Question 1

Reference: Ref 4-8 (Figure: Demand, Supply Shifts) In the figure, the initial demand curve is D1 and the initial supply curve is S1. Resource prices in this market increase; at the same time, the consumer population declines as migration causes an outflow of population to other regions. What happens to the supply curve and/or demand curve?

Accepted Answer

The answer of  Reference: Ref 4-8 (Figure: Demand, Supply...

Question 2

Figure: Market Changes  Reference: Ref 4-7 (Figure: Market Changes) Refer to the figures. If these figures represent the market for blue jeans, which figure shows the effect of an increase in the price of denim, a raw material used to make jeans?

Accepted Answer

The answer of Figure: Market Changes  Reference: Ref 4-7...

Question 3

Why did Vernon Smith win the Nobel Prize in Economics in 2002?

Accepted Answer

Vernon Smith won the Nobel Prize in Economics in 2002 for his work in using laboratory experiments to confirm the theory of supply and demand.

Question 4

In a free market in which an equilibrium price and quantity prevails:

Accepted Answer

The answer of In a free market in which an...

Question 5

An increase in supply and a decrease in demand occur in a market. What happens to the equilibrium price and quantity?

Accepted Answer

An increase in supply will shift the supply curve to the right, and a decrease in demand will shift the demand curve to the left. This will result in a surplus of the good in the market, causing the price to decrease until a new equilibrium is reached where quantity demanded equals quantity supplied. The change in the equilibrium quantity is ambiguous because it will depend on the magnitudes of the shifts in supply and demand.

Question 6

Reference: Ref 4-8 (Figure: Demand, Supply Shifts) In the figure, the initial demand curve is D1 and the initial supply curve is S1. Suppose this depicts the market for corn. How does the market change when flooding in Iowa destroys a significant amount of the corn crop.

Accepted Answer

The answer of  Reference: Ref 4-8 (Figure: Demand, Supply...

Question 7

The September 11 terrorist attacks turned many people away from flying. The demand and supply model would predict which of the following events in the airline travel market?

Accepted Answer

The September 11 attacks caused people to be hesitant about flying, which means that the demand for airline travel decreased. When demand decreases, the equilibrium price and quantity both decrease as well. This is because suppliers will not be able to sell as much at a higher price, so they lower their prices to attract buyers.

Question 8

Reference: Ref 4-6 (Figure: Gains from Trade) Refer to the figure. What are the total gains from trade at the free market equilibrium?

Accepted Answer

The answer of  Reference: Ref 4-6 (Figure: Gains from...

Question 9

The U.S. government limits the importation of Chinese-made bras. What effect does this trade restriction have on the market for bras?

Accepted Answer

The import restriction decreases the supply of Chinese-made bras, shifting the supply curve leftward, resulting in a higher equilibrium price and a lower equilibrium quantity.

Question 10

An increase in demand and a decrease in supply occur in a market. What happens to the equilibrium price and quantity?

Accepted Answer

An increase in demand and a decrease in supply will both push the equilibrium price up, but in opposite directions. The equilibrium quantity will depend on the magnitude of each shift. Since we don't know which shift is larger, the change in the equilibrium quantity is ambiguous. However, we do know that the equilibrium price will decrease.

Question 11

Reference: Ref 4-7 (Figure: Market Changes) Refer to the figures. If the figures represent the market for wool sweaters, which figure shows the effect of an unseasonably warm winter?

Accepted Answer

The answer of  Reference: Ref 4-7 (Figure: Market Changes)...

Question 12

Reference: Ref 4-8 (Figure: Demand, Supply Shifts) In the figure, the initial demand curve is D1 and the initial supply curve is S1. If this depicts the equilibrium in the market for computer printers, what will happen when the price of computers increases?

Accepted Answer

If the price of computers increases, there will likely be a decrease in demand for computer printers, as consumers may choose to allocate more of their budget towards the more expensive computers. This will cause the demand curve to shift left from D1 to D2. As a result, there will be less demand at the previous equilibrium price, leading to a decrease in price and a decrease in quantity supplied. Therefore, the new equilibrium will occur at a lower price and quantity, represented by the intersection of D2 and S1.

