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									CHAPTER 3

SUPPLY, DEMAND, AND THE MARKET PROCESS
QUESTIONS 1 THROUGH 10 ARE A SUGGESTED QUIZ.

1.   Which of the following would most likely increase the demand for peanut butter?
     a. a decrease in the price of jelly, a good that is often used with peanut butter
     b. the discovery that excessive consumption of peanut butter is harmful to one‟s health
     c. crop failures that raise the price of peanuts
     d. the invention of a new product that consumers think is a good substitute for peanut butter
2.   Economic profit is best defined as
     a. a company‟s net income as indicated by its accounting statement.
     b. the difference between the price of a product and the monetary cost of the raw materials used to
         produce it.
     c. the difference between the revenue from the sale of a product and the opportunity cost of the
         resources used to produce it.
     d. income paid by a business to its owners.
3.   If Harry only pays $25,000 to purchase a new car even though he would have been willing to pay as
     much as $35,000 for the car, this indicates that
     a. Harry is an irrational consumer.
     b. The seller earned a $10,000 profit on the sale of the car.
     c. Harry reaped $10,000 of consumer surplus from the transaction.
     d. The seller received $10,000 worth of producer surplus on the transaction.
4.   The number of people willing to buy tickets to the Super Bowl is invariably greater than the
     number of tickets (and seats) available. This is evidence that the price of the tickets is
     a. higher than the equilibrium price.
     b. equal to the equilibrium price since the number of tickets bought equals the number sold.
     c. lower than the equilibrium price.
     d. higher than the equilibrium price when the demand is inelastic but lower when the demand is
         elastic.
5.   “A reduction in gasoline prices caused the demand for gasoline to increase. The lower gas prices
     also led to an increase in demand for large cars, causing their prices to rise.” These statements
     a. are essentially correct.
     b. contain one error; the lower gasoline prices would cause an increase in the quantity demanded
          of gasoline, not an increase in demand.
     c. contain one error; the lower gasoline prices would increase the quantity demanded of large
          cars, not the demand.
     d. contain two errors; the lower gasoline prices would cause the quantity of gasoline demanded
          (rather than the demand) to increase, and the lower gasoline price would cause an increase in
          quantity demanded (rather than the demand) for large cars.




84
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6.    A cold spell in Florida extensively reduced the orange crop, and as a result, California oranges
      commanded a higher price. Which of the following statements best explains the situation?
      a. The supply of Florida oranges fell, causing the supply of California oranges to increase as well
          as their price.
      b. The supply of Florida oranges fell, causing the supply of California oranges to decrease and
          their price to increase.
      c. The supply of Florida oranges fell, causing their price to increase and the demand for
          California oranges to increase.
      d. The demand for Florida oranges was reduced by the freeze, causing an increase in the price of
          California oranges and a greater demand for them.
7.    When the market for a good is in equilibrium,
      a. consumer surplus will equal producer surplus.
      b. the total value created for consumers will equal the total cost of production for business firms.
      c. all units valued more highly than the opportunity cost of production will be supplied.
      d. all units that have value will be produced, regardless of their cost of production.
8.    When a firm is earning economic profit, this indicates the firm is
      a. increasing the value of the resources that it is using.
      b. reducing the value of the resources that it is using.
      c. supplying the market with a low quality product.
      d. creating less value for consumers than another firm that is currently earning losses.
9.    If cable TV service and satellite TV service are substitutes,
      a. a decrease in the price of cable will decrease the demand for satellite TV.
      b. an increase in the price of cable will decrease the demand for satellite TV.
      c. an increase in the price of cable will generally have no effect on the demand for satellite TV.
      d. an increase in the price of cable will shift the demand curve for satellite TV to the left.
10.   The invisible hand principle indicates that competitive markets can help promote the efficient use of
      resources
      a. only if buyers and sellers really care, personally, about economic efficiency.
      b. even when each market participant cares only about their own self interest rather than about the
           overall efficiency of resource use.
      c. even if business firms fail to produce goods efficiently.
      d. if, and only if, businesses recognize their social obligation to keep costs low and use resources
           wisely.

ANSWER KEY 1 THROUGH 10

1. (a), 2. (c), 3. (c), 4. (c), 5. (b), 6. (c), 7. (c), 8. (a), 9. (a), 10. (b)

CONSUMER CHOICE AND THE LAW OF DEMAND
11.   The curve that shows the relationship between the price of a good and the quantity that consumers
      are willing to purchase at each price is the
      a. supply curve.
*     b. demand curve.
      c. production possibilities curve.
      d. consumption curve.
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12.   The demand schedule for a good
      a. indicates the relationship between the price of the good and the price of other goods.
*     b. indicates the quantities of the good that people will buy at various prices.
      c. illustrates the quantity producers will provide at alternative prices.
      d. is determined primarily by the cost of producing the good.
13.   The law of demand is simply a reflection of the
      a. law of comparative advantage.
      b. production possibilities curve.
      c. work of Alfred Marshall who formulated the law.
*     d. basic principle of economics: Incentives influence behavior in a predictable fashion.
14.   The law of demand refers to the
      a. decrease in price that can be expected as more units of a product are demanded.
      b. increase in price that results from an increase in demand for a good of limited supply.
*     c. inverse relationship between the price of a good and the quantity demanded.
      d. increase in the quantity of a good available when its price increases.
15.   In economics, the demand for a good refers to the amount of the good people
      a. would like to have if the good were free.
*     b. are willing to buy at various prices.
      c. need to achieve a minimum standard of living.
      d. will buy at alternative income levels.
