Mr. Beck
|
SUNY College at Oneonta
|
Review Questions for Chapter 4 & Beginning
of Chapter 22-Solutions
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1. An improvement in the
technology of producing gasoline results in an increase in supply. The
entire supply curve shifts to the right. More gasoline can be supplied
profitably at the same price of gasoline.
The shift in supply results in choice c,
equilibrium
price would decrease, but equilibrium quantity would increase.
The equilibrium point
changes from E to N as illustrated below:
Return to Question
1
2. Glass and automobiles
are complementary goods. If there are fewer automobiles produced, there
will be less demand for glass. This decrease in demand is shown by a shift
in the entire demand curve for glass to the left. The leftward shift indicates
that some factor other than an increase in the price of glass has decreased
the demand for glass.
Note that there is no shift in the supply curve
for glass because the costs of producing glass have not changed and glass
manufacturers would be willing to supply the same amount of glass at existing
prices. The correct choice is a, only
the demand curve for glass shifts to the left.
The equilibrium point changes from E to N as illustrated
below:
Return to Question
2
3. The availability of
increased content exclusively for broadband internet consumers will increase
demand and shift the entire demand curve for all internet service providers
to the right.
The number 1 rating for Time Warner Cable will cause
an increase in demand for Time Warner's broadband service. This additional
demand for Time Warner Cable will shift its entire demand curve further
to the right, reinforcing the shift caused by the availability of increased
content for broadband users..
An increase in demand has the result that the
equilibrium price and quantity of Time Warner broadband cable service would
both increase. The correct choice is a.
The equilibrium point
changes from E to N as illustrated below:
Return to Question
3
4. A decrease in the costs
of producing Apple Macintosh computers will cause an increase in
supply. Apple is able profitably to supply more Macintoshes at the same
price. The entire supply curve will shift down and to the right. This would
result in a decrease in price and an increase in quantity.
The university requirement is a non-price factor
which will decrease the demand for Apple Macintosh computers. Potential
students will be less likely to purchase Macintoshes and the entire demand
curve will shift to the left. This decrease in demand would result in a
decrease in both price and quantity.
Combining the 2 effects results in a reinforcing
decrease in price but the effect on quantity is indeterminate The first
event would cause quantity to increase and the second event would cause
quantity to decrease. No information is provided on which event has a stronger
effect. Thus, equilibrium quantity may increase, decrease, or remain constant.
The correct answer is choice d,
the equilibrium price will decrease, but the
effect on quantity is indeterminate.
The equilibrium point changes from E to N as illustrated
below:
Return to Question
4
5. A decrease in both equilibrium
price and quantity would be caused by a decrease in demand. The correct
answer is c,
the
entire demand curve has shifted to the left.
The equilibrium point
changes from E to N as illustrated below:
Return to Question
5
6. An improvement in the
technology of producing good X results in an increase in supply. The entire
supply curve shifts to the right. More of good X can be supplied profitably
at the same price of good X. This increase in supply would result in a
decrease in price and an increase in quantity.
An increase in income would cause an increase in
demand. The entire demand curve will shift up and to the right. This would
result in an increase in both price and quantity.
Combining the 2 effects results in a reinforcing
increase in quantity, but the effect on price is indeterminate The first
event would cause price to decrease and the second event would cause price
to increase. No information is provided on which event has a stronger effect.
Thus, equilibrium price may increase, decrease, or remain constant.
The correct answer is choice d,
the equilibrium quantity will increase, but
the effect on price is indeterminate.
The equilibrium point changes from E to N as illustrated
below:
Return to Question
6
7. Consumers will buy more
video tapes because technology has decreased the price of VCRs. Video tapes
and VCRs are complementary goods. People will demand more video tapes because
more VCRs are being sold. The entire demand curve
for video tapes will shift up and to the right,
choice b. This is illustrated by an
increase in demand as show below.
Note that there is no shift in the supply curve
for video tapes because the costs of producing tapes have not changed and
tape
manufacturers would only be willing to supply the same amount of tapes
at existing prices. The equilibrium point changes from E to N:
Return to Question
7
8. A shift in the entire
demand curve to the right represents an increase in demand. An increase
in demand refers to a situation in which consumers would demand more units
of U.S. produced automobiles at the same price of automobiles; that is,
a change in some factor other than price makes consumers demand a greater
quantity of U.S. produced autos.
Choices a and b both represent an increase in supply
which would shift the entire supply curve to the right.
Choice c would represent a decrease in demand for
U.S. produced autos because of increased foreign competition. This would
shift the entire demand curve for U.S. produced autos to the left.
The correct answer is choice d;
an increase in consumers' incomes
would increase demand because more consumers would be able to afford to
purchase automobiles at the existing price.
Return to Question
8
9. An increase in wages
will increase the cost of producing Dell computers. This will result in
a decrease in supply. The entire supply curve will shift up and to the
left. Supply will shift up because it will not be profitable to supply
the same number of computers unless Dell can raise the price to recover
the increased production costs. Supply will shift to the left because if
Dell cannot raise the price of its computers, it will not be willing to
employ as many of the higher cost workers and its production will be reduced.
The decrease in supply would cause price to increase and quantity to decrease.
An improvement in the technology of producing Dell
computers results in an increase in supply. The entire supply curve shifts
to the right. More Dell computers can be supplied profitably at the same
price. This increase in supply would result in a decrease in price and
an increase in quantity.
The 2 events conflict. The first causes a decrease
in supply and the second causes an opposite increase in supply. No information
is provided on which event has a stronger effect. The correct answer is
e,
the effect on both equilibrium price
and quantity is indeterminate.
Return to Question
9
10. An improvement in
the technology of producing DVD players results in an increase in supply.
The entire supply curve shifts to the right. More DVD players can be supplied
profitably at the same price of DVD players.
The shift in supply results in choice b,
only
the supply curve for DVD players shifts to the right.
The equilibrium point
changes from E to N as illustrated below:
Note that although consumers will buy more DVD players, there was not
a shift in demand. There is a movement down along the given demand curve
for DVD players. The increased quantity demanded results from the decrease
in the price caused by the shift in the supply curve.
