Test Bank for Managerial Economics: Foundations of Business Analysis and Strategy, 13th Edition

Chapter 2: DEMAND, SUPPLY, AND MARKET EQUILIBRIUM Multiple Choice 2-1 If the price of a complement for tires decreases, all else equal, a. quantity demanded for tires will decrease. b. quantity supplied for tires will decrease. c. demand for tires will increase. d. demand for tires will decrease. e. supply for tires will increase. Answer: c Difficulty: 01 Easy Topic: Demand AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-01 2-2 The market demand curve for a given good shifts when there is a change in any of the following factors EXCEPT a. the price of the good. b. the level of consumers’ income. c. the prices of goods related in consumption. d. the tastes of consumers. Answer: a Difficulty: 01 Easy Topic: Demand AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-01 2-3 Which of the following would DECREASE the demand for tennis balls? a. An increase in the price of tennis balls b. A decrease in the price of tennis rackets c. An increase in the cost of producing tennis balls d. A decrease in average household income when tennis balls are a normal good Answer: d Difficulty: 01 Easy Topic: Demand AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-01 2-4 If input prices increase, all else equal, a. quantity supplied will decrease. b. supply will increase. c. supply will decrease. d. demand will decrease. Answer: c Difficulty: 01 Easy Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1 Topic: Supply AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-02 2-5 Which of the following would increase the supply of corn? a. an increase in the price of pesticides b. a decrease in the demand for corn c. a fall in the price of corn d. a severe drought in the corn belt e. a decrease in the price of wheat Answer: e Difficulty: 02 Medium Topic: Supply AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-02 2-6 When Sonoma Vineyards reduces the price of its Cabernet Sauvignon from $15 a bottle to $12 a bottle, the result is an increase in a. the demand for this wine. b. the supply of this wine. c. the quantity of this wine demanded. d. the quantity of this wine supplied. Answer: c Difficulty: 02 Medium Topic: Supply AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-02 2-7 Which of the following will cause a change in quantity supplied? a. a change in input prices b. a technological change c. a change in the number of firms in the market d. a change in the market price of the good Answer: d Difficulty: 01 Easy Topic: Supply AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-02 2-8 When the average price of smart phones falls, the result is a. an increase in supply of smart phones. b. an increase in the quantity of smart phones supplied. c. an increase in the quantity of smart phones demanded. d. a decrease in the quantity of smart phones demanded. Answer: c Difficulty: 01 Easy Topic: Demand Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2 AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-01 2-9 Use the following general linear demand relation: Qd = 680 – 9P + 0.006 M – 4PR where M is income and PR is the price of a related good, R. From this relation it is apparent that the good is: a. an inferior good b. a substitute for good R c. a normal good d. a complement for good R e. both c and d Answer: e Difficulty: 02 Medium Topic: Demand AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-01 2-10 Use the following general linear demand relation: Qd = 680 – 9P + 0.006 M – 4PR where M is income and PR is the price of a related good, R. If M = $15,000 and PR = $20, the demand function is a. P = 690 – 9Qd . b. Qd = 690 – 9P . c. Qd = 680 – 9P . d. P = 680 – 9Qd . e. Qd = 800 -19P . Answer: b Difficulty: 02 Medium Topic: Demand AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-01 2-11 Use the following general linear demand relation: Qd = 680 – 9P + 0.006 M – 4PR where M is income and PR is the price of a related good, R. If M = $15,000 and PR = $20 and the supply function is Qs = 30 + 3P , equilibrium price and quantity are, respectively, a. P = $55 and Q = 195. Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3 b. P = $6 and Q = 38. c. P = $12 and Q = 200. d. P = $50 and Q = 170. e. P = $40 and Q = 250. Answer: a Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-12 Use the following general linear demand relation: Qd = 680 – 9P + 0.006 M – 4PR where M is income and PR is the price of a related good, R. If M = $15,000 and PR = $20 and the supply function is Qs = 30 + 3P , then, when the price of the good is $60, a. there is a shortage of 60 units of the good. b. there is equilibrium in the market. c. there is a surplus of 60 units of the good. d. the quantities demanded and supplied are indeterminate. Answer: c Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-13 Use the following general linear demand relation: Qd = 680 – 9P + 0.006 M – 4PR where M is income and PR is the price of a related good, R. If M = $15,000 and PR = $20 and the supply function is Qs = 30 + 3P , then, when the price of the good is $40, a. there is equilibrium in the market. b. there is a shortage of 180 units of the good. c. there is a surplus of 180 units of the good. d. there is a shortage of 80 units of the good. Answer: b Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 4 2-14 Use the following demand and supply functions: Demand: Qd = 50 – 4P Supply: Equilibrium price and output are a. P = $5 and Q = 70. b. P = $11 and Q = 3.32. c. P = $12 and Q = 44. d. P = $15 and Q = 50. e. none of the above Answer: e Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-15 Use the following demand and supply functions: Demand: Qd = 50 – 4P Supply: If the price is $10, there is a a. surplus of 30 units. b. shortage of 30 units. c. surplus of 40 units. d. shortage of 10 units. e. none of the above Answer: a Difficulty: 01 Easy Topic: Market Equilibrium AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-03 2-16 Qs = 20 + 2P Qs = 20 + 2P Use the following demand and supply functions: Demand: Qd = 50 – 4P Supply: If the price is $2, there is a a. surplus of 10 units. b. shortage of 10 units. c. surplus of 30 units. d. shortage of 18 units. e. none of the above Answer: d Difficulty: 01 Easy Topic: Market Equilibrium AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-03 Qs = 20 + 2P Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5 2-17 Refer to the figure below: If price is $16 there is a. a shortage of 250 units. b. a surplus of 250 units. c. a shortage of 125 units. d. a surplus of 125 units. e. equilibrium in the market. Answer: b Difficulty: 01 Easy Topic: Market Equilibrium AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-03 2-18 Refer to the figure below: Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 6 If the price is $16, the resulting a. surplus will lead to a fall in price. b. shortage will lead to a fall in price. c. surplus will lead to a rise in price. d. shortage will lead to a rise in price. Answer: a Difficulty: 01 Easy Topic: Market Equilibrium AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-03 2-19 Refer to the figure below: Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7 If price is $8, a. there will be a surplus of 150 units. b. there will be a shortage of 150 units. c. price will fall. d. shortage of 75 units. e. surplus of 75 units. Answer: b Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-20 Suppose that the market for salad dressing is in equilibrium. Then the price of lettuce rises. What will happen? a. The price of salad dressing will rise. b. The supply of salad dressing will decrease. c. The demand for salad dressing will decrease. d. The quantity demanded of salad dressing will increase. Answer: c Difficulty: 02 Medium Topic: Changes in Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-05 2-21 Scientists have developed a bacterium they believe will lower the freezing point of agricultural products. This innovation could save farmers $1 billion a year in crops now lost to frost damage. If this technology becomes widely used, what will happen to the equilibrium price and quantity in, for example, the potato market? a. price will decrease, quantity will decrease b. price will decrease, quantity will increase c. price will increase, quantity will decrease d. price will increase, quantity will increase e. The change in equilibrium price and quantity is indeterminate. Answer: b Difficulty: 02 Medium Topic: Changes in Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-05 2-22 Suppose that the market for engagement rings is in equilibrium. Then political unrest in South Africa shuts down the diamond mines there. South Africa is the world’s primary supplier of diamonds. What will happen? a. The equilibrium quantity of engagement rings will decrease. b. The equilibrium price of engagement rings will decrease. c. The demand for engagement rings will decrease. d. The supply of engagement rings will increase. Answer: a Difficulty: 02 Medium Topic: Changes in Market Equilibrium Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8 AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-02 2-23 So long as the actual market price exceeds the equilibrium market price, there will be a. downward pressure on the price. b. upward pressure on the price. c. excess demand. d. a shortage. Answer: a Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-24 In which of the following cases will the effect on equilibrium output be indeterminate (i.e., depend on the magnitudes of the shifts in supply and demand)? a. Demand increases and supply increases b. Demand decreases and supply decreases c. Demand decreases and supply increases d. Demand remains constant and supply increases Answer: c Difficulty: 02 Medium Topic: Changes in Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-25 Increases in the wage rates of coal miners and decreases in the price of natural gas would cause the price of coal to a. rise, fall, or remain unchanged depending on the magnitude of the changes, but the equilibrium quantity of coal would fall. b. rise, fall, or