Question 13

In a free market when there are unexploited gains from trade:

Accepted Answer

Unexploited gains from trade occur when there are buyers who are willing to pay more for goods than sellers are asking. In a free market, this should ultimately lead to an increase in prices and quantity traded, as sellers recognize the opportunity for profit and adjust their prices accordingly. The market will eventually reach a new equilibrium point where all gains from trade have been fully exploited. However, the process may be slow and not immediate. Option A is incorrect because the market will eventually adjust, though it may take some time. Option B is also incorrect as sellers would be willing to sell at the higher prices that buyers are willing to pay. Option D is not the best answer as the market is not yet at equilibrium.

Question 14

Reference: Ref 4-7 (Figure: Market Changes) Refer to the figures. If the figures represent the market for a popular soda, which figure shows the effect of an increase in the price of a competing energy drink?

Accepted Answer

Figure C shows a decrease in demand for the popular soda (represented by the shift of the demand curve to the left) due to an increase in the price of a competing energy drink. As a result, the equilibrium quantity decreases, and the equilibrium price could either increase or decrease depending on the magnitude of the demand shift compared to the supply shift.

Question 15

Brazilian rosewood is renowned for its tonal qualities and gorgeous figuring on acoustic guitars. However, Brazilian rosewood is now banned from use in the construction of new guitars. What will likely happen to the price of used Brazilian rosewood guitars over time?

Accepted Answer

With the ban on new guitars using Brazilian rosewood, the supply of Brazilian rosewood guitars will decrease over time. This decrease in supply coupled with the continuing demand for guitars made from this highly sought-after tonewood will likely lead to an increase in the price of used guitars made from Brazilian rosewood.

Question 16

Figure: Demand, Supply Shifts  Reference: Ref 4-8 (Figure: Demand, Supply Shifts) In the figure, the initial demand curve is D1 and the initial supply curve is S1. If technological innovations lower the costs of production, what will happen?

Accepted Answer

Technological innovations that lower the costs of production will shift the supply curve to the right from S1 to S3. This will cause equilibrium price to decrease and equilibrium quantity to increase. The demand curve will not be affected, therefore it will remain at D1.

Question 17

Lead, an input in the production of ammunition, has increased in price from $0.60/lb in 2006 to over $1.50/lb in 2007. What happened to the equilibrium price and quantity of ammunition over this period?

Accepted Answer

An increase in the price of an input in the production process will cause an increase in the cost of production for firms. This will result in a decrease in the supply of ammunition as firms will be willing to supply less at any given price. As a result, the equilibrium price will increase, and the equilibrium quantity will decrease.

Question 18

Suppose there is an increase in demand in a market and no change in the supply. What will happen to the market equilibrium price and quantity?

Accepted Answer

An increase in demand with no change in supply will lead to a shortage of goods at the original equilibrium price. As a result, the price will rise to a new equilibrium point where the quantity demanded and supplied are equal. This increase in price will incentivize producers to increase their output, leading to a rise in the equilibrium quantity as well.

Question 19

Which of the following would increase the demand for beef?

Accepted Answer

When consumer income increases, people tend to purchase more meat, including beef.

Question 20

Gains from trade are maximized when:

Accepted Answer

Gains from trade are maximized when the market price is equal to the equilibrium price. At the equilibrium price, the quantity demanded and supplied are the same, meaning that all trades that are mutually beneficial have been completed. If the price were higher or lower than the equilibrium price, there would still be mutually beneficial trades that could be made but are not because of the price gap. Therefore, maximizing gains from trade require that the market price equals the equilibrium price.

Quiz 4: Equilibrium: How Supply and Demand Determine Prices

Figure: Market Changes Reference: Ref 4-7 (Figure: Market Changes) Refer to the figures. If these figures represent the market for blue jeans, which figure shows the effect of an increase in the price of denim, a raw material used to make jeans?