Return to Question
10
11.
The graph above illustrates a decrease in demand for Apple Macintosh
Computers. This means that something other than an increase in the price
of Apple Macintosh computers has caused consumers to demand fewer Macintosh
computers. A decrease in the price of a substitute good (Dell Computers)
would increase competition and cause some consumers to purchase Dell computers
instead of Apple Macintosh computers. This would shift the entire demand
curve for Apple Macintosh computers to the left. The correct choice is
c.
Return to Question
11
12. If business people are afraid to fly
then this would decrease the demand for commercial air travel. The entire
demand curve will shift down and to the left.
An increase in the price of airline fuel increases
the cost of supplying commercial air travel. This increase in the cost
of production results in a decrease in supply and shifts the entire supply
curve up and to the left.
The correct choice is c,
equilibrium
quantity would decrease, but the effect on price is indeterminate.
The equilibrium point changes from E to N as illustrated
below:
Return to Question
12
13. For equilibrium quantity
to remain constant despite an increase in price, there must be a dual shift
in both the supply and demand curves. A shift in only one of the
two curves would always result in a change in equilibrium quantity.
An increase in price results from both a decrease
in supply (a shift in the supply curve to the left)
and an increase in demand (a shift in the demand
curve to the right). The correct answer is
d.
The equilibrium point
changes from E to N as illustrated below:
Return to Question
13
14. 1. An increasing
number of universities requiring that students purchase personal computers
would increase the demand for all brands of computers. This will shift
the entire demand curve for Gateway computers up and to the
right.
2. The decrease in the price of Dell computers
(a substitute good for Gateway computers) will encourage some buyers
to purchase Dell instead of Gateway. This will decrease the demand for
Gateway computers and shift the entire demand curve for Gateway computers
down and to the left.
Since the 2 events have exactly opposite
effects on the demand curve for Gateway computers, and there is no information
on which event is stronger, there is no way to know if the overall net
effect is a shift in the demand curve to the right or to the left (or no
net shift at all). Therefore, no conclusions can be drawn and the effect
on both equilibrium price and quantity is indeterminate, choice
f.
Return to Question
14
15. A tax will increase
the cost of selling cigarettes. This will result in a decrease in supply.
The entire supply curve will shift up and to the left. Supply will shift
up because it will not be profitable to supply the same amount of cigarettes
unless cigarette companies can raise the price to recover the increased
costs. The higher price will discourage consumption of cigarettes and result
in a decrease in quantity demanded, a movement along the given demand curve
from E to N as illustrated below.
The correct choice is c,
the
equilibrium price of cigarettes will increase, but the quantity will decrease.
Return to Question
15
16. An increase in wages
will increase the cost of producing Gateway computers. This will result
in a decrease in supply. The entire supply curve will shift up and to the
left. Supply will shift up because it will not be profitable to supply
the same number of computers unless Gateway can raise the price to recover
the increased production costs. Supply will shift to the left because if
Gateway cannot raise the price of its computers, it will not be willing
to employ as many of the higher cost workers and its production will be
reduced. The decrease in supply would cause price to increase and quantity
to decrease.
An increase in income would cause an increase in
demand because more consumers can afford to buy computers at the same price.
The entire demand curve will shift up and to the right. This increase in
demand will cause both the price and quantity to increase.
Since both shifts result in an increase in price,
the combined effect will definitely be an increase in price. However, since
the supply shift would cause a decrease in quantity and the demand shift
would cause an increase in quantity, these contradictory results mean that
the overall effect on quantity is indeterminate (it depends on which effect
is stronger).
The correct choice is b,
the
equilibrium price would increase, but the effect on quantity is indeterminate.
The equilibrium point changes from E to N as illustrated
below:
Return to Question
16
17. A decrease in demand
for labor would be shown by a shift in the entire demand curve for labor
to the left. At the current wage of $5.15, this will generate a surplus
of labor as supply will now exceed the lower demand for labor. If the wage
were permitted to decrease, the lower wage would result in an adjustment
to a new lower equilibrium wage where supply once again equals demand for
labor. However, a minimum wage is a price floor. It prevents the wage from
decreasing. The result is that supply remains greater than the decreased
demand for labor at the $5.15 level and a surplus
of unemployed labor would result, choice b.
Return to Question
17
18. Raising the minimum
wage above the equilibrium wage simply increases the price of labor and
forces it to remain at the higher level.. Since price if on the vertical
axis, an increase in price is shown on a supply-demand curve by a movement
up along both the given supply and demand curves for labor, choice
e.
Return to Question
18
19. For equilibrium price
to remain constant despite a decrease in quantity, there must be a dual
shift in both the supply and demand curves. A shift in only one of the
two curves would always result in a change in equilibrium price.
A decrease in quantity results from both a decrease
in supply (a shift in the supply curve up and to
the left) which would increase price and a decrease in demand (a
shift
in the demand curve down and to the left) which would decrease price.
The correct answer is
c.
Return to Question
19
20. A shift in the entire
demand curve for beef to the right represents an increase in demand.
This results from some event, other than a change in the price of beef,
which causes people to buy more beef. Choice c,
the
price of beef is reduced, will not shift
the demand curve for beef. It will cause a
movement down along a
given demand curve for beef. The given negatively sloped demand curve indicates
that people will consume more beef when the price of beef is reduced.
Return to Question
20
21. A decrease in income
will result in a decrease in demand. It will shift the entire demand curve
to the left resulting in a decrease in both price and quantity.
An increase in the costs of producing new homes
will result in a decrease in supply. It will shift the entire supply curve
up and to the left resulting in an increase in price but a decrease in
quantity.
Combining the 2 results yields a definite decrease
in quantity. However, the effect on price is indeterminate since the decrease
in demand will decrease price but the decrease in supply will increase
price.
The correct choice is d,
quantity
will decrease, but the effect on price is indeterminate.
Return to Question
21
22. An improvement in
technology will result in an increase in supply. This will shift the entire
supply curve down and to the right.
