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Seminar 2 - WA - 30july
Seminar 2 - WA - 30july
By Le Thanh Ha
Type I: True/False question (give a brief explanation)
1. In a market economy, supply and demand determine both the quantity of each good
produced and the price at which it is sold.
Ans: True
2. In a competitive market, the quantity of each good produced and the price at which
it is sold are not determined by any single buyer or seller.
Ans: True
3. The law of demand states that, other things equal, when the price of a good rises,
the quantity demanded of the good rises, and when the price falls, the quantity
demanded falls.
Ans: False
Because the relationship between price and quantity demanded is given as:
Price increases quantity demanded decreases
Note: we need to pay to two things when stating the law of demand:
The relationship between price and quantity demanded
The side effects of price on quantity demanded
4. When quantity supplied exceeds quantity demanded at the current market price, the
market has a surplus and market price will likely rise in the future to eliminate the
surplus.
5. Ans: False because market price will likely decrease to eliminate the surplus.
Price adjustment mechanism:
When surplus/shortage exists, current market is higher/smaller than the equilibrium
price.
The adjustment of current market price to eliminate surplus/shortage.
6. An increase in demand will cause an increase in price, which will cause an increase
in quantity supplied.
Ans: True
7. If a good or service is sold in a competitive market free of government regulation,
then the price of the good or service adjusts to balance supply and demand.
Ans: True
8. A price ceiling set above the equilibrium price causes quantity demanded to exceed
quantity supplied.
Ans: False
A price ceiling should set below the equilibrium price
Consequences: quantity supplied is smaller than quantity demanded shortage
9. A price floor set below the equilibrium price causes quantity supplied to exceed
quantity demanded.
Ans: False
10. If the equilibrium wage is $4 per hour and the minimum wage is $5.15 per hour,
then a shortage of labor will exist.
Ans: False
Because there is a surplus (unemployment) of labor will exist
11. A tax on sellers and a decrease in input prices affect the supply curve in the same
way.
Ans: False
A tax on sellers supply decrease Supply curve shifts to the LHS
A decrease in input prices supply increases Supply curve shifts to the RHS
12. An increase in income will cause the demand curve to shift to the right.
Ans: False
The effects of income on demand are conditional on the type of goods (normal, inferior)
13. When an increase in the price of one good lowers the demand for another good, the
two goods are called complements
Ans: True
14. If a person expects the price of socks to increase next month, then that person’s
current demand for socks will increase.
Ans: True
15. An increase in the price of pizza will shift the demand curve for pizza to the left.
Ans: False
An increase in the price of pizza will cause the move of demand curve to the left.
16. A reduction in an input price will cause a change in quantity supplied, but not a
change in supply.
Ans:
17. An increase in the price of ink will shift the supply curve for pens to the left.
Ans: True
Because ink is a kind of input for producing the pens.
18.
19. If a company making frozen orange juice expects the price of its product to be
higher next month, it will supply more to the market this month.
20. Sellers respond to a surplus by cutting their prices.
21. When quantity demanded exceeds quantity supplied at the current market price, the
market has a shortage and market price will likely rise in the future to eliminate the
shortage.
Pe'
Pe
D D'
Qe Qe' quantity
Pe
Pe'
D' D
Qe' Qe quantity
2. In market, there are 120 sellers and 60 buyers. Individual supply and demand functions
3600
are P=16 q2and P= 2 .
q
1. What are market demand and market supply?
2. What are market prices and market quantity at the equilibrium?
3. Demand and supply for product X are
(D): P = 60 – 0,25Q
(S): P = 10 + 0,25Q
a. Draw the figure and compute the price and quantity in the equilibrium
b. If the gov imposes the tax on the sellers: t=10/product. Let show the tax burden on buyer
and seller due to the tax. How much of the tax will the buyers pay, seller receive? Draw a
figure.
c. If the gov sets the ceiling price P= 40. What happened?
d. If the gov sets the ceiling price P=30. What happened?
Solution:
a.The price and quantity in the equilibrium:
60 – 0,25Q=10 + 0,25Q Q = 100 P= 35
b. (S’) P’=P+t=10 + 0,25Q+10=20+0.25Q
The after-tax equilibrium: 20+0.25Q = 60 – 0,25Q Q = 40
The price paid by consumer is 40
The price received by producer is 30
The tax burden imposed on consumer = 40-35=5
The tax burden imposed on producer = 30-30=5
c. Price ceiling = 40
The initial market price = 35
Implying that Price ceiling set above the initial market price Nothing happens in the
market.
d. Price ceiling = 30
The initial market price = 35
Implying that Price ceiling set below the initial market price Shortage
Pc=30 Qd= (60-30)*4=120 and Qs= (30-10)*4=80
Shortage = Qd-Qs=120-80=40
b. slopes upward.
c. represents the sum of the prices that all the buyers are willing to pay for a given quantity of the
good.
d. represents the sum of the quantities demanded by all the buyers at each price of the good.
3. To obtain the market demand curve for a product, sum the individual demand curves
a. vertically.
b. diagonally.
c. horizontally.
b. shifts when the price of hot dogs changes because the quantity demanded of hot dogs is
measured on the horizontal axis of the graph.
c. does not shift when the price of hot dogs changes because the price of hot dogs is measured on
the vertical axis of the graph.
d. does not shift when the price of hot dogs changes because the quantity demanded of hot dogs is
measured on the horizontal axis of the graph.
5. Which of the following would not shift the demand curve for mp3 players?
a. a decrease in the price of mp3 players
b. a fad that makes mp3 players more popular among 12-25 year olds
6. Which of the following is not a determinant of the demand for a particular good?
a. the prices of related goods
b. income
c. tastes
a. a substitute good.
b. a normal good.
c. an inferior good.
d. a complementary good.
8. Suppose that a decrease in the price of good X results in fewer units of good Y being sold. This implies
that X and Y are
a. complementary goods.
b. normal goods.
c. inferior goods.
d. substitute goods.
9. You wear either shorts or sweatpants every day. You notice that sweatpants have gone on sale, so your
demand for
b. when policymakers believe that the market price of a good or service is unfair to buyers or
sellers.
b. both to raise revenue for public purposes and to influence market outcomes.
c. when they realize that price controls alone are insufficient to correct market inequities.
d. only in those markets in which the burden of the tax falls clearly on the sellers.
14. If a price ceiling is not binding, then
a. there will be a surplus in the market.
c. the market will be less efficient than it would be without the price ceiling.
17. If the government removes a binding price ceiling from a market, then the price paid by buyers will
a. increase and the quantity sold in the market will increase.