remain unchanged depending on the magnitude of the changes, but the equilibrium quantity of coal would increase. c. rise, but the equilibrium quantity of coal would rise or fall depending on the magnitude of the changes. d. rise, but the equilibrium quantity of coal would fall. e. fall, but the equilibrium quantity of coal would rise or fall depending on the magnitude of the changes. Answer: a Difficulty: 02 Medium Topic: Changes in Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 9 2-26 Refer to the figure below: In the figure, the equilibrium price and quantity are a. P = $6 and Q = 800. b. P = $4 and Q = 300. c. P = $4 and Q = 400. d. P = $6 and Q = 300. e. P = $7 and Q = 800. Answer: d Difficulty: 01 Easy Topic: Market Equilibrium AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-03 Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 10 2-27 Refer to the figure below: Let demand remain constant at D; an increase in wages causes firms to be willing and able to sell 150 fewer units at each price than they were before the wage increase. a. The new equilibrium price and quantity will be P = $6 and Q = 150. b. The new equilibrium price and quantity will be P = $6 and Q = 400. c. The new equilibrium price and quantity will be P = $7 and Q = 250. d. The new equilibrium price and quantity will be P = $8 and Q = 300. Answer: c Difficulty: 02 Medium Topic: Changes in Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-05 2-28 Refer to the figure below: Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11 Let supply remain constant at S; a decrease in income causes consumers to be willing and able to purchase 150 fewer units at each price than they were previously. a. The new equilibrium price and quantity will be P = $6 and Q = 150. b. The new equilibrium price and quantity will be P = $5 and Q = 150. c. The new equilibrium price and quantity will be P = $7 and Q = 250. d. The new equilibrium price and quantity will be P = $5 and Q = 200. Answer: d Difficulty: 02 Medium Topic: Changes in Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-05 2-29 Refer to the figure below: Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 12 Let supply remain constant at S; an increase in the price of a substitute good causes consumers to be willing and able to buy 150 more units of the good at each price in the list than they were when demand was D. Which of the following statements is (are) true? a. At the original equilibrium price there will be a shortage of 150. b. At the original equilibrium price there will be a surplus of 150 c. At the new equilibrium P = $6 and Q = 450. d. At the new equilibrium P = $7 and Q = 400. e. both a and d Answer: e Difficulty: 02 Medium Topic: Changes in Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-05 2-30 Use the following demand and supply functions: Demand: Qd = 900 – 60P Supply: Qs = -200 + 50P Equilibrium price and output are a. P = $7 and Q = 480. b. P = $10 and Q = 300. c. P = $20 and Q = 150. d. P = $100 and Q = 5,300. Answer: b Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-31 Use the following demand and supply functions: Demand: Qd = 900 – 60P Supply: Qs = -200 + 50P If the price is currently $11, there is a a. surplus of 110 units. b. shortage of 240 units. c. surplus of 350 units. d. shortage of 700 units. Answer: a Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-32 Use the following demand and supply functions: Demand: Qd = 900 – 60P Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 13 Supply: Qs = -200 + 50P Let supply remain constant; an increase in income causes consumers to be willing and able to buy 220 more units at each price than they were previously. The new equilibrium price and quantity are a. P = $10 and Q = 520. b. P = $12 and Q = 400. c. P = $10 and Q = 80. d. P = $15 and Q = 600. Answer: b Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-33 A “puppy boom” and an increase in the price of horse meat would cause the market price of dog food to a. rise, fall, or remain unchanged depending on the magnitude of the changes, and the market output to rise. b. rise and the market output to rise, fall, or remain unchanged depending on the magnitude of the changes. c. rise and the market output to rise. d. fall and the market output to rise, fall, or remain unchanged depending on the magnitude of the changes. Answer: b Difficulty: 02 Medium Topic: Changes in Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-05 2-34 With a given supply curve, a decrease in demand leads to a. a decrease in equilibrium price and an increase in equilibrium quantity. b. an increase in equilibrium price and a decrease in equilibrium quantity. c. a decrease in equilibrium price and a decrease in equilibrium quantity. d. no change in price and a decrease in equilibrium quantity. Answer: c Difficulty: 01 Easy Topic: Changes in Market Equilibrium AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-05 2-35 Suppose that more people want Orange Bowl tickets than the number of tickets available. Which of the following statements is