16.   The law of demand refers to the
*     a. negative relationship between the price of a good and the willingness of consumers to buy it.
      b. price increase that results from an increase in demand for a good of limited supply.
      c. inverse relationship between the price of a good and the quantity offered for sale.
      d. increase in the quantity of a good available when its price increases.
17.   The law of demand indicates that
      a. every physical good has a use.
      b. when people want a good badly enough, they will find a way to pay for it.
      c. the desire for a good is unrelated to its price.
*     d. the quantity of a good that people will buy is inversely related to the price of the good.
18.   The law of demand indicates that as the price of a good decreases,
      a. suppliers sell less of it.
      b. suppliers sell more of it.
      c. buyers buy less of it.
*     d. buyers buy more of it.
19.   The law of demand indicates that as the price of a good increases,
      a. suppliers sell less of it.
      b. suppliers sell more of it.
*     c. buyers buy less of it.
      d. buyers buy more of it.
20.   How will consumers generally react to an increase in the price of butter?
      a. They will purchase a larger quantity of butter.
*     b. They will substitute other goods like margarine for the more expensive butter.
      c. They will reduce their purchases of substitute goods like margarine.
      d. They will continue purchasing the same quantity of butter at the higher price.
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21.   How will consumers generally react to a decrease in the price of a product?
      a. They will purchase less of it.
      b. They will substitute other goods for it.
*     c. They will purchase more of it.
      d. They will continue purchasing the same quantity at the lower price.
22.   Consumers buy less of a good as its price increases because
      a. production costs have risen.
*     b. substitute goods are now relatively cheaper.
      c. the income of consumers has effectively risen.
      d. the higher price will make the good more valuable to each consumer.
23.   The height of the demand curve for a product indicates the
      a. minimum price consumers are willing to pay for an additional unit of it.
      b. minimum quantity consumers are willing to purchase at the current price.
*     c. maximum price consumers are willing to pay for an additional unit of it.
      d. minimum price required to induce suppliers to produce an additional unit of it.
24.   The maximum price that consumers are willing to pay for the hundredth unit of a good can be found
      as
      a. the height of the supply curve at a quantity of 100.
*     b. the height of the demand curve at a quantity of 100.
      c. the difference between the height of the supply and demand curves at a quantity of 100.
      d. none of the above.
25.   Because the height of the demand curve measures the marginal value of the good to consumers, the
      fact that a demand curve slopes downward to the right illustrates that
*     a. as more of a product is consumed, consumers will value additional units less.
      b. as more of a product is consumed, consumers will value additional units more.
      c. the value of additional units of the good is unrelated to the amount consumed.
      d. the cost of production for a good generally rises as more of it is produced.
26.   Which of the following is true in competitive markets?
*     a. Price reflects the marginal value consumers place on the last unit purchased.
      b. Price reflects the total value consumers derive from the consumption of all units of the good.
      c. The total area under the demand curve, but above the price, indicates the surplus producers
          derive from the production and sale of the good.
      d. The total area above the supply curve, but below the price, indicates the surplus consumers
          derive from the consumption of the good.
27.   Which of the following is true?
*     a. The height of the demand curve for a product at a given quantity represents the marginal value
          derived by the consumption of that unit.
      b. The height of the demand curve for a product at a given quantity reflects the total value
          consumers derive from all units of the good consumed.
      c. The total area above the demand curve for a product is equal to consumer surplus.
      d. At every quantity, the height of the demand curve for a product represents the cost of
          producing that unit.
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28.   The difference between the amount consumers would be willing to pay and the amount they actually
      pay for a good is called
      a. price elasticity of demand.
*     b. consumer surplus.
      c. the substitution effect.
      d. income elasticity of demand.
29.   In a supply and demand graph, the triangular area that represents the difference between the
      maximum price consumers were willing to pay for a good and the market price is called
*     a. consumer surplus.
      b. producer surplus.
      c. marginal cost.
      d. triangular arbitrage.
30.   Ceteris paribus, an increase in the price of a good will cause the
      a. quantity demanded of the good to increase.
      b. quantity supplied of the good to decrease.
*     c. consumer surplus derived from the good to decrease.
      d. supply of the good to decrease.
31.   Ceteris paribus, a decrease in the price of a good will cause the
      a. quantity demanded of the good to decrease.
      b. quantity supplied of the good to increase.
*     c. consumer surplus derived from the good to increase.
      d. supply of the good to increase.
32.   Which of the following best explains the source of consumer surplus for good A?
      a. Many consumers pay prices that are greater than the equilibrium price of good A.
*     b. Many consumers would be willing to pay more than the market price for good A.
      c. Many consumers think the market price of good A is greater than its cost.
      d. Many consumers think the demand for good A is elastic.
33.   Which of the following would be the best example of consumer surplus?
*     a. Jane pays $30 a month for phone service even though it is worth $70 to her.
      b. Sam refuses to pay $10 for a hair cut because it is only worth $8 to him.
      c. Fred buys a car for $4,000, the maximum amount that he would be willing to pay for it.
      d. When Sue purchases a candy bar for $.50, she uses a $20 bill to pay for it.
34.   Bill pays $150 a month for electricity, when he would be willing to pay $250 for the same service.
      This is an example of
      a. irrational pricing by the electric company.
      b. producer surplus.
*     c. consumer surplus.
      d. This is a trick question because nobody pays less for something than it is worth to them.