A decrease in the price of a substitute good, steel,
will cause a decrease in demand for aluminum. There will be less demand
for aluminum at the existing price of aluminum, because more consumers
than previously will prefer to purchase steel at the lower price of steel.
This represents some event other than a change in the price of aluminum
which decreases the demand for aluminum.
The correct choice is d,
the
demand curve for aluminum shifts to the left and the supply curve of aluminum
shifts to the right.
Return to Question
22
23. An increase in the
price of a substitute good, Tylenol, will increase the demand for aspirin.
This will shift the demand curve for aspirin to the right, resulting in
an increase in both the price and quantity of aspirin.
The government study represents some event, other
than a change in price, which will make people buy more aspirin. It will
increase the demand for aspirin, further shifting the demand curve for
aspirin to the right. This will also result in an increase in both the
price and quantity of aspirin.
Since both events reinforce each other, the correct
choice is a, the equilibrium
price and quantity would both increase.
Return to Question
23
24. The decrease in the price
of steel, a material used in the construction of automobiles, will decrease
the cost of producing autos. A decrease in cost will cause an increase
in the supply of autos,
shifting the entire supply
curve for automobiles down and to the right, choice
b.
Note that there is no shift in the demand curve
for automobiles. If the lower cost of producing autos is translated into
lower automobile prices, consumers will purchase more automobiles. However,
this would be shown by a movement down and to the right along a given demand
curve for automobiles, not by the formation of an entire new demand curve
for automobiles.
Return to Question
24
25. If the current minimum
wage were above the equilibrium wage, then there would be a surplus of
labor as the supply of labor would exceed the demand for labor. If the
minimum wage were eliminated and the wage (the price of labor) could adjust
to its lower equilibrium level, this would cause both an increase in the
quantity demanded of labor (a
movement down
and to the right along the existing
demand curve
for labor) and a decrease in the quantity supplied of labor (a movement
down and to the left along the existing supply
curve of labor). The correct choice is b.
Return to Question
25
26. An improvement in
technology will result in an increase in supply. The entire supply curve
will shift down and to the right.
This will cause a decrease in equilibrium price,
but an increase in quantity, choice a.
The equilibrium point changes from E to N as illustrated
below:
Return to Question
26
27. Tires and automobiles
are complementary goods. If there is an increase in the production of automobiles,
more tires will be demanded. The increase in the production of autos is
some factor, other than a change in the price of tires, which will increase
the number of tires sold. As such, it is an increase in demand for
tires, shown by a shift in the entire demand curve for tires to the right.
The correct choice is c,
only
the demand curve for tires shifts to the right.
Return to Question
27
28. The Consumer Reports
recommendation will increase the demand for Macintosh computers. It is
an event, other than a decrease in the price of Macintosh computers, which
will make consumers buy more Macintosh computers. As such, it is an increase
in demand, shown by a shift in the entire demand curve for Macintosh computers
to the right.
The university requirement not to buy Macintosh
computers will have the exact opposite effect. It will decrease
demand, shifting the entire demand curve for Macintosh computers to the
left.
Since we have no information on which effect is
stronger, there is insufficient information provided on whether there will
be a net increase in demand (with the resultant increase in price and quantity)
or a net decrease in demand (in which case both the price and quantity
of Macintosh computers would decrease).
The correct answer is therefore f,
the
effect on both equilibrium price and quantity is indeterminate.
Return to Question
28
29. A shift in the entire
demand curve for U.S. autos to the right represents an increase in demand,
something which would cause consumers to purchase more U.S. autos
at the existing price. The correct answer is something other than
a decrease in price which would make consumers buy more U.S. autos. If
the price of foreign cars were to increase, then the existing price of
U.S. autos would become more attractive as it would now be cheaper relative
to the now more expensive foreign cars. The correct choice is b.
Return to Question
29
30. An increase in demand
will shift the entire demand curve out and to the right. This will cause
both equilibrium price and quantity to increase.
An increase in supply will shift the entire supply curve out and to
the right. This will cause equilibrium quantity to increase and equilibrium
price to decrease.
Notice that both increases will cause the equilibrium quantity to increase.
However, the only way for the equilibrium price to remain constant is for
both
shifts to occur with equal strength so that the resulting price effects
(increase and decrease) exactly cancel each other out. The correct choice
is b and it is shown
on the graph below. The original equilibrium point is E and the final,
resultant equilibrium point is N, directly across and to the right of point
E.
Return to Question
30
31. If the price of a
substitute good for aspirin were to decrease, more consumers would purchase
the substitute good. This would decrease the demand for aspirin at the
existing price of aspirin. This is shown by a shift in the entire demand
curve for aspirin to the left.
The positive government study would have the exact
opposite effect. It would cause more consumers to purchase aspirin. This
would increase the demand for aspirin at the existing price of aspirin.
This is shown by a shift in the entire demand curve for aspirin to the
right.
Since we do not know which effect is stronger, we
do not know whether the resultant shift in the demand curve for aspirin
is to the left, to the right, or no resultant shift at all (which would
happen if the 2 effects are of equal strength and cancel each other out).
The correct answer is therefore f, the effect
on both equilibrium price and quantity is indeterminate.
Return to Question
31
32. Glass and automobiles
are complementary goods. If there are more automobiles produced, there
will be greater demand for glass. This increase in demand is shown by a
shift in the entire demand curve for glass to the right. The rightward
shift indicates that some factor other than an decrease in the price of
glass has increased the demand for glass.
Note that there is no shift in the supply curve
for glass because the costs of producing glass have not changed and glass
manufacturers would be willing to supply the same amount of glass at existing
prices. The correct choice is a, only
the demand curve for glass shifts to the right.
The equilibrium point changes from E to N as illustrated
below:
Return to Question
32
33. An improvement in
the technology of producing VCRs results in an increase in supply. The
entire supply curve shifts to the right. More VCRs can be supplied
profitably at the same price of VCRs.
A decrease in the price of a substitute good, DVD
players, will cause some consumers to buy the substitute good instead of
VCRs. Fewer VCRs can be sold at the existing price of VCRs. This results
in a decrease in demand for VCRs. The entire demand curve for VCRs shifts
to the left.