correct? a. There is a shortage of Orange Bowl tickets at the box office price. b. The box office price is higher than the equilibrium price for Orange Bowl tickets. c. If the box office price were raised, the excess demand for Orange Bowl tickets would decrease. d. both a and c e. all of the above Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 14 Answer: d Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-36 Use the following general linear demand relation: Qd = 100 – 5P + 0.004 M – 5PR where P is the price of good X, M is income, and PR is the price of a related good, R. What is the demand function when M = $50,000 and PR = $10? a. Qd = 350 – 5P b Qd = 300 – 5P c. Qd = 200 – 5P d. Qd = 100 – 5P e. none of the above Answer: e Difficulty: 02 Medium Topic: Demand AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-01 2-37 Use the following general linear demand relation: Qd = 100 – 5P + 0.004 M – 5PR where P is the price of good X, M is income, and PR is the price of a related good, R. From the demand function it is apparent that related good R is a. normal. b. inferior. c. a substitute for good X . d. a complement for good X. Answer: d Difficulty: 02 Medium Topic: Demand AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-01 2-38 Use the following general linear demand relation: Qd = 100 – 5P + 0.004 M – 5PR Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15 where P is the price of good X, M is income, and PR is the price of a related good, R. If M = $50,000 and PR = $10 and the supply function is Qs = 150 + 5P , market price and output are, respectively, a. P = $12 and Q = 150. b. P = $10 and Q = 200. c. P = $12 and Q = 200. d. P = $15 and Q = 175. e. P = $15 and Q = 225. Answer: b Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-39 Use the following general linear demand relation: Qd = 100 – 5P + 0.004 M – 5PR where P is the price of good X, M is income, and PR is the price of a related good, R. If income increases to $100,000 and the price of the related good is now $20, what is the demand function? a. Qd = 300 – 5P b. Qd = 400 -10P c. Qd = 100 -10P d. Qd = 400 – 5P e. none of the above Answer: d Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-40 Use the following general linear demand relation: Qd = 100 – 5P + 0.004 M – 5PR where P is the price of good X, M is income, and PR is the price of a related good, R. Income is $100,000, the price of the related good is $20, and the supply function is Qs = 150 + 5P. What is the equilibrium price? a. $30 b. $25 c. $40 d. $35 e. $50 Answer: b Difficulty: 02 Medium Topic: Market Equilibrium Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 16 AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-41 Use the following general linear demand relation: Qd = 100 – 5P + 0.004 M – 5PR where P is the price of good X, M is income, and PR is the price of a related good, R. Income is $80,000, and the price of the related good is $40. Also let consumers’ tastes change so that consumers now demand 100 more units at each price. When the price of the good is $50, how many units of the good are demanded? a. 70 b. 200 c. 220 d. 100 e. none of the above Answer: a Difficulty: 02 Medium Topic: Demand AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-01 2-42 If a demand curve goes through the point P = $6 and Qd = 400, then a. $6 is the highest price consumers will pay for 400 units. b. $6 is the lowest price consumers can be charged to induce them to buy 400 units. c. 400 units are the most consumers will buy if price is $6. d. consumers will buy more than 400 if price is $6. e. both a and c Answer: e Difficulty: 02 Medium Topic: Demand AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-01 2-43 If a supply curve goes through the point P = $10 and Qs = 320, then a. $10 is the highest price that will induce firms to supply 320 units. b. $10 is the lowest price that will induce firms to supply 320 units. c. at a price higher than $10 there will be a surplus. d. at a price lower than $10 there will be a shortage. e. both c and d Answer: b Difficulty: 02 Medium Topic: Supply AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-02 Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 17 2-44 Use the following general linear supply function: Qs = 40 + 6P – 8PI +10F where Qs is the quantity supplied of the good, P is the price of the good, PI is the price of an input, and F is the number of firms producing the good. If PI = $20 and F = 60 what is the equation of the supply function? a. Qs = 400 + 6P b. Qs = 40 + 8P c. P = 480 + 6Qs d. Qs = 480 + 6P e. none of the above Answer: d Difficulty: 02 Medium Topic: Supply AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-02 2-45 Use the following general linear supply function: Qs = 40 + 6P – 8PI +10F where Qs is the quantity supplied of the good, P is the price of the good, PI is the price of an input, and F is the number of firms producing the good. If PI = $20, F = 60, and the demand function is Qd = 600 – 6P the equilibrium price and quantity are, respectively, a. P = $10 and Q = 