35.   If Susan receives $3,000 of value from a computer that she was able to purchase from Joe‟s
      Computer Shop for $1,800, this indicates that
      a. Susan‟s opportunity cost of purchasing the computer was $3,000.
      b. Joe earned a $1,200 profit on the sale of the computer.
*     c. Susan reaped a consumer surplus of $1,200 from the purchase of the computer.
      d. Joe incurred a loss a $1,200 on the sale of the computer.
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36.   If consumer purchases of a good are highly sensitive to the price of the good, this is illustrated by a
*     a. demand curve that is relatively flat (more horizontal).
      b. demand curve that is relatively steep (more vertical).
      c. supply curve that is relatively flat (more horizontal).
      d. supply curve that is relatively steep (more vertical).
37.   If consumer purchases of a good are not very sensitive to the price of the good, this is illustrated by
      a
      a. demand curve that is relatively flat (more horizontal).
*     b. demand curve that is relatively steep (more vertical).
      c. supply curve that is relatively flat (more horizontal).
      d. supply curve that is relatively steep (more vertical).
38.   If consumer purchases of a good are highly sensitive to the price of the good, economists say the
      demand for the good is relatively
      a. inelastic.
*     b. elastic.
      c. robust.
      d. inverse.
39.   If consumer purchases of a good are not very sensitive to the price of the good, economists say the
      demand for the good is relatively
*     a. inelastic.
      b. elastic.
      c. robust.
      d. inverse.
40.   If the demand for a good is relatively elastic, this means that consumer purchases of the good are
      a. not very sensitive to the price of the good.
*     b. highly sensitive to the price of the good.
      c. unrelated to the price of the good.
      d. unaffected by changes in the income level of consumers.
41.   If the demand for a good is relatively inelastic, this means that consumer purchases of the good are
*     a. not very sensitive to the price of the good.
      b. highly sensitive to the price of the good.
      c. unrelated to the price of the good.
      d. unaffected by changes in the income level of consumers.
42.   If a large percentage increase in the price of a good results in a small percentage reduction in the
      quantity demanded of the good, demand is said to be
      a. horizontal.
*     b. relatively inelastic.
      c. relatively elastic.
      d. income proof.
43.   If a small percentage increase in the price of a good results in a rather large percentage reduction in
      the quantity demanded of the good, demand is said to be
      a. vertical.
      b. relatively inelastic.
*     c. relatively elastic.
      d. robust.
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44.   The price elasticity of demand for a commodity is determined primarily by the
      a. size of the consumer surplus.
*     b. availability of good substitutes for the good.
      c. incomes of consumers.
      d. availability of complementary goods.
45.   The demand for which one of the following goods is likely to be the most inelastic?
      a. frozen pizza
      b. root beer
      c. Sony television sets
*     d. cold relief medications
46.   Of the following goods, which is most likely to be quite inelastic?
*     a. gasoline
      b. Chevrolet automobiles
      c. fresh tomatoes
      d. provolone cheese
47.   Which of the following would likely have the most inelastic demand?
*     a. gasoline
      b. 7-Up soda
      c. generic brand margarine
      d. a McDonald‟s Big Mac
48.   Which one of the following goods would likely have the most inelastic demand?
      a. Kellogg‟s Corn Flakes
*     b. salt
      c. a new Toyota automobile
      d. fresh green beans

CHANGES IN DEMAND VERSUS CHANGES IN QUANTITY DEMANDED
49.   A demand curve shows the relationship between price and quantity demanded, other things
      constant. These “other things” include which of the following?
      a. consumer preferences
      b. the price of substitute goods
      c. consumer income
*     d. all of the above
50.   When economists say the demand for a product has decreased, they mean
*     a. the demand curve has shifted to the left.
      b. the product price has increased, and as a consequence, consumers are buying less of the
         product.
      c. consumers are now willing and able to buy more of this product at each possible price.
      d. the demand curve has shifted to the right.
51.   When economists say the demand for a product has increased, they mean the
*     a. demand curve has shifted to the right.
      b. price of the product has fallen, and consequently, consumers are buying more of it.
      c. cost of producing the product has risen.
      d. amount of the product that consumers are willing to purchase at various prices has decreased.
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52.   When economists say the quantity demanded of a product has increased, they mean the
      a. demand curve has shifted to the left.
      b. demand curve has shifted to the right.
*     c. price of the product has fallen, and consequently, consumers are buying more of it.
      d. price of the product has risen, and consequently, consumers are buying less of it.
53.   When economists say the quantity demanded of a product has decreased, they mean the
      a. demand curve has shifted to the left.
      b. demand curve has shifted to the right.
      c. price of the product has fallen, and consequently, consumers are buying more of it.
*     d. price of the product has risen, and consequently, consumers are buying less of it.
54.   In which statement(s) is “demand” used correctly?
      (I) “An increase in the price of housing will reduce the demand for housing.”
      (II) “As consumer income increases, the demand for housing will tend to rise.”
      a. in both statements I and II
      b. in statement I only
*     c. in statement II only
      d. in neither statements I nor II
55.   In which statement(s) is “demand” used correctly?
      (I) “An increase in the price of hot dogs will reduce the demand for hot dogs.”
      (II) “An increase in the price of hot dogs will reduce the demand for hot dog buns.”
      a. in both statements I and II
      b. in statement I only
*     c. in statement II only
      d. in neither statements I nor II
56.   In which statement(s) are “demand” and “quantity demanded” used correctly?
      (I) “An increase in the price of coffee will reduce the quantity demanded of coffee.”
      (II) “An increase in the price of coffee will reduce the demand for creamer used in coffee.”
