Chapter 4 : (Market Forces of Supply and Demand)

Section A

1. If buyers and sellers in a certain market are price takers, then individually
a. they have no influence on market price.
b. they have some influence on market price, but that influence is limited.
c. buyers will be able to find prices lower than those determined in the market.
d. sellers will find it difficult to sell all they want to sell at the market price.

2. Two goods are substitutes if a decrease in the price of one good

a. decreases the demand for the other good.
b. decreases the quantity demanded of the other good.
c. increases the demand for the other good.
d. increases the quantity demanded of the other good.

3. The law of demand says that

a. an increase in quantity demanded causes price to decrease.
b. an increase in price causes quantity demanded to increase.
c. an increase in price causes quantity demanded to decrease.
d. an increase in quantity demanded causes price to increase.

4. Which of the following events would cause a movement upward and to the right
along the supply curve for tomatoes?
a. The number of sellers of tomatoes increases.
b. There is an advance in technology that reduces the cost of producing
tomatoes.
c. The price of fertilizer decreases, and fertilizer is an input in the production
of tomatoes.
d. The price of tomatoes rises.

5. Which of the following events could cause an increase in the supply of ceiling
fans?
a. The number of sellers of ceiling fans increases.
b. There is an increase in the price of air conditioners, and consumers regard
air conditioners and ceiling fans as substitutes.
c. There is an increase in the price of the motor that powers ceiling fans.
d. All of the above are correct.

6. If, at the current price, there is a shortage of a good,

a. sellers are producing more than buyers wish to buy.
b. the market must be in equilibrium.
c. the price is below the equilibrium price.
d. quantity demanded equals quantity supplied.

7. A decrease in input costs to firms in a market will result in

a. a decrease in equilibrium price and a decrease in equilibrium quantity.
b. an increase in equilibrium price and no change in equilibrium quantity.
c. an increase in equilibrium price and an increase in equilibrium quantity.
d. a decrease in equilibrium price and an increase in equilibrium quantity.
8. Suppose that demand decreases and supply decreases. What would you expect to
occur in the market for the good?
a. Equilibrium price would increase, but the impact on equilibrium quantity
would be ambiguous.
b. Equilibrium price would decrease, but the impact on equilibrium quantity
would be ambiguous.
c. Equilibrium quantity would decrease, but the impact on equilibrium price
would be ambiguous.
d. Both equilibrium price and equilibrium quantity would increase.

9. Which of the following would not be a determinant of the demand for a particular
good?
a. prices of related goods
b. income
c. tastes
d. the prices of the inputs used to produce the good

10. Two goods are complements if a decrease in the price of one good
a. decreases the quantity demanded of the other good.
b. decreases the demand for the other good.
c. increases the quantity demanded of the other good.
d. increases the demand for the other good.

11. Two goods are substitutes if a decrease in the price of one good
a. decreases the demand for the other good.
b. decreases the quantity demanded of the other good.
c. increases the demand for the other good.
d. increases the quantity demanded of the other good.

12. Proton Berhad announces that it will offer RM3,000 rebates on new Waja starting
next month. As a result of this information, today’s demand curve for Waja
a. shifts to the right.
b. shifts to the left.
c. shifts either to the right or to the left, but we cannot determine the direction
of the shift from the given information.
d. will not shift; rather, the demand curve for Mustangs will shift to the right
next month.

13. Which of the following is consistent phù hợp with the law of demand?
a. An increase in the price of a tape causes an increase in the quantity of tapes
demanded.
b. An increase in the price of a soda causes a decrease in the quantity of soda
demanded.
c. A decrease in the price of a gallon of milk causes a decrease in the quantity
of milk demanded.
d. A decrease in the price of juice causes no change in the quantity of juice
demanded.
14. A drop in the price of a compact disc shifts the demand curve for prerecorded tapes
leftward. From that you know compact discs and prerecorded tapes are
a. complements.
b. substitutes.
c. inferior goods.
d. normal goods.

15. A reduction in the price of a good

a. shifts the good’s demand curve leftward and also decreases the quantity
demanded.
b. shifts the good’s demand curve leftward but does not decrease the quantity
demanded.
c. does not shift the good’s demand curve leftward but does decrease the
quantity demanded.
d. neither shifts the good’s demand curve leftward nor decreases the quantity
demanded.

16.

The figure above represents the market for candy. People become more concerned
that eating candy causes them to gain weight, which they do not like. As a result,
the
a. demand curve shifts from D2 to D1 and the supply curve will not shift.
b. demand curve shifts from D1 to D2 and the supply curve shifts from S1 to S2.
c. demand curve shifts from D2 to D1 and the supply curve shifts from S2 to S1.
d. demand curve will not shift, and the supply curve shifts from S1 to S2.

17. Which of the following correctly describes how price adjustments eliminate a
shortage?
a. As the price rises, the quantity demanded decreases while the quantity
supplied increases.
b. As the price rises, the quantity demanded increases while the quantity
supplied decreases.
c. As the price falls, the quantity demanded decreases while the quantity
supplied increases.
d. As the price falls, the quantity demanded increases while the quantity
supplied decreases.
 18. Goods A and B are complementary goods (in consumption). The cost of a resource
used in the production of A decreases. As a result,
a. the equilibrium price of B will fall and the equilibrium price of A will rise.
b. the equilibrium price of B will rise and the equilibrium price of A will fall.
c. the equilibrium prices of both A and B will rise.
d. the equilibrium prices of both A and B will fall.