640. b. P = $8 and Q = 326. c. P = $10 and Q = 540. d. P = $8 and Q = 640. e. none of the above. Answer: c Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-46 Use the following general linear supply function: Qs = 40 + 6P – 8PI +10F where Qs is the quantity supplied of the good, P is the price of the good, PI is the price of an input, and F is the number of firms producing the good. Now suppose PI = $40 and F = 50, what is the largest amount of the good that firms will supply when the price of the good is $20? a. 340 units Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 18 b. 220 units c. 120 units d. 80 units Answer: a Difficulty: 02 Medium Topic: Supply AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-02 2-47 Use the following general linear supply function: Qs = 40 + 6P – 8PI +10F where Qs is the quantity supplied of the good, P is the price of the good, PI is the price of an input, and F is the number of firms producing the good. When PI = $40 and F = 50, the INVERSE supply function is a. P = –36.667 + 0.1667Qs. b. P = –220 + 6Qs. c. P = 220 + 0.1667Qs. d. P = 220 + 6Qs. Answer: a Difficulty: 02 Medium Topic: Supply AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-48 Use the following general linear supply function: Qs = 40 + 6P – 8PI +10F where Qs is the quantity supplied of the good, P is the price of the good, PI is the price of an input, and F is the number of firms producing the good. Suppose PI = $40 and F = 50, what is the lowest price that will induce firms to supply 400 units of output? a. $15 b. $20 c. $25 d. $30 e. $35 Answer: d Difficulty: 02 Medium Topic: Supply AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-02 Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 19 2-49 Use the following general linear supply function: Qs = 40 + 6P – 8PI +10F where Qs is the quantity supplied of the good, P is the price of the good, PI is the price of an input, and F is the number of firms producing the good. Suppose PI = $40, F = 50, and the demand function is Qd = 700 – 6P , then if government sets a price of $50 what will be the result? a. a shortage of 120 b. a surplus of 120 c. a shortage of 160 d. a surplus of 160 Answer: b Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-50 Use the following general linear supply function: Qs = 40 + 6P – 8PI +10F where Qs is the quantity supplied of the good, P is the price of the good, PI is the price of an input, and F is the number of firms producing the good. Suppose PI = $40, F = 50, and the demand function is Qd = 700 – 6P , then if government sets a price of $30 what will be the result? a. a shortage of 120 b. a surplus of 120 c. a shortage of 160 d. a surplus of 160 Answer: a Difficulty: 02 Medium Topic: Ceiling and Floor Prices AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-06 2-51 Use the following general linear demand function below: Qd = a + bP + cM + dPR where Qd = quantity demanded, P = the price of the good, M = income, PR = the price of a good related in consumption. The law of demand requires that a. a < 0. b. b < 0. c. P < 0. d. a < 0 and b < 0. e. b < 0 and P < 0. Answer: b Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 20 Difficulty: 02 Medium Topic: Demand AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-01 2-52 Use the following general linear demand function below: Qd = a + bP + cM + dPR where Qd = quantity demanded, P = the price of the good, M = income, PR = the price of a good related in consumption. If c = 15 and d = 20, the good is a. a normal good. b. an inferior good. c. a substitute for good R. d. a complement with good R. e. both a and c Answer: e Difficulty: 02 Medium Topic: Demand AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-01 2-53 Use the following general linear demand function below: Qd = a + bP + cM + dPR where Qd = quantity demanded, P = the price of the good, M = income, PR = the price of a good related in consumption. For the general linear demand function given above a. DQd DM = c. b. d is the effect on the quantity demanded of the good of a one-dollar change in the price of the related good, all other things constant. c. b is the effect on the quantity demanded of the good of a one-dollar change in the price of the good, all other things constant. d. all of the above Answer: d Difficulty: 03 Hard Topic: Demand AACSB: Analytical Thinking Blooms: Analyze Learning Objective: 02-01 Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 21 2-54 If the current price of a good is $10, market demand is Qd = 400 – 20P , and market supply is Qs = -50 + 10P , then a. more of the good is being produced than people want to buy. b. a lower price will increase the shortage. c. at the current price there is excess demand, or a shortage, of 150 units. d. Both b and c e. All of the above Answer: d Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-03 2-55 Yesterday's newspaper reported the results of a study indicating that people who eat more bananas are more attractive to the opposite sex. What do you expect to happen to the market price and quantity of