Principles of Microeconomics ECON 101 6-26-06 Quiz #1 Questions for Review 8. What happens to the equilibrium price if the supply curve shifts to the right and the demand curve does not shift? The equilibrium price will fall. 9. What happens to the equilibrium price if the demand curve shifts to the right and the supply curve does not shift? The equilibrium price will rise. 10. Do price ceilings cause shortages or surpluses? What about price floors? Price ceilings can cause shortages. Quantity demanded exceeds quantity supplied. Price floors can cause surpluses. Quantity supplied exceeds quantity demanded. Problems 1. Price per Pound Quantity Supplied Quantity Demanded $.38 1,500 525 $.37 1,000 600 $.36 700 700 $.35 600 900 $.34 550 1200 a. Is there a shortage or surplus when the price equals $.38? There is a surplus; quantity supplied exceeds quantity demanded. What about $.34? Here there is a shortage; quantity demanded exceeds quantity supplied. b. What are the equilibrium price and quantity? p e .36 q e 700 c. Graph the supply curve and the demand curve. $0.39 975 units $0.38 $0.38 $0.37 $0.37 $0.36 $0.36 $0.35 $0.35 $0.34 $0.34 0 200 400 600 800 1,000 1,200 1,400 1,600 d. Show how the equilibrium price and quantity can be found on the graph. We see that the quantity supplied equals the quantity demanded at a price of $.36. e. If there is a shortage or surplus at $.38, calculate its size in billions of pounds and show it on the graph. There is a surplus at $.38, quantity supplied exceeds quantity demanded by 975 billion pounds. 2. a. Price per Pound Quantity Supplied Quantity Demanded $0.38 1,100 525 $0.37 600 600 $0.36 300 700 $0.35 200 900 $0.34 150 1200 b. Find the new equilibrium price and the new equilibrium quantity. Explain how the market adjusts to the new equilibrium. The new equilibrium is p e $.37 and q e 600 . At the old equilibrium price of $.36 there is a temporary shortage. Quantity demanded exceeds quantity supplied by 400 units. So, there is upward pressure on prices and eventually the market will settle down to the new equilibrium, where quantity demanded equals the new quantity supplied. c. Did the equilibrium quantity change by more or less than the change in supply? The equilibrium quantity changed by less than the change in supply. The equilibrium quantity changed by 100, from 700 to 600. However, the supplied was decreased by 400 at every price. d. Graph the new supply curve along with the old supply curve and the demand curve. $0.39 $0.38 $0.38 $0.37 $0.37 $0.36 $0.36 $0.35 $0.35 $0.34 $0.34 0 200 400 600 800 1,000 1,200 1,400 1,600 e. Show the change in equilibrium price and equilibrium quantity on the graph. (yellow=old) 3. Use the supply and demand model to explain what happens to the equilibrium price and quantity for frozen yogurt in the following cases: a. There is a large expansion in the number of firms producing frozen yogurt. A large expansion in the number of firms producing frozen yogurt will cause the supply curve to shift to the right, and will leave demand unchanged. As we saw in QFR #8 this will cause the equilibrium price to fall and the equilibrium quantity to increase. b. It is widely publicized in the press that frozen yogurt isn’t as healthful as was previously thought. This information is likely to decrease demand (shift it to the left). Hence, the equilibrium price will fall, and the equilibrium quantity will fall. d. Frozen yogurt suddenly becomes popular because a movie idol promotes it in television commercials. This event is likely to cause an increase in demand (shift the demand curve to the right). So, as in QFR #9 the equilibrium price and quantity will rise. 9. Assuming that either supply or demand, but not both, changes, indicate the direction and change in either supply or demand that must have occurred to produce the following: a. A decrease in the price and quantity of apples. Decrease in the demand for apples, and supply remains unchanged. b. A decrease in the price of bananas with and increase in the quantity of bananas. Increase in the supply for bananas, and demand remains unchanged. c. Increase in the price and quantity of cars. Increase in the demand for cars, and supply unchanged. d. An increase in the quantity of computers with a decrease in the price. Increase in the supply for computers, and demand remains unchanged. 12. a. Suppose you find out that an increase in the price of first class postage leads to an increase in the demand for overnight delivery service and a decrease in the demand for envelopes. For which good is postage a complement, and for which is it a substitute? Since and increase in postage leads to an increase in the demand for overnight delivery service we would conclude that postage and overnight delivery are substitutes. b. Suppose someone told you that an increase in the price of gasoline caused a decrease in the demand for public transportation by train. Is this what you would predict? Why or why not? I would predict the contrary. I would expect that public transportation and transportation by car are substitutes for one another. So, I would have expected to see in increase in the demand for public transportation as a result of an increase in the price of gasoline.
Pages to are hidden for
"Principles of Microeconomics"Please download to view full document