19. The demand for hot dogs is given by QD = 8000 – 7000P, where QD is the quantity
demanded and P is the price in dollars. The supply for hot dogs is given by
QS = 4000 + 1000P, where QS is the quantity supplied and P is the price in dollars.
Given these supply and demand relationships,
a. At the equilibrium, the price = $0.50 and the quantity = 4500 hot dogs.
b. At a price of $1, there is a shortage of 4000 hot dogs.
c. At a price of $1, there is a surplus of 4000 hot dogs.
d. Both answers A and C are correct.

Section B
Question 1
Outline the main determinants of quantity demanded and quantity supplied, and explain how these
interact to determine the market price.

Quantity demanded:
when the price of a good rises, the quantity demanded of the good falls, and when the price
falls, the quantity demanded rises, demand schedule , , a table that shows the relationship between
the price of a good and the quantity demanded constant everything else that influences how much
of the good consumers want to buy
Quantity supply:

When the price of good is high, selling good is profitable, and so the quantity supplied is
large. Sellers of good work long hours, buy many good machines, and hire many workers. By
contrast, when the price of good is low, the business is less profitable, so sellers produce less
good. At a low price, some sellers may even choose to shut down, and their quantity supplied
falls to zero. This relationship between price and quantity supplied is called the law of supply:
Other things being equal, when the price of a good rises, the quantity supplied of the good also
rises, and when the price falls, the quantity supplied falls as well.

Equilibrium in a market occurs when the price balances the plans of buyers and
sellers. The equilibrium price is the price at which the quantity demanded equals
the quantity supplied. The equilibrium quantity is the quantity bought and sold at the equilibrium
price.

Question 2
Given the following demand and supply functions of product X (units/day).
Demand : Qd = 20 – 2P
Supply : Qs = 2 + 4P

a) Currently, price = 2, is the market in equilibrium? if not, is there a shortage and surplus and how
many units?
Demand: Qd= 20 -2.2= 16
Supply: Qs= 2 + 4.2 = 10
 16 ≠ 10  the market not in equilibrium
 There is a shortage: 16-10= 6 units

b) Graph the demand and supply. Label the equilibrium price and equilibrium quantity.
Equilibrium:
Qd=Qs  20 -2P = 2 +4P  P=3  Qd = 14, Qs= 14

Question 3
Suppose that the demand and supply for standard microwaves is described by the following
equations: QD = 20,000 – 100P and QS = –1,000 + 50P where P is the price in dollars; QD is the
quantity demanded in units per month; QS is the quantity supplied in units per month.
a) Solve for the equilibrium price and quantity.
QD=QS  20,000 – 100P = -1,000 + 50P  P=140
The equilibrium price and quantity
QD= 20,000 – 100.140 = 6,000
QS= -1,000 +50.120=6000
 The equilibrium price and quantity is 6,000 units

b) Determine the price the buyers pay and the price the sellers receive if a $30 unit tax is
imposed on the sellers.

QD = 20,000 – 100P

QS1 = –1,000 + 50(P – 30) = -1000 + 50P -1500 = -2500 + 50P

New equilibrium
QD = QS1
20000 – 100P = -2500 + 50P
150P = 22500
Pe1 = 22500/150 = $150 per unit = Pb1
Ps1 = Pb1 – Tax = $150 - $30 = $120 per unit.

Question 4
Below you find a demand schedule for ice cream cones for June, July and August. A, B and C are
three different consumers.
 26

Price A B C
$2 40 30 10
$3 30 22 8
$4 20 18 2
a) Draw a market demand schedule for ice cream cones.

Price Quantity
demand
2$ 80
3$ 60
4$ 40

b) The current market price is $3. What is market demand at this price?
The current market price is $3, the market demand is 60 units

c) Show on your diagram what happens to the market demand curve when market demand declines
by 20 percent owing to cold, rainy weather.

The market demand curve 2 to the left

Question 5
The following is a supply table for trading cards. Price is stated in terms o
f price per package of 10. Quantity is package per week.
a. Determine the market supply for trading cards using the table.
26
32
39
51
62
83

b. What is the relationship between price and market quantity supplied? What two things accounts
for this relationship?
- Price rises, market quantity supplied also rises
-
Section C
Question 1
Using supply and demand analysis, explain the effect on the equilibrium price and quantity traded
of houses in a country of each of the following events. (Consider each event separately.)
(a) A rise in real incomes.
- A rise in real incomes is likely to lead to an increase in the demand for houses. This
causes the equilibrium price and quantity traded of the good to rise
(b) A fall in the rate of interest on loans for house purchases for an extended period of time.
- A fall in the rate of interest on loans would most likely increase the demand for
Houses, This causes the equilibrium price and quantity traded of the good to
rise

(b) A rise in the level of taxes to be paid on the sale of a house.

A rise in the level of taxes paid on the sale of a house would reduce supply since the
net price received by sellers would fall and thus less people would want to sell their
house at any given price, This causes the equilibrium price to rise and quantity
traded of the good to fall

(c) The relaxation of planning controls allowing more land to be used for building new houses.

A relaxation of planning controls allowing more land to be used for building would
decrease the costs that house builders face causing supply to increase. This causes the
the equilibrium price to fall and quantity traded of the good to rise

Question 2
Using supply and demand analysis, consider the effect on the market price and quantity traded of
beef traded in a country following:
a. An outbreak of a disease which affects the beef stock in the country.
an outbreak of disease affecting the beef stock will result in a backward shift in the supply
curve for beef, to Supply , price increases and the quantity traded decreases
b. The introduction of new regulation for beef production which raises the cost of supplying beef.
an increase in the costs of producing beef will result in a backward shift in the supply curve for
beef to Supply, price increases and the quantity traded decreases
c. An effective advertising campaign promoting the consumption of beef.
an outward shift in the demand curve for beef to Demand, price and quantity traded increase.