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Macroeconomics Study Set 43

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Quiz 3 : A: - Demand, Supply, and Market Equilibrium

Suppose a producer sells 1,000 units of a product at $5 per unit one year, 2,000 units at$8 the next year, and 3,000 units at $10 the third year.Is this evidence that the law of demand is violated? Explain. Free Essay Answer: Answer: No.The law of demand shows the relationship between price and quantity demanded.In general, as price falls the quantity demanded will increase.One of the assumptions, however, is that all other things are equal or held constant.In this case, this assumption may have been violated and that is why it seems there is a positive relationship between price and quantity.The most likely explanation for the set of events is that demand for the product increased from one year to the next.If that was true, then price would rise and the equilibrium quantity would increase. Describe and give a reason for the law of supply. Free Essay Answer: Answer: The law of supply indicates that, other things being equal, producers will produce and be willing to sell more of their product at a high price than at a low price.This means that there is a direct relationship between price and quantity supplied.The basic explanation is that, given product costs, a higher price means greater profits and thus more incentive for business to increase the quantity supplied. Suppose that a decrease in the price of feed grain leads to a dramatic decrease in the price of beef.Use the income effect and the substitution effect to explain why there was an increase in the quantity of beef purchased. Free Essay Answer: Answer: The income effect predicts that the quantity of beef purchased will rise when beef prices fall because people will now be able to afford more.The purchasing power of their income rises when prices fall, assuming other things remain the same. The substitution effect predicts that the lower price of beef will lead consumers of substitute foods such as chicken and pork to buy more of the relatively less expensive beef and to buy less chicken or pork or other beef substitutes whose prices have not fallen. Define "demand." Essay Answer: State the law of demand and explain why the other-things-equal assumption is critical to it. Essay Answer: What effect should each of the following have upon the demand for MP3 players? Explain your reasoning in each case.(a) the development of reasonably-priced smart phones that compete with MP3 players (b) an increase in population and incomes (c) a substantial increase in the number and quality free downloadable MP3s (d) consumer expectations of substantial price increases in MP3 players (e) a decrease in the price of MP3 players Essay Answer: Define "supply." Essay Answer: Explain how the prices of related goods also affect demand. Essay Answer: What is the difference between a change in supply and a change in quantity supplied? Essay Answer: Give examples of two substitute goods and two complementary goods.In each case explain why the goods are substitutes or complements. Essay Answer: The Federal government is considering passing an excise tax that would increase the price of a pack of cigarettes by$1.00.What would be the likely effect of this change on the demand and supply of cigarettes? What is likely to happen to cigarette prices and the quantity consumed if the tax bill is enacted?
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List five basic determinants of market demand that could cause demand to decrease.
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The demand schedules of three individuals (Tom, Dick, and Harry) are shown.If they are the only three buyers of CDs, complete the market demand schedule for CDs.Graphically, is the market demand for a product the horizontal or vertical sum of the individual demand schedules?
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Differentiate between a normal (superior) and an inferior good.
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What are some of the characteristics of a market that can be described by a demand and supply model?
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What is the difference between a change in demand and a change in quantity demanded?
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