an increase in consumer income will:
A. increase equilibrium price and quantity if the product is a normal good.
B. decrease equilibrium price and quantity if the product is a normal good.
C. have no effect on equilibrium price and quantity.
D. reduce the quantity demanded, but not shift the demand curve.

A. increase equilibrium price and quantity if the product is a normal good.

With a downsloping demand curve and an upsloping supply curve for a product, a decrease in resource prices will:
A. increase equilibrium price and quantity.
B. decrease equilibrium price and quantity.
C. decrease equilibrium price and increase equilibrium quantity.
D. increase equilibrium price and decrease equilibrium quantity.

C. decrease equilibrium price and increase equilibrium quantity.

Given a downsloping demand curve and an upsloping supply curve for a product, an increase in the price of a substitute good will:
A. increase equilibrium price and quantity.
B. decrease equilibrium price and quantity.
C. increase equilibrium price and decrease equilibrium quantity.
D. decrease equilibrium price and increase equilibrium quantity.

A. increase equilibrium price and quantity.

Over time, the equilibrium price of a gigabyte of computer memory has fallen while the equilibrium quantity purchased has increased. Based on this we can conclude that:
A. Decreases in the demand for computer memory have exceeded increases in supply.
B. Decreases in the supply of computer memory have exceeded increases in demand.
C. Increases in the demand for computer memory have exceeded increases in supply.
D. Increases in the supply of computer memory have exceeded increases in demand.

D. Increases in the supply of computer memory have exceeded increases in demand.

Suppose that in the clothing market, production costs have fallen, but the equilibrium price and quantity purchased have both increased. Based on this information we can conclude that:
A. The supply of clothing has grown faster than the demand for clothing.
B. Demand for clothing has grown faster than the supply of clothing.
C. The supply of and demand for clothing have grown by the same proportion.
D. There is no way to determine what has happened to supply and demand with this information.

B. Demand for clothing has grown faster than the supply of clothing.

138. In the above market, economists would call a government-set minimum price of $50 a:
A. price ceiling.
B. price floor.
C. equilibrium price.
D. fair price.

B. price floor.

139. In the above market, economists would call a government-set maximum price of $40 a:
A. price ceiling.
B. price floor.
C. equilibrium price.
D. fair price.

A. price ceiling.

140. If government set a minimum price of $50 in the above market, a:
A. shortage of 21 units would occur.
B. shortage of 125 units would occur.
C. surplus of 21 units would occur.
D. surplus of 125 units would occur.

C. surplus of 21 units would occur.

141. If government set a maximum price of $45 in the above market:
A. a shortage of 21 units would arise.
B. a surplus of 21 units would arise.
C. a surplus of 40 units would arise.
D. it would create neither a shortage nor a surplus.

D. it would create neither a shortage nor a surplus.

142. Refer to the above diagram. A government-set price floor is best illustrated by:
A. price A.
B. quantity E.
C. price C.
D. price B.

C. price C.

143. Refer to the above diagram. A government-set price ceiling is best illustrated by:
A. price A.
B. quantity E.
C. price C.
D. price B.

A. price A.

144. Refer to the above diagram. Rent controls are best illustrated by:
A. price A.
B. quantity E.
C. price C.
D. price B.

A. price A.

145. Refer to the above diagram. A government price support program to aid farmers is best illustrated by:
A. quantity E.
B. price C.
C. price A.
D. price B.

B. price C.

146. Refer to the above diagram. A government-set maximum permissible interest rate is best illustrated by:
A. price B.
B. quantity E.
C. price C.
D. price A.

D. price A.

Price floors and ceiling prices:

interfere with the rationing function of prices.

A price floor means that:

government is imposing a minimum legal price that is typically above the equilibrium price.

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