The correct choice is d.
Return to Question
33
34. A decrease in income
would cause a decrease in demand. The entire demand curve will shift down
and to the left. This would result in a decrease in both equilibrium price
and equilibrium quantity.
A decrease in the cost of producing large screen
televisions would cause an increase in supply. The entire supply curve
will shift down and to the right. This would result in a decrease in equilibrium
price but an increase in equilibrium quantity.
Combining the 2 effects yields a definite decrease
in equilibrium price. However, the effect on equilibrium quantity is indeterminate
since 1 effect yields a decrease in quantity and the other yields an increase
in quantity. There is no way to know which effect is stronger.
The correct choice is e,
equilibrium
price would decrease, but the effect on quantity is indeterminate.
The equilibrium point changes from E to N as illustrated
below:
Return to Question
34
35. A shortage exists
when demand exceeds supply at the existing price for a product. The excess
demand will cause the price of the product to be bid up until an equilibrium
price is reached where supply = demand and the shortage is eliminated.
The correct choice is e.
This is illustrated below by the increase in price from P1 to Pe and a
movement to the equilibrium point, E.
Return to Question
35
36. An increase in the
minimum wage above the equilibrium wage would cause more workers to want
to work (a movement up and to the right along a given supply curve for
labor). However, the higher wage would reduce the incentives for employers
to hire the now more expensive labor and would result in a movement back
up and to the left along a given demand curve for labor.
The correct choice is e,
there
will be a movement up along both the existing supply and demand curves
for labor. The result will be a surplus of labor (supply greater
than demand) at the new, higher, above equilibrium, minimum wage.
The effect is illustrated on the graph below by
movements up along the demand curve from E to A and along the supply curve
from E to B. The original minimum wage is Pe and the new, higher minimum
wage is Ph:
Return to Question
36
37. Apple's iMac computers
are a substitute consumption good for Dell computers. If the price of iMacs
were to decrease, some of Dell's customers would buy the cheaper iMacs.
There would thus be less demand for Dell computers at the existing price
of Dell computers. This would represent a decrease in demand for Dell computers
and would be shown by a shift in the entire demand
curve for Dell computers to the left. The
correct choice is a.
Return to Question
37
38. Graphically, we need
a result which would cause the following changes:
The result requires a combination of an increase in supply (shift in
the entire supply curve down and to the right) with a decrease in demand
(a shift in the entire demand curve down and to the left).
Choice b will yield
the desired result: A decrease in wages represents a decrease in the cost
of production. This will increase supply. A decrease in the price of a
substitute good Y will cause consumers to purchase more of good Y, thereby
decreasing the demand for good X.
Return to Question
38
39. If the price of computers continues
to decrease, this will cause an increase in the quantity demanded of computers.
Because digital cameras is an optional computer accessory, the more computers
being sold, the greater the demand for digital cameras. The increased sale
of computers provides an explanation, other than a decrease in the price
of digital cameras themselves, for an increase in demand for cameras. The
entire demand curve for digital cameras shifts to
the right, choice a.
Return to Question
39
40. A minimum wage is
only relevant if it provides a wage level higher than the equilibrium
wage which would exist. Therefore, a minimum wage set below the equilibrium
wage has no effect and can be ignored. However, as the graph below illustrates,
a minimum wage (the price of labor) set above the equilibrium wage will
create a surplus of labor (the supply of labor is greater than the demand
for labor at the artificially high wage Ph).
The correct choice is a. A
minimum wage set above the equilibrium wage will create a surplus of labor.
Return to Question
40
41. An increase in income will cause an
increase in demand for oil; the entire demand curve for oil shifts up and
to the right. This would cause both the equilibrium price and equilibrium
quantity of oil to increase.
The release of oil from the government's oil reserves
would increase the supply of oil; the entire supply curve for oil shifts
down and to the right. This would cause the equilibrium price of oil to
decrease and the equilibrium quantity of oil to increase.
Since both changes increase the equilibrium quantity
of oil, the equilibrium quantity of oil definitely increases. However,
the effect on price is indeterminate because the increase in demand would
increase the price of oil and the increase in supply would decrease the
price of oil.
The correct choice is d,
increase
in equilibrium quantity, but the effect on price is indeterminate.
The two changes are illustrated
below with the equilibrium point changing from E to N:
Return to Question
41
42. An increase in the
cost of production will decrease supply. This is shown by a shift in the
entire supply curve up and to the left. This would result in an increase
in the equilibrium price and a decrease in the equilibrium quantity.
An increasing number of universities requiring their
students to buy IBM compatible computers instead of Apple Macintoshes will
decrease the demand for Apple Macintosh computers. It is an event other
than an increase in the price of Macintoshes which will cause consumers
to buy fewer Macintoshes. It is shown by a shift in the entire demand curve
down and to the left. This would result in a decrease in both the equilibrium
price and the equilibrium quantity for Macintoshes.
Combining the 2 results yields a definite decrease
in the equilibrium quantity for Macintoshes since both effects yield that
result. However, the effect on the equilibrium price is indeterminate because
the decrease in supply would increase price and the decrease in demand
would decrease price.
The correct choice is c,
the
equilibrium quantity would decrease, but the effect on equilibrium price
is indeterminate.
The two changes are illustrated
below with the equilibrium point changing from E to N:
Return to Question
42
43. A shift in
the entire demand curve for a good is caused by a change in something other
than the price of the good which causes a change in demand. Therefore,
choice c, a change in
the price of the Nintendo 64 video game console, will
not
result in a shift in the entire demand curve. Rather, the decrease in price
is shown by a movement down and to the right along a given demand
curve for Nintendo 64 video game consoles causing consumers to increase
their quantity demanded.
Return to Question
43
44. An increase in incomes
means that consumers can afford to purchase more of all goods. This represents
an increase in demand, something other than a decrease in price which causes
consumers to buy more automobiles. It is shown by a shift in the
entire demand curve for luxury automobiles up and to the right. As illustrated
by the change from point E to point N on the graph below, the result is
that there would be an increase in both equilibrium
price and quantity, choice a.