*     a. in both statements I and II
      b. in statement I only
      c. in statement II only
      d. in neither statements I nor II
57.   Which of the following would lead to an increase in the demand for designer blue jeans?
      a. a decrease in the price of designer blue jeans
      b. a reduction in the price of the cotton used to produce the jeans
*     c. an increase in the income of youthful Americans
      d. an increase in the price of the cotton used to produce the jeans
58.   Which of the following would lead to an increase in the demand for computer software?
      a. a decrease in the price of computer software
*     b. a decrease in the price of personal computers
      c. an decrease in the cost of producing computer software
      d. an decrease in personal income
59.   Which of the following is least likely to increase the demand for new tires?
*     a. a decrease in the price of tires
      b. a decrease in the price of cars
      c. an increase in consumer income
      d. an increase in the number of miles people drive per year
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60.   “If gasoline sales were taxed at a higher rate, the price of gasoline would rise. Consequently, the
      demand for gasoline would decline. As a result of the higher gasoline prices, the demand for fuel-
      efficient automobiles would increase.” These statements are
      a. essentially correct.
*     b. incorrect; the high gasoline prices would cause the quantity demanded of gasoline, not the
           demand, to fall.
      c. incorrect; these statements confuse a change in demand with a shift in supply.
      d. incorrect; demand is confused with quantity demanded for both gasoline and fuel-efficient cars.
61.   According to the basic principle of economics, individuals will buy less of a commodity, compact
      discs, for example, if the price rises. However, if the price rises between period 1 and period 2, we
      may not observe people buying fewer compact discs because
      a. often the law of demand does not hold in the real world.
      b. up to a certain point, higher prices often increase the attractiveness of products to consumers.
      c. this basic principle of economics often fails to yield accurate predictions.
*     d. other factors, such as the income of consumers, may have also changed, offsetting the expected
           effect on compact disc sales.
62.   Other things constant, an increase in consumer income will
      a. shift the demand curve for automobiles to the left.
*     b. shift the demand curve for automobiles to the right.
      c. cause a movement along the demand curve for automobiles, but it will not shift the demand
          curve.
      d. lead to a reduction in the supply of automobiles.
63.   Other things constant, a decrease in consumer income will
*     a. decrease the demand for large-screen television sets.
      b. increase the demand for large-screen television sets.
      c. cause a movement along the demand curve for large-screen television sets, but it will not shift
          the demand curve.
      d. have no impact on the quantity demanded or the demand curve for large-screen television sets.
64.   For a typical product, a decrease in consumer income will cause the market demand for the product
      to
*     a. decrease, which is a shift to the left of the demand curve.
      b. decrease, which is a shift to the right of the demand curve.
      c. increase, which is a shift to the left of the demand curve.
      d. increase, which is a shift to the right of the demand curve.
65.   For a typical product, an increase in consumer income will cause the market demand for the product
      to
      a. decrease, which is a shift to the left of the demand curve.
      b. decrease, which is a shift to the right of the demand curve.
      c. increase, which is a shift to the left of the demand curve.
*     d. increase, which is a shift to the right of the demand curve.
66.   Which of the following would most likely cause the demand for inkjet printers to decrease?
*     a. a decrease in consumer income
      b. an increase in the price of laser printers, a substitute for inkjet printers
      c. a decrease in the price of printer paper used with inkjet printers
      d. a decrease in the price of inkjet printer cartridges used in inkjet printers
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67.   Which of the following would most likely cause the current demand for DVD players to rise?
*     a. an increase in consumer income
      b. a decline in the price of VCRs, a substitute for DVD players
      c. a decrease in the price of DVD players
      d. the expectation that the price of DVD players will decline sharply during the next six months
68.   In a typical college town, when students go home for the summer, the demand for many items such
      as pizza and beer
*     a. decreases, which is a shift to the left of the demand curves for these goods.
      b. decreases, which is a shift to the right of the demand curves for these goods.
      c. increases, which is a shift to the left of the demand curves for these goods.
      d. increases, which is a shift to the right of the demand curves for these goods.
69.   Which of the following would lead to an increase in the demand for fast food in Houston?
*     a. an increase in Houston‟s population
      b. a decrease in average consumer income in Houston
      c. a front page newspaper article in Houston stating that fast food is very bad for your health
      d. a decrease in the average price charged by sit-down restaurants
70.   Which of the following would lead to an increase in the demand for gasoline in Universityville, a
      typical college town?
      a. the local bus service beginning to offer free bus transportation to students
*     b. homecoming weekend when many former alumni visit the local college
      c. a large protest by a campus environmental group urging people to walk or ride their bikes
           rather than drive
      d. an increase in the tuition charged by the local college, which reduces student enrollment
71.   If the number of consumers in a market increases, the market demand curve will
      a. decrease, which is a shift to the left of the demand curve.
*     b. increase, which is a shift to the right of the demand curve.
      c. not shift, but rather this will just cause a movement along the demand curve.
      d. do none of the above.
72.   Two products that serve similar purposes for a consumer would be referred to as
*     a. substitutes.
      b. complements.
      c. inferior goods.
      d. unrelated goods.
73.   Coke and Pepsi are an example of
      a. inferior goods.
      b. unrelated goods.
*     c. substitutes.
      d. complements.
74.   Which of the following goods are most likely to be substitutes?
      a. potato chips and chip dip
      b. bread and peanut butter
      c. ketchup and French fries
*     d. bananas and apples
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75.   If the price of coffee decreases, the demand curve for tea (a substitute good) will
      a. remain unchanged.
      b. shift to the right.