bananas? a. price will decrease, quantity will decrease b. price will decrease, quantity will increase c. price will increase, quantity will decrease d. price will increase, quantity will increase Answer: d Difficulty: 02 Medium Topic: Demand AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-05 2-56 If the market price of eggs rises at the same time as the market quantity of eggs purchased decreases, this could have been caused by a. an increase in demand with no change in supply. b. a decrease in supply with no change in demand. c. an increase in supply and an increase in demand. d. an increase in supply and a decrease in demand. Answer: b Difficulty: 02 Medium Topic: Changes in Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-05 2-57 Derrick owns and operates a bakery. Every Saturday he bakes a batch of fresh kolaches, and every Saturday he sells all the kolaches and has to turn some customers away. Which of the following statements is correct? a. At the current price, quantity demanded exceeds quantity supplied. b. The current price is higher than the equilibrium price. c. If Derrick lowered the price of kolaches, the shortage would increase. d. both a and c e. all of the above Answer: d Difficulty: 02 Medium Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 22 Topic: Market Equilibrium AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-03 2-58 In which of the following cases must price always fall? a. Demand increases and supply increases. b. Demand decreases and supply decreases. c. Supply increases and demand remains constant. d. Demand decreases and supply increases. e. Both c and d Answer: e Difficulty: 02 Medium Topic: Changes in Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-05 2-59 Consumer surplus a. is positive for all but the last unit purchased. b. for a particular unit of consumption is computed by taking the difference between demand price and market price. c. is the area below demand and above market price over all the units consumed. d. added to producer surplus provides a measure of the net gain to society from the production and consumption of the good. e. all of the above Answer: e Difficulty: 01 Easy Topic: Measuring the Value of Market Exchange AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-04 2-60 If the demand price for the 2,000th unit of a good is $10, then a. total consumer surplus for 2,000 units is $10,000. b. the economic value of the 2,000th unit is $10. c. consumer surplus for the 2,000th unit can be computed by subtracting the supply price for the 2,000th unit. d. the net gain to society from the production and consumption of the 2,000th unit can be computed by subtracting the supply price from $10. e. Both b and d Answer: e Difficulty: 02 Medium Topic: Measuring the Value of Market Exchange AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-04 2-61 Suppose an individual buyer values a pound of butter at $10. If the market price of butter is $8, what is the consumer surplus for this buyer? a. $0 b. $2 Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 23 c. $3 d. $4 e. $5 Answer: b Difficulty: 01 Easy Topic: Measuring the Value of Market Exchange AACSB: Reflective Thinking Blooms: Remember Learning Objective: 02-04 2-62 If the market price of a good is $150 and the supply price of the good is $70, what is the producer surplus if any? a. $0 b. $70 c. $80 d. $150 e. $220 Answer: c Difficulty: 01 Easy Topic: Measuring the Value of Market Exchange AACSB: Reflective Thinking Blooms: Remember Learning Objective: 02-04 2-63 Suppose the demand and supply curves for good X are both linear. The demand price for the first unit of X is $28, and the supply price for the first unit of X is $6. If the equilibrium price for good X is $16 and the equilibrium quantity of X is 24,000 units, then total consumer surplus is $________, total producer surplus is $_________, and total social surplus is $_____________. a. $28; $6; $16 b. $144,000; $120,000; $264,000 c. $120,000; $144,000; $264,000 d. $672,000; $144,000; $384,000 e. $144,000; $672,000; $384,000 Answer: b Difficulty: 03 Hard Topic: Measuring the Value of Market Exchange AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-04 2-64 Suppose there are only three consumers in the market for a good and each consumer will buy only one unit of the good. Their individual economic values for the good are $6, $8, and $12, respectively. If the market price for the good is $10, what is the total consumer surplus for the three buyers? a. $2 b. $4 c. $6 d. $8 e. $12 Answer: a Difficulty: 02 Medium Topic: Measuring the Value of Market Exchange Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 24 AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-04 The world market for newly smelted primary aluminum (i.e., excluding scrap or recycled sources) recently experienced a period of rising inventories and falling prices. The Wall Street Journal reported that Russian smelter Rusal, the world’s largest aluminum producer, expected primary aluminum ingot prices would need to fall even further before worldwide inventory accumulation could stabilize. Suppose the demand for primary aluminum can be represented by the equation Qd = 124 − 0.025P (Qd is the monthly worldwide quantity demanded in millions of metric tons of new aluminum, P is the dollar price of new aluminum per ton). Further suppose the world supply of aluminum is Qs = –50 + 0.025P (Qs is the monthly worldwide quantity supplied in millions of metric tons of new aluminum; P is the dollar price of new aluminum per ton). On the axes provided below, sketch the world demand and supply curves for primary aluminum to help you answer the next three questions. 