Return to Question
44
45. If the price of Tylenol
decreases, this would decrease the demand for aspirin because some consumers
would now buy the cheaper Tylenol.
The government study confirming that taking aspirin
can help reduce the danger of heart attacks would increase the demand for
aspirin. It is something other than a change in the price of aspirin which
would change the demand for aspirin.
The 2 events are opposites. The first will decrease
the demand for aspirin and the second will increase the demand for aspirin.
Without additional information about the relative strengths of these effects,
we cannot conclude whether the net effect is an increase, decrease, or
no net change in the demand for aspirin.
The correct choice is f,
the
effect on both equilibrium price and quantity of aspirin is indeterminate.
Return to Question
45
46. The negative publicity
would cause some consumers not to want to buy Ford Explorers at the current
price. This represents a reason other than an increase in the price of
Ford Explorers which would make consumers buy fewer Explorers. The result
is a decrease in demand, a shift in the entire demand
curve for Ford Explorers to the left. The correct choice is c.
Note that there is no change in the supply curve for Ford Explorers.
Ford would still want to supply as many automobiles at the same price as
before. The problem is that there will be a decrease in demand. This would
cause a movement down and to the left along a given supply curve as shown
by the movement from E to N on the graph below:
Return to Question
46
47. An increase in the minimum wage above
the equilibrium wage would cause more workers to want to work (a movement
up and to the right along a given supply curve for labor). However, the
higher wage would reduce the incentives for employers to hire the now more
expensive labor and would result in a movement back up and to the left
along a given demand curve for labor.
The correct choice is e,
there
will be a movement up along both the existing supply and demand curves
for labor. The result will be a surplus of labor (supply greater
than demand) at the new, higher, above equilibrium, minimum wage.
The effect is illustrated on the graph below by
movements up along the demand curve from E to A and along the supply curve
from E to B. The original minimum wage is Pe and the new, higher minimum
wage is Ph:
Return to Question
47
48. The price ceiling of $20 will prevent
the adjustment from the current equilibrium point, E, to the new equilibrium
point, N. As shown on the graph below, at the current ceiling price of
$20, quantity demanded will remain at 35 units per
day and a shortage will result because now
supply will be less than demand at $20. The correct choice is b.
Return to Question
48
49. A decrease in demand for labor would
be shown by a shift in the entire demand curve for labor to the left. At
the current wage of $5.15, this will generate a surplus of labor as supply
will now exceed the lower demand for labor. If the wage were permitted
to decrease, the lower wage would result in an adjustment to a new lower
equilibrium wage where supply once again equals demand for labor. However,
a minimum wage is a price floor. It prevents the wage from decreasing.
The result is that supply remains greater than the decreased demand for
labor at the $5.15 level and a surplus of unemployed
labor would result, choice b.
Return to Question
49
50. Raising
the minimum wage above the equilibrium wage simply increases the price
of labor and forces it to remain at the higher level.. Since price if on
the vertical axis, an increase in price is shown on a supply-demand curve
by a movement up along both the given supply and
demand curves for labor, choice
e.
Return to Question
50
51. If the current minimum wage were above
the equilibrium wage, then there would be a surplus of labor as the supply
of labor would exceed the demand for labor. If the minimum wage were eliminated
and the wage (the price of labor) could adjust to its lower equilibrium
level, this would cause both an increase in the quantity demanded of labor
(a
movement down and to the right along the
existing
demand curve for labor) and a decrease
in the quantity supplied of labor (a movement down
and to the left along the existing supply curve of
labor). The correct choice is b.
Return to Question
51
52. An increase in demand will cause both
the equilibrium price and quantity to increase. This is illustrated by
the change in the equilibrium point from E to N on the graph below:
The correct choice is c, from
1990 to 2000 the entire demand curve for gasoline shifted to the right.
Return to Question
52
53. 1. A decrease in the cost of raw materials
would decrease the cost of producing Apple Macintosh computers. This would
result in an increase in supply, illustrated by a shift in the entire supply
curve down and to the right. This would result in a decrease in price
and an increase in quantity.
2. A decrease in the price of a substitute good, Dell computers, will
increase competition and decrease the demand for Apple Macintosh computers.
This decrease in demand for Apple Macintosh computers is illustrated by
a shift in the entire demand curve for Apple Macintosh computers to the
left. This would result in a decrease in both price and quantity.
Combining the 2 effects yields a reinforcing decrease
in price, but the effect on quantity is indeterminate The first event would
cause quantity to increase but the second event would cause quantity to
decrease. No information is provided on which event has a stronger effect.
Thus, equilibrium quantity may increase, decrease, or remain constant.
The correct answer is choice d,
the
equilibrium price would decrease, but the effect on equilibrium quantity
is indeterminate.
The equilibrium point changes from E to N as illustrated
below:
Return to Question
53
54. 1. A decrease in household incomes would
cause a decrease in demand, illustrated by a shift in the entire demand
curve for Ford Taurus automobiles to the left. This would result in a decrease
in both price and quantity.
2. The recommendation by Consumer Reports would cause an increase in
demand, illustrated by a shift in the entire demand curve for Ford
Taurus automobiles to the right. This would result in an increase in both
price and quantity.
Since the 2 events' effects on both price and quantity are conflicting,
the resultant effect on both equilibrium price and
quantity is indeterminate. The correct choice is f.
It is unknown whether the
increase in demand is stronger than, weaker than, or equal to the
decrease in demand. The combined resultant shift in demand may be to the
right or to the left. It is even possible that the opposing shifts in demand
cancel out exactly so that there is no resultant change in the position
of the demand curve at all.
Return to Question
54
55. The ability to copy music files has
made CD-RW drives a popular option when students purchase new computers.
This has increased the demand for CD-RW drives, shifting the demand curve
for CD-RW drives to the right.
Note that there is no direct effect on the supply curve for CD-RW drives
as there has been no change in technology or the cost of producing the
drives.
The correct choice is a, Only
the demand curve for CD-RW drives shifts to the right.