*     c. shift to the left.
      d. do none of the above
76.   If a decrease in the price of good Y causes the demand for good Z to decrease, this indicates that
      a. Y and Z are complements.
*     b. Y and Z are substitutes.
      c. Y and Z are unrelated.
      d. the demand for Y is elastic, but the demand for Z is inelastic.
77.   If air travel and bus travel are substitutes,
      a. an increase in the price of bus travel will decrease the demand for air travel.
*     b. a decrease in the price of bus travel will decrease the demand for air travel.
      c. an increase in the price of bus travel will generally have no effect on the demand for air travel.
      d. an increase in the price of bus travel will shift the demand curve for air travel to the left.
78.   Which one of the following factors would increase the demand for oranges?
*     a. an increase in the price of grapefruit, a substitute product
      b. a reduction in the price of bananas, a substitute product
      c. development of a line of high-yield orange trees that are also more freeze resistant
      d. a decrease in consumer income
79.   Which of the following would most likely cause the demand for Miller beer to decrease?
*     a. a decrease in the price of Budweiser beer
      b. an increase in the price of Miller beer
      c. an increase in the price of barley used to make Miller beer
      d. All of the above will decrease the demand for Miller beer.
80.   A decrease in the price of milk will
      a. increase the demand for milk.
      b. reduce the demand for milk.
*     c. reduce the demand for orange juice, a substitute for milk.
      d. do both a and c
81.   The price of chicken increases as the result of higher beef prices. This indicates that
*     a. chicken and beef are substitutes.
      b. chicken and beef are complements.
      c. the market demand for beef is inelastic.
      d. the market demand for chicken is elastic.
82.   Which of the following would most likely cause the current demand for natural gas to decrease?
      a. an increase in consumer income
      b. an increase in the price of natural gas
*     c. a decrease in the price of electricity, a substitute for natural gas
      d. the expectation that the price of natural gas will rise sharply next month
83.   Suppose the prices of petroleum products, including gasoline and fuel oil, fell sharply. Which of the
      following would most likely occur as the result of the lower prices of petroleum products?
      a. a reduction in the consumption of gasoline
      b. an increase in demand for solar heating systems
      c. an increase in demand for smaller, more efficient automobiles
*     d. a reduction in the demand for home insulation products
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84.   Assuming Chinese food and Thai food are substitutes, if Lucy Ho‟s Chinese restaurant reduces its
      prices,
      a. the demand for food at Lucy Ho‟s will increase.
      b. the quantity demanded for food at Lucy Ho‟s will increase.
      c. the demand facing the nearby Bahn Thai restaurant will decrease.
*     d. both b and c will happen.
85.   Which of the following factors would cause the demand curve for a good to increase (shift to the
      right)?
      a. a decrease in the price of the good
      b. an increase in the price of the good
*     c. an increase in the price of a substitute good
      d. an increase in the price of a complementary good
86.   Which of the following would most likely increase demand for tickets to major league baseball
      games?
      a. a decrease in consumer income
*     b. an increase in the price of tickets to professional football games, a substitute for baseball games
      c. an increase in the price of refreshments sold at the baseball games
      d. none of the above
87.   If widgets and gidgets were substitutes, an increase in the price of gidgets would cause
*     a. the demand for widgets to increase.
      b. the demand for widgets to fall.
      c. the demand for widgets to remain unchanged, it would only affect the quantity demanded of
           widgets.
      d. none of the above
88.   Which one of the following would most likely increase the demand for wheat?
*     a. an increase in the price of soybeans, a substitute product
      b. a decrease in the price of corn, a substitute product
      c. the development of a hybrid seed that doubles wheat yields per acre
      d. a decrease in the price of wheat
89.   Two products that are usually consumed jointly would be referred to as
      a. substitutes.
*     b. complements.
      c. inferior goods.
      d. unrelated goods.
90.   Which of the following goods are most likely to be complements?
*     a. hamburgers and French fries
      b. oranges and apples
      c. Pepsi and Coke
      d. Chevrolets and Fords
91.   Which of the following goods are most likely to be complements?
      a. potato chips and pretzels
*     b. hot dogs and hot dog buns
      c. Pepsi and Coke
      d. DVD players and VCRs
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92.   Which of the following would most likely decrease the current demand for DVD players?
      a. an increase in consumer income
*     b. an increase in the prices of television sets, a complement for DVD players
      c. an expectation that the price of DVD players would rise sharply in the near future
      d. an increase in the price of VCRs, a substitute for DVD players
93.   Suppose the price of gasoline and other petroleum products declined sharply. Which of the
      following will most likely occur as the result of the lower petroleum prices?
      a. an increase in demand for solar heating systems
*     b. an increase in demand for larger, more powerful automobiles
      c. an increase in demand for home insulation products
      d. an increase in demand for gasoline
94.   If coffee and cream are complements, an increase in the price of coffee will cause
      a. the demand for cream to increase.
*     b. the demand for cream to fall.
      c. the demand for coffee to fall.
      d. no change in the demand for cream; only quantity demanded would be affected.
95.   The current demand for a good would decrease if
*     a. the price of a complementary good rose.
      b. the price of a substitute good rose.
      c. consumers suddenly believed the price of the good would be sharply higher in the future.
      d. consumer income increased.