2-65 At the time of Rusal’s concern, primary aluminum prices were relatively high at $4,200 per ton. At this price, calculate the monthly rate of inventory growth in the global aluminum market using the given demand and supply equations for the world aluminum market. a. b. c. Inventories would be growing at a rate of 36 million metric tons per month. Inventories would be growing at a rate of 55 million metric tons per month. Inventories would be falling at a rate of 19 million metric tons per month. Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 25 d. Inventories would be falling at a rate of 37 million metric tons per month. Answer: a Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-03 2-66 Rusal believed the price of aluminum would fall because of the growing accumulation of inventories worldwide. Evaluate Rusal’s prediction by using the demand and supply equations to make a prediction about the movement of world aluminum price, i.e., explain why you think price will either rise or fall. a. b. c. Price is likely to fall from $4,200 to $3,480 per ton in order to reach market equilibrium. Price is likely to fall from $4,200 to $3,000 per ton in order to reach market equilibrium. Price is likely to fall from $4,200 to $3,000 per ton in order to eliminate the existing surplus of aluminum. d. Price is likely to fall from $4,200 to $3,000 per ton in order to eliminate the existing shortage of aluminum. Answer: a Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-03 2-67 When the world aluminum market reaches equilibrium, how much aluminum worldwide do you expect will be produced and sold each month? a. 19 million metric tons per month b. 37 million metric tons per month c. 44 million metric tons per month d. 55 million metric tons per month Answer: b Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-03 2-68 Two events occur simultaneously in the market for California wine: Event 1: The price of glass wine bottles falls because strict government regulations on anti-shatter glass containers are abolished by Congress. Event 2: The price of cheese decreases. Using demand and supply analysis predict what is likely to happen to the equilibrium price of California wine and the equilibrium quantity of California wine. a. Demand for California wine increases and supply of California wine increases, and the impact of these two simultaneous events is to increase equilibrium price and increase equilibrium quantity. Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 26 b. Demand for California wine increases and supply of California wine decreases, and the impact of these two simultaneous events is to increase equilibrium price while the change in equilibrium quantity is indeterminate. c. Demand for California wine decreases and supply of California wine decreases, and the impact of these two simultaneous events is to decrease equilibrium quantity while the change in equilibrium price is indeterminate. d. Demand for California wine decreases and supply of California wine decreases, and the impact of these two simultaneous events is to increase equilibrium price while the change in equilibrium quantity is indeterminate. e. Demand for California wine increases and supply of California wine increases, and the impact of these two simultaneous events is to increase equilibrium quantity while the change in equilibrium price is indeterminate. Answer: e Difficulty: 03 Hard Topic: Changes in Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-05 2-69 Two events occur simultaneously in the market for California wine: Event 1: The price of glass wine bottles falls because strict government regulations on anti-shatter glass containers are abolished by Congress. Event 2: The price of cheese increases. Using demand and supply analysis predict what is likely to happen to the equilibrium price of California wine and the equilibrium quantity of California wine. a. Demand for California wine increases and supply of California wine increases, and the impact of these two simultaneous events is to increase equilibrium price and increase equilibrium quantity. b. Demand for California wine increases and supply of California wine decreases, and the impact of these two simultaneous events is to decrease equilibrium price while the change in equilibrium quantity is indeterminate. c. Demand for California wine decreases and supply of California wine decreases, and the impact of these two simultaneous