Return to Question
55
56. A shift in the entire demand curve to
the left represents a decrease in demand. A decrease in demand occurs when
something other than an increase in price reduces demand for the item;
that is, consumers will purchase fewer units at the given, original price.
An example of a decrease in demand is choice e,
Incomes
of U.S. consumers fall because of increased unemployment.
Note why the other choices are incorrect:
Choice A will cause an increase in supply of U.S. automobiles.
Choice B will cause an increase in demand for U.S. automobiles.
Choice C will cause a decrease in supply of U.S. automobiles.
Choice D will also cause a decrease in supply of U.S. automobiles.
Return to Question
56
57. A shift in the entire supply curve for
U.S. produced automobiles up and to the left represents a decrease in supply.
This would be caused by choice e,
an
increase in the cost of steel and aluminum, raw materials used in the production
of U.S. automobiles. This is because the increased
costs of production would require automobile producers to increase their
prices to maintain their same level of profits and to be willing to supply
the same quantity as previously.
Return to Question
57
58. 1. A decrease in people's incomes
would decrease the demand for Friedrich air conditioners . This is illustrated
by a shift in the entire demand curve for Friedrich air conditioners to
the left. This would result in a decrease in both price and quantity.
2. A decrease in the price of a substitute good, Kenmore air conditioners,
will increase competition and decrease the demand for Friedrich air conditioners.
This decrease in demand for Friedrich air conditioners is illustrated by
a shift in the entire demand curve for Friedrich air conditioners to the
left. This would result in a further decrease in both price and quantity.
Since both events 1 and 2 reinforce the decrease in demand for Friedrich
air conditioners, the resultant effect is indicated by choice c,
Equilibrium
price and quantity would both decrease.
Return to Question
58
59.. A surplus occurs when quantity supplied
is greater than quantity demanded. This will only be true when the current
price is above the market-clearing equilibrium price. Automatically, the
price will adjust until the equilibrium level is reached. In this case,
the
price will decrease and the surplus will be eliminated, choice c.
The results are illustrated on the following graph in which the price decreases
from Ph to Pe and the equilibrium point E will be achieved:
Return to Question
59
60. If the existing price of $5 is below
the equilibrium price of $7 per unit, then a shortage exists. This is illustrated
on the following diagram in which, at $5, quantity supplied (which is less
than 100 units) is less than quantity demanded (which is greater than 100
units).
The correct choice is d, a
shortage exists because quantity supplied is less than 100 units per day
and quantity demanded is greater than 100 units per day.
Return to Question
60
61. For equilibrium price to remain constant
despite a decrease in quantity, there must be a dual shift in both the
supply and demand curves. A shift in only one of the two curves would always
result in a change in equilibrium price.
A decrease in quantity without a corresponding decrease
in price results from a combination of a decrease in demand (shift
in the demand curve to the left) which causes
both price and quantity to decrease and a decrease in supply (shift
in the supply curve to the left) which causes
price to increase, but quantity to further decrease..
The correct answer
is c. There
have been shifts in both the entire supply and demand curves to the left.
The equilibrium point changes from E to N as illustrated below:
Return to Question
61
62.
| |
1995
|
1998
|
|
Equilibrium Price
|
$14/unit
|
$12/unit
|
|
Equilibrium Quantity
|
100 units
|
150 units
|
The table indicates that, from 1995 to 1998, equilibrium price decreased
(from $14 to $12) and equilibrium quantity increased (from 100 to 150 units).
This would be caused by an increase in supply, a shift
in the entire supply curve to the right (choice
a).
1998's equilibrium point is down and to the right of 1995's equilibrium
point as illustrated on the following graph:
Return to Question
62
63. A decrease in the price of a competitive
good, the SONY Playstation 2, would increase competition for Nintendo's
GameCube and decrease the demand for the GameCube. Some consumers,
who were thinking about buying the GameCube, may decide to purchase the
SONY Playstation 2 instead. This decrease in demand for Nintendo's GameCube
would cause the entire demand curve for the GameCube
to shift to the left. The correct choice is
b
as illustrated on the graph below:
Return to Question
63
64. If Hollywood decides to release more
movies in the DVD format, this will make DVD players more attractive and
will increase the demand for DVD players. This is shown by a shift in the
entire demand curve for DVD players to the right.
However, if household incomes decrease, this will
have the exact opposite effect. The decreased income will mean fewer consumers
can afford DVD players. This will decrease the demand for DVD players and
is shown by a shift in the entire demand curve for DVD players to the left.
Since the 2 events have the exact opposite effect
and there is no information on which effect is stronger, there is no way
of knowing if the combined effect is to shift the demand curve for DVD
players to the right or to the left.
The correct answer is choice f,
the effect on both equilibrium price and quantity
is indeterminate.
Return to Question
64
65.
The above graph illustrates a situation in which the existing
price ($10) is greater than the equilibrium price ($7). Notice that at
$10, quantity supplied (illustrated by point B) is greater than 100 units
per day and quantity demanded (illustrated by point A) is less than 100
units per day. When quantity supplied is greater than quantity demanded,
a surplus exists. The correct choice is a.
Return to Question
65
66. From 1990 to 2000 the equilibrium price
decreased (from $100 to $80) and the equilibrium quantity also decreased
(from 50 units per day to 45 units per day). A change in both equilibrium
price and quantity in the same direction is caused by a shift in the entire
demand curve. Since both price and quantity decreased, a decrease in demand
occurred and the
entire demand curve for good X shifted
to the left, choice d. This is illustrated
by points E and N on the following graph:
Return to Question
66
67. The Nintendo GameCube is a competitive,
substitute, good for SONY's Playstation 2. If the GameCube is popular,
then this will decrease the demand for playstation 2's. As illustrated
on the graph below by points E and N, a decrease in demand results in a
decrease in both the equilibrium price and equilibrium quantity of the
Playstation 2, choice a.
Return to Question
67
68. As illustrated on the graph below,
a government imposed price ceiling (a maximum legal price such as Pl) set
below the equilibrium price (Pe) will result in a shortage because quantity
supplied is less than quantity demanded at the below-equilibrium price.
The correct choice is a.