96.   Which of the following would most likely increase the demand for televisions?
      a. a decrease in the price of televisions
      b. a decline in consumer income
      c. a decrease in the price of home stereo systems, a substitute for televisions
*     d. a decrease in the price of DVD players, a product that is complementary with televisions
97.   Suppose the price of widgets falls, and as a result, the demand for gadgets increases. We can
      conclude that
      a. widgets and gadgets are substitutes.
*     b. widgets and gadgets are complements.
      c. widgets and gadgets are unrelated products.
      d. the value of gadgets to consumers is greater than the value of widgets.
98.   If an increase in the price of good X causes the demand for good Y to decrease, this indicates that
*     a. X and Y are complements.
      b. X and Y are substitutes.
      c. X and Y are unrelated.
      d. the demand for X is elastic, but the demand for Y is inelastic.
99.   Assume that eggnog and cookies are complements. If the price of eggnog goes up, what happens to
      the demand for cookies?
      a. demand for cookies increases
*     b. demand for cookies decreases
      c. demand for cookies remains unchanged
      d. the shift in demand will depend on the original price of cookies
                                            Chapter 3/Supply, Demand, and the Market Process           97


100. If salsa and nacho chips are complements, an increase in the price of nacho chips would
     a. increase the price of salsa.
*    b. decrease the demand for salsa.
     c. increase the demand for salsa.
     d. have no effect on the demand for salsa.
101. An increase in the expected future price of a good will cause the current demand for the good to
     a. decrease, which is a shift to the left of the demand curve.
     b. decrease, which is a shift to the right of the demand curve.
     c. increase, which is a shift to the left of the demand curve.
*    d. increase, which is a shift to the right of the demand curve.
102. A decrease in the expected future price of a good will cause the current demand for the good to
*    a. decrease, which is a shift to the left of the demand curve.
     b. decrease, which is a shift to the right of the demand curve.
     c. increase, which is a shift to the left of the demand curve.
     d. increase, which is a shift to the right of the demand curve.
103. The current demand for automobiles would decrease if
     a. the price of gasoline fell.
     b. consumer income rose.
*    c. consumers suddenly believed the price of automobiles would be sharply lower in the near
         future.
     d. consumers suddenly believed the price of automobiles would be sharply higher in the near
         future.
104. Suppose all of the major computer manufacturers announced that beginning next month there would
     be major price reductions on their computers. This would cause the current demand for computers
     to
     a. increase.
*    b. decrease.
     c. remain unchanged.
     d. increase if the demand for computers was relatively inelastic, but decrease if the demand for
         computers was relatively elastic.
105. As the number of elderly consumers in a market increases and the number of younger consumers
     declines, we would expect
     a. an increase in the demand for medical services.
     b. a decrease in the demand for medical services.
     c. a decrease in the demand for blue jeans.
*    d. both a and c.
106. Which of the following is most likely to shift the demand curve for electricity to the left?
*    a. consumers becoming more energy conscious
     b. an increase in income
     c. a decrease in the price of electricity
     d. an increase in the price of natural gas, a substitute source of energy
107. Which of the following will decrease the demand for coffee?
*    a. the discovery that caffeine can cause heart problems
     b. an increase in the price of coffee
     c. an increase in the price of tea, a substitute for coffee
     d. a decrease in the prices of coffee makers and coffee cups, complements to coffee
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108. In the first few months after the September 11, 2001 terrorist attacks, many Americans were
     reluctant to fly on airplanes. Which of the following would you have expected to happen as a result?
*    a. a decrease in the demand for air travel
     b. an increase in the demand for jet fuel for airplanes
     c. a increase in the demand for air travel
     d. an increase in the profitability of commercial airlines

PRODUCER CHOICE AND THE LAW OF SUPPLY
109. Often using the business firm, producers
     a. organize productive resources.
     b. transform resources into goods and services.
     c. sell the final products to consumers for a price.
*    d. do all of the above.
110. The total economic cost of producing a good or service is called the
     a. comparative value of construction.
     b. social consequence of resources.
     c. marginal valuation of output.
*    d. opportunity cost of production.
111. The opportunity cost of production differs from an accounting definition of a firm‟s costs because it
     includes
     a. expenditures the firm undertakes for research and development.
*    b. the opportunity cost of assets and financial resources owned by the firm.
     c. the direct monetary cost of purchasing resources.
     d. the firm‟s revenue as a cost.
112. A manufacturer invests $30 million in a factory to produce pencils that will earn $2 million in
     accounting profit per year. Assuming the money tied up in the factory could be earning a 10 percent
     rate of interest in the bank, the manufacturer will bear an opportunity cost (in terms of forgone
     interest) of
     a. $1 million per year, which is more than the factory is earning in accounting profit.
     b. $1 million per year, which is less than the factory is earning in accounting profit.
*    c. $3 million per year, which is more than the factory is earning in accounting profit.
     d. $3 million per year, which is less than the factory is earning in accounting profit.
113. If a firm is not covering the cost of all resources employed by the firm (including the opportunity
     cost of resources owned by the firm), it will generally
*    a. go out of business in the long run.
     b. remain in business as long as the current conditions are unchanged.
     c. experience an increase in its stock price because investors will be attracted to it.
     d. attempt to expand the size of its operation.
114. (I) The price a firm must pay to use a resource is a measure of the value that could have been
     created for consumers by using that resource to produce an alternative good or service.
     (II) A loss indicates that a firm has used resources to produce a good that had less value to
     consumers than the alternative goods or services that could have been produced with those same
     resources.
     a. I is true; II is false.
     b. I is false; II is true.
*    c. Both I and II are true.
     d. Both I and II are false.