events is to decrease equilibrium quantity while the change in equilibrium price is indeterminate. d. Demand for California wine decreases and supply of California wine decreases, and the impact of these two simultaneous events is to increase equilibrium price while the change in equilibrium quantity is indeterminate. e. Demand for California wine increases and supply of California wine increases, and the impact of these two simultaneous events is to increase equilibrium quantity while the change in equilibrium price is indeterminate. Answer: b Difficulty: 03 Hard Topic: Changes in Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-05 Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 27 2-70 Two events occur simultaneously in the market for California wine: Event 1: The price of glass wine bottles rises because the California state government imposes strict new government regulations on anti-shatter glass containers for all food and beverage products. Event 2: The price of cheese increases. Using demand and supply analysis predict what is likely to happen to the equilibrium price of California wine and the equilibrium quantity of California wine. a. Demand for California wine increases and supply of California wine increases, and the impact of these two simultaneous events is to increase equilibrium price and increase equilibrium quantity. b. Demand for California wine increases and supply of California wine decreases, and the impact of these two simultaneous events is to decrease equilibrium price while the change in equilibrium quantity is indeterminate. c. Demand for California wine decreases and supply of California wine decreases, and the impact of these two simultaneous events is to decrease equilibrium quantity while the change in equilibrium price is indeterminate. d. Demand for California wine decreases and supply of California wine decreases, and the impact of these two simultaneous events is to increase equilibrium price while the change in equilibrium quantity is indeterminate. e. Demand for California wine increases and supply of California wine increases, and the impact of these two simultaneous events is to increase equilibrium quantity while the change in equilibrium price is indeterminate. Answer: c Difficulty: 03 Hard Topic: Changes in Market Equilibrium AACSB: Analytical Thinking Blooms: Apply Learning Objective: 02-05 Use the following information on the demand for good X to answer the next 6 questions. Suppose the quantity demanded of good X (Qd) depends only on the price of good X (P), monthly income (M), and the price of a related good R (PR): Qd = 30,500 -1,000P + 0.25M + 5PR 2-71 The equation for the (direct) demand curve for the good when M = $60,000 and PR = $1,000 is Qd = _____________. a. Qd = 50,500 – 1,000P b. Qd = 30,500 – 1,000P c. Qd = 30,500 – 1,000P + 0.25M d. Qd = 30,500 – 1,000P + 5PR e. P = 50.5 – 0.0001 P Answer: a Difficulty: 02 Medium Topic: Demand AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-01 Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 28 2-72 Good R a _______________ for good X. All else constant, a $3 decrease in PR will cause quantity demanded of good X to _____________ by _________ units. a. substitute; increase; 0.75 b. substitute; decrease; 15 c. substitute; decrease; 3 d. complement; increase; 3 e. complement; decrease; 0.75 Answer: b Difficulty: 02 Medium Topic: Demand AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-01 2-73 For the direct demand curve derived above, the equation for the inverse demand function is a. P = 50,500 – 1,000Qd b. P = 30,500 – 0.001Qd c. Qd = 30,500 – 0.001P + 0.25M d. Qd = 30,500 – 0.001P + 5PR e. P = 50.5 – 0.0001 P Answer: e Difficulty: 02 Medium Topic: Demand AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-01 2-74 Now suppose the supply for good X is Qs = -10,000 + 2,000 P . The equilibrium price and 3 quantity are P = ________ and Q = __________. a. $30; 14,400 b. $30; 14,000 c. $36.30; 14,000 d. $36.30; 14,200 e. $38; 15,000 Answer: d Difficulty: 02 Medium Topic: Market Equilibrium AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-03 2-75 Total consumer surplus in equilibrium is $_________________. Total producer surplus in equilibrium is $______________. The net gain to society created by the market for good X is $__________________. Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 29 a. $100,820; $151,230; $252,050 b. $151,230; $100,820; $252,050 c. $252,050; 100,820; $352,870 d. $352,870; $252,050; 151,230 Answer: a Difficulty: 02 Medium Topic: Measuring the Value of Market Exchange AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-04 2-76 The economic value of the 10,000th unit is $_______________ and the minimum price producers will accept to produce this unit is $__________. a. $100,820; $151,230 b. $50.50; $15 c. $36.30; $36.30 d. $40.50; $30 Answer: d Difficulty: 02 Medium Topic: Measuring the Value of Market Exchange AACSB: Reflective Thinking Blooms: Understand Learning Objective: 02-04 Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 30