Note that a price ceiling (maximum legal price) set above the equilibrium
price will have no effect because in that case the price will automatically
adjust to the equilibrium level. A price may be below, but not above, the
maximum legal price imposed by the government.
Return to Question
68
69. A decrease in income will cause a decrease
in demand, shifting the entire demand curve to the left. This will cause
both equilibrium price and equilibrium quantity to decrease.
An increase in the cost of producing new homes will
cause a decrease in supply, shifting the entire supply curve to the left.
This will cause equilibrium price to increase and equilibrium quantity
to decrease.
Since both shifts result in a decrease in quantity,
equilibrium quantity will decrease.
However, the effect on equilibrium price is indeterminate
because the decrease in demand will cause price to decrease and the decrease
in supply will cause price to increase.
As illustrated by the shift from point E to point
N on the graph below, the correct choice is e,
quantity
will decrease, but the effect on price is indeterminate.
Return to Question
69
70. An increase in the price of Tylenol,
a substitute good for Bayer aspirin, will increase the demand for Bayer
aspirin.
The government report confirming that taking aspirin
will reduce the risk of heart attack will also increase the demand for
Bayer aspirin.
Both effects reinforce each other. The increase
in demand for Bayer aspirin will shift the entire demand curve for Bayer
aspirin to the right. As illustrated by the shift from point E to point
N below, the resultant effect will be that the equilibrium
price and quantity of Bayer aspirin would both increase, choice
a.
Return to Question
70
71. Since steel is used in automobiles,
the price of steel affects the cost of producing automobiles. If the price
of steel were to decrease, then the cost of producing automobiles would
decrease. A decrease in the cost of producing automobiles will increase
the supply of automobiles, shifting the entire supply
curve for automobiles to the right. The correct choice is b.
This is illustrated by the shift from point E to point N on the graph below:
Return to Question
71
72. A decrease in consumer incomes will
decrease demand for U.S. air conditioners because fewer consumers will
be able to afford to purchase air conditioners. The decrease in demand
will shift the entire demand curve for air conditioners to the left. This
will result in a decrease in both the equilibrium
price and quantity of air conditioners, choice
a.
The effect is illustrated by the shift from point
E to point N on the graph below:
Return to Question
72
73. A surplus occurs when the price is greater
than the equilibrium price. At the above-equilibrium price, quantity supplied
(as indicated by point B on the graph below) is greater than the equilibrium
quantity of 20 and quantity demanded (as indicated by point A) is less
than the equilibrium quantity of 20. The correct choice is a.
Return to Question
73
74. A minimum wage set above the equilibrium
wage would generate a surplus of labor because the quantity supplied of
labor would exceed the quantity demanded. If the minimum wage were eliminated,
then there would be nothing any longer preventing the attainment of an
equilibrium wage at which the supply and demand curves for labor intersected.
Therefore, eliminating the minimum wage would simply cause a movement
down along the given supply and demand curves for labor, a movement
which would have been prevented by the previous high (above-equilibrium)
minimum wage. The correct choice is c.
Return to Question
74
75. An improvement in the technology of
producing CD-RW drives would increase the supply of CD-RW drives, shifting
the entire supply curve to the right. This would result in a decrease
in equilibrium price and an increase in equilibrium quantity, choice
d.
This is illustrated by the shift from point E to point N on the graph below:
Return to Question
75
76. Consumer Reports'
positive rating of the Honda Odyssey will increase the demand for
the Odyssey. There will be a shift in the entire demand curve up and to
the right. This would result in an increase in both price and quantity.
However, the decrease in the price of Toyota's SUV
( a competitive, substitute product) will increase the quantity demanded
of Toyota's SUV at Honda's expense. This would decrease the demand
for the Honda Odyssey, shift the demand curve for the Honda Odyssey to
the left and cause both the Odyssey's price and quantity to decrease.
Since the 2 events have opposite (conflicting) effects
on the Honda Odyssey, and there is no information on which effect, if either,
is stronger, there is no way to know if the overall, net effect on the
Honda Odyssey is an increase or decrease in demand or no net effect at
all.
The result is that the effect
on both equilibrium price and quantity is indeterminate,
choice f.
Return to Question
76
77.
As illustrated on the graph below, a shortage exists if the existing price
is below the equilibrium price of $10 per unit.
At the below-equilibrium price (<$10), quantity
supplied is less than 500 units per day (as
indicated by point A) and quantity demanded
is greater than 500 units per day (as indicated
by point B). The correct choice is e.
Return to Question
77
78. The decrease in the
price of Nintendo's GameCube ( a competitive, substitute product for the
Microsoft XBox) will increase the quantity demanded of Nintendo's GameCube
at Microsoft's expense. This would decrease the demand for the Microsoft
XBox, shift the demand curve for the XBox to the left (something
other than an increase in the price of the XBox itself has caused a decrease
in demand for the XBox) and cause both the XBox's price
and quantity to decrease, choice a.
The result is illustrated below. E is the initial point and N is the
final result.
Return to Question
78
79.
|
2001 |
2002 |
| Equilibrium Price |
$10/unit |
$15/unit |
| Equilibrium Quantity |
50 units per day |
85 units per day |
From 2001 to 2002, the equilibrium price has increased (from $10 to $15
per unit) and the equilibrium quantity has also increased (from 50 units
to 85 units per day). A change in demand will cause both equilibrium price
and quantity to change in the same direction. Since equilibrium price and
quantity have both increased, there has been an increase in demand and
the
entire demand curve for good X shifted to the right,
as illustrated on the graph below. E is the equilibrium point for 2001
and N is the equilibrium point for 2002. The correct choice is b.
Return to Question
79
80. As digital cameras become more popular,
the demand for conventional cameras will decrease. The decreased demand
for conventional cameras will decrease the demand for film since film and
conventional cameras are complementary goods (they are used together).
This decrease in demand for film is illustrated by a shift in the entire
demand
curve for film to the left (something other than an increase in
the price of film has caused the demand for film to decrease). The correct
choice is a.
Return to Question
80
81. If AT&T stops offering cable internet
service then some of AT&T's customers will change to Time Warner Cable's
internet service. This increase in demand for Time Warner Cable will shift
the entire demand curve to the right. A change in demand causes equilibrium
price and quantity to change in the same direction so both price and quantity
will increase.
Higher wages will increase the cost of producing
Time Warner Cable's internet service. These higher costs will cause Time
Warner to increase its price. The higher price will result in a decrease
in quantity demanded for their service. This would be shown by a shift
up and to the left in the entire supply curve resulting in a movement up
and to the left along the demand curve.
The overall resultant effect is that equilibrium
price will increase (both events would cause an increase in price),
but the effect on equilibrium quantity is indeterminate
(the first effect would cause quantity to increase, but the second effect
would cause quantity to decrease). The correct choice is e.
Graphically, the result would be a change from equilibrium point E
to point N:
Return to Question
81
82. If the price of aluminum were to decrease,
then the cost of producing automobiles would decrease since automobiles
use aluminum in producing cars. This decrease in costs of production would
shift the entire supply curve down and to the right. The lower costs enable
auto makers to profitably sell cars at a lower price. Consumers would respond
to the lower price by increasing their quantity demanded as shown by a
movement along the given demand curve from E to N on the graph below. The
correct choice is
c, the
equilibrium price of automobiles would decrease, but equilibrium quantity
would increase.
Return to Question
82
83. An increase in incomes would increase
the demand for furniture. The entire demand curve shifts up and to the
right because something other than a decrease in price has caused the demand
for furniture to increase. A change in demand causes both equilibrium price
and quantity to change in the same direction. Since demand increased, there
will be an increase in both the equilibrium price
and equilibrium quantity of furniture, choice
a.
The result is illustrated by the shift from point
E to N in the graph below:
Return to Question
83
84. Graphically, we need a result which
would cause the following changes (from E to N):
The result requires a combination of an increase in supply (shift in
the entire supply curve down and to the right) which would cause price
to decrease and quantity to increase with an increase in demand (a shift
in the entire demand curve up and to the right) which would cause both
price and quantity to increase. The combination yields an increase in quantity
(both effects cause quantity to increase) and potentially a constant
price (if the effects of the decrease in price and increase in price exactly
cancel each other out).
Choice b, there
have been shifts in both the entire supply and demand curves to the right,
will yield the desired result.
Return to Question
84
85. A technological improvement in production
lowers the cost of production. This increase in supply (shift in the supply
curve down and to the right) will enable SONY to lower the price
of its laptop computers and still make a profit. The lower price will cause
an increase in quantity demanded, as shown by a movement down and to the
right along the given demand curve from E to N on the graph below. The
correct choice is e,
equilibrium
quantity would increase, but equilibrium price would decrease.
Return to Question
85
86. 1. An unusually
hot summer will increase the demand for air conditioners.
2. If the price of Kenmore
air conditioners (a substitute, competing good for Whirlpool air conditioners)
increases, there will be an increase in demand for Whirlpool air conditioners.
Since both events would cause an increase in demand
for Whirlpool air conditioners, the result is that equilibrium
price and quantity would both increase, choice
e.
The result is shown by the change from point E to N on the graph below:
Return to Question
86
87. A minimum wage which is set below the
equilibrium wage is irrelevant and has no effect because the actual wage
may exceed the minimum wage. However, a minimum wage set above the equilibrium
wage acts as a price floor, preventing the wage from falling to the equilibrium
level.
If the minimum wage is set above the equilibrium
wage, then the higher wage will cause an increase in the quantity supplied
of labor but also cause a decrease in the quantity demanded of labor. When
the supply of labor exceeds the demand for labor, a surplus
of labor results The correct choice is b.
The graph below illustrates the case in which the minimum wage of Ph is
set above the equilibrium wage of Pe:
Return to Question
87
88. An increase in demand will cause both
the equilibrium price and equilibrium quantity to increase. However, the
price ceiling imposed by the government prevents the new equilibrium point
from being reached because the price cannot increase. The result is shown
below. Point E is the original equilibrium point and point N is the final
point after the increase in demand.
Since the price was not permitted to increase, quantity
supplied will remain at 10 units per day.
However, the increase in demand results in a shortage
because at the existing price of $5 demand now exceeds supply. The correct
choice is e.
Return to Question
88
89. An increase in aggregate demand (a shift in the entire aggregate
demand curve to the right) occurs when spending (total expenditures) increases.
A tax cut will increase households' disposable (after-tax) income, enabling
consumers to increase their level of consumption spending.
The correct answer is b.
Return to Question
89
90. The greatest decrease in the economy's price level will occur when
an increase in supply (shift in the entire aggregate supply curve to the
right) is accompanied by a decrease in demand (shift in the entire aggregate
demand curve to the left). This is illustrated by the following graph in
which the equilibrium point changes from point E to point N.
The correct answer is d.
Return to Question
90
91. An increase in aggregate supply (a shift
in the entire aggregate supply curve to the right) occurs when businesses
are able to supply more goods and services at lower costs. This will occur
when technological improvements increase worker productivity,
choice d.
Return to Question
91
92.
As shown on the graph above, an increase in aggregate demand (illustrated
by a shift to the right in the entire aggregate demand curve) will cause
a change in the equilibrium point from point E to point N. This results
in both a higher price level and a higher level of gross domestic product
(GDP).
The correct answer is a.
Return to Question
92
93. The greatest amount of inflation (highest increase in the price
level) will occur when an increase in demand (shift in the entire aggregate
demand curve to the right) is accompanied by a decrease in supply (shift
in the entire aggregate supply curve to the left). This is illustrated
by the following graph in which the equilibrium point changes from point
E to point N.
The correct answer is c.
Return to Question
93
94. Unemployment increases during a recession in which the economy's
level of gross domestic product (GDP) falls. The greatest decrease in gross
domestic product (GDP) will occur when a decrease in demand (shift in the
entire aggregate demand curve to the left) is accompanied by a decrease
in supply (shift in the entire aggregate supply curve to the left). This
is illustrated by the following graph in which the equilibrium point changes
from point E to point N.
The correct answer is b.
Return to Question
94
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