                                             Chapter 3/Supply, Demand, and the Market Process               99


115. Profit can be defined as the
*    a. difference between the sales revenue of a business firm and the opportunity cost of the
          resources required to produce the goods supplied by the firm.
     b. difference between a company‟s income and direct monetary costs of production.
     c. difference between the price of a product and the consumer‟s valuation of the good.
     d. amount of total revenue earned by the firm minus its payments to stockholders.
116. “Production should be for people, not for profit.” This statement
     a. reflects sound economic logic.
     b. is correct, because profitable production reduces the wealth of a society and the value of the
         society‟s resources.
     c. is incorrect, since it fails to realize that profits generate tax revenue that is used to finance
         government spending that benefits everyone.
*    d. is incorrect, since it fails to recognize that if an activity is profitable, it has generated more
         value for people than the possible alternative activities.
117. A firm has the choice to use $10,000 worth of resources to produce one of two goods A or B.
     Suppose that the total value to consumers of the two goods (as is reflected in the revenue the firm
     could get for selling these goods) was $7,000 for good A and $15,000 for good B. Which of the
     following would be true?
     a. The firm would make more profit if it chose to produce good B than good A.
     b. The total value for consumers created by this firm would be higher if it produces good B than if
          it produces good A.
     c. If the firm could find another good to produce with these resources that could sell for $20,000,
          it would create even more value for consumers (as well as more profit).
*    d. All of the above are true.
118. When a firm is earning economic profit, this indicates the firm is
*    a. increasing the value of the resources that it is using.
     b. reducing the value of the resources that it is using.
     c. supplying the market with a low quality product.
     d. creating less value for consumers than another firm that is currently earning losses.
119. Profits and losses play an important role in helping
     a. to signal to government which businesses are suffering losses so that they can be subsidized.
     b. consumers decide which products they value the most by looking at each firm‟s profit.
*    c. to allocate scarce resources in a manner that maximizes the value created to society.
     d. ensure that the total profits in the economy exactly equal the total losses.
120. (I) Profits direct producers toward activities that increase the value of resources.
     (II) Losses impose a penalty on those who reduce the value of resources.
     a. I is true; II is false.
     b. I is false; II is true.
*    c. Both I and II are true.
     d. Both I and II are false.
121. To be economically successful, the entrepreneur must
*    a. combine resources in a manner that increases their value.
     b. produce a good that consumers value less than the resources used to produce it.
     c. use only personal financial capital to avoid the interest payments that would have to be paid if
         the money is borrowed from the bank.
     d. transform or rearrange resources to maximize the entrepreneur‟s cost of production.
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122. According to the law of supply,
*    a. producers are willing to supply larger amounts of a good as its price increases.
     b. a direct relationship exists between the price of a good and the amount buyers choose to buy.
     c. an inverse relationship exists between the price of a good and the amount buyers wish to buy.
     d. an inverse relationship exists between the price of a good and the amount producers supply.
123. According to the law of supply,
     a. more of a good is desired by consumers as the price falls.
     b. less of a good is desired by consumers as the price rises.
*    c. more of a good will be offered by suppliers as the price rises.
     d. less of a good will be offered by suppliers as the price rises.
124. According to the law of supply, as the price of a good increases,
     a. buyers will buy more of the good.
     b. buyers will buy less of the good.
*    c. sellers will produce more of the good.
     d. sellers will produce less of the good.
125. (I) The demand curve indicates the quantity of a good that consumers are willing to purchase at
     different prices.
     (II) The supply curve indicates the quantity of a good that producers are willing to supply at
     different prices.
*    a. Both I and II are true.
     b. I is true; II is false.
     c. I is false; II is true.
     d. Both I and II are false.
126. (I) The height of the supply curve indicates the minimum price necessary to induce producers to
     supply additional units of the good.
     (II) The height of the demand curve indicates the value consumers place on additional units of the
     good.
     a. I is true; II is false.
     b. I is false; II is true.
*    c. Both I and II are true.
     d. Both I and II are false.
127. The height of the supply curve at a quantity of 100 represents the
     a. total value of all 100 units to consumers.
*    b. minimum price required to induce a producer to supply the hundredth unit.
     c. equilibrium price of the good regardless of the position of the demand curve.
     d. profit derived by producers from the sale of the hundredth unit.
128. In a supply and demand graph, the triangular area that represents the difference between the market
     price and the minimum price required to induce suppliers to produce a good is called
     a. consumer surplus.
*    b. producer surplus.
     c. marginal cost.
     d. triangular arbitrage.
                                            Chapter 3/Supply, Demand, and the Market Process               101


129. Bill is willing to cut lawns for a minimum of $200 a week. He is, however, paid $250 for the same
     service by a lawn maintenance company. This is an example of
     a. consumer surplus.
     b. employment discrimination.
*    c. producer surplus.
     d. the derivation of accounting profit.
130. If Harry is paid $25,000 to sell his crop of tomatoes even though he would have been willing to
     have sold the crop for as little as $20,000, this indicates that
     a. Harry received no producer surplus from the transaction.
*    b. Harry received $5,000 of producer surplus from the transaction.
     c. Harry received $20,000 of producer surplus from the transaction.
     d. Harry received $25,000 of producer surplus from the transaction.
131. Ceteris paribus, an increase in the price of a good will cause the
     a. quantity demanded of the good to increase.
     b. quantity supplied of the good to decrease.
*    c. producer surplus derived from the good to increase.
     d. supply of the good to decrease.
132. If the quantity of a good supplied is highly sensitive to the price of the good, this is illustrated by a
     a. demand curve that is relatively flat (more horizontal).
     b. demand curve that is relatively steep (more vertical).
*    c. supply curve that is relatively flat (more horizontal).
     d. supply curve that is relatively steep (more vertical).
133. If the quantity of a good supplied is not very sensitive to the price of the good, this is illustrated by a
     a. demand curve that is relatively flat (more horizontal).
     b. demand curve that is relatively steep (more vertical).
     c. supply curve that is relatively flat (more horizontal).
*    d. supply curve that is relatively steep (more vertical).
134. If the quantity of a good supplied is highly sensitive to the price of the good, economists say the
     supply of the good is relatively
     a. inelastic.
*    b. elastic.
     c. robust.
     d. inverse.
135. If the quantity of a good supplied is not very sensitive to the price of the good, economists say the
     supply of the good is relatively
*    a. inelastic.
     b. elastic.
     c. robust.
     d. inverse.
136. If the supply of a good is relatively elastic, this means that the quantity supplied of the good is
     a. not very sensitive to the price of the good.
*    b. highly sensitive to the price of the good.
     c. unrelated to the price of the good.
     d. none of the above.
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137. If the supply of a good is relatively inelastic, this means that the quantity supplied of the good is
*    a. not very sensitive to the price of the good.
     b. highly sensitive to the price of the good.
     c. unrelated to the price of the good.
     d. none of the above.
138. If a large percentage increase in the price of a good results in a small percentage increase in the
     quantity supplied of the good, supply is said to be
     a. horizontal.
*    b. relatively inelastic.
     c. relatively elastic.
     d. income proof.
139. If a small percentage increase in the price of a good results in a rather large percentage increase in
     the quantity supplied of the good, supply is said to be
     a. vertical.
     b. relatively inelastic.
*    c. relatively elastic.
     d. robust.

CHANGES IN SUPPLY VERSUS CHANGES IN QUANTITY SUPPLIED
140. When economists say the supply of a product has decreased, they mean that
*    a. the supply curve has shifted to the left.
     b. the product price has decreased, and as a consequence, suppliers are producing less of the
        product.
     c. producers are now willing to sell more of this product at each possible price.
     d. the supply curve has shifted to the right.
141. When economists say the supply of a product has increased, they mean the
*    a. supply curve has shifted to the right.
     b. price of the product has risen, and consequently, suppliers are producing more of it.
     c. supply curve has shifted to the left.
     d. amount of the product that consumers are willing to purchase at various prices has increased.
142. When economists say the quantity supplied of a product has increased, they mean the
     a. supply curve has shifted to the left.
     b. supply curve has shifted to the right.
*    c. price of the product has risen, and consequently, suppliers are producing more of it.
     d. price of the product has fallen, and consequently, suppliers are producing less of it.
143. When economists say the quantity supplied of a product has decreased, they mean the
     a. supply curve has shifted to the left.
     b. supply curve has shifted to the right.
     c. price of the product has risen, and consequently, suppliers are producing more of it.
*    d. price of the product has fallen, and consequently, suppliers are producing less of it.
144. In which statement(s) is “supply” used correctly?
     (I) “An increase in the price of eggs will increase the supply of eggs.”
     (II) “As the cost of producing eggs rises, the supply of eggs will tend to fall.”
     a. in both statements I and II
     b. in statement I only
*    c. in statement II only
     d. in neither statements I nor II
                                         Chapter 3/Supply, Demand, and the Market Process            103


145. In which statement(s) are “supply” and “quantity supplied” used correctly?
     (I) “An increase in the price of computers will increase the quantity supplied of computers.”
     (II) “A technological advance that lowers the cost of producing computers will increase the supply
     of computers.”
*    a. in both statements I and II
     b. in statement I only
     c. in statement II only
     d. in neither statements I nor II
146. Other things constant, which of the following would most likely cause the supply of garden hoses to
     decrease?
*    a. an increase in the price of plastic used to make garden hoses
     b. a technological advance that lowers the cost of producing garden hoses
     c. the occurrence of a very dry year with little rain
     d. a decrease in the price of grass seed
147. A decrease in the price of leather used to make shoes would cause the
     a. demand for shoes to decrease.
     b. demand for shoes to increase.
     c. supply of shoes to decrease.
*    d. supply of shoes to increase.
148. As a result of the September 11, 2001 terrorist attacks, new regulations were imposed that required
     airlines to adopt more costly security measures. Other things constant, how would this increase in
     the cost of providing air travel security affect the supply of air travel?
     a. Higher security cost would result in an increase in the supply of air travel.
*    b. Higher security cost would result in a reduction in the supply of air travel.
     c. Higher security cost would not affect the supply of air travel.
     d. Higher security cost would shift the supply curve of air travel to the right.
149. Which of the following would most likely cause a reduction in the supply of Microsoft X-Box video
     game consoles?
     a. an increase in the price of Microsoft X-Box video game consoles
*    b. an increase in the price of the computer chips used to make Microsoft X-Box video game
         consoles
     c. an increase in the price of Sony Playstation 2 video game consoles, a substitute for the X-Box
     d. a reduction in the price of the game CDs used with X-Box console
150. You are using a supply and demand diagram to study the market for oranges. What impact would an
     increase in the price of oil that orange growers burn to keep oranges from freezing in the winter
     have on the market?
     a. It would shift the supply curve to the right.
*    b. It would shift the supply curve to the left.
     c. It would shift the demand curve to the left.
     d. It would shift the demand curve to the right.
151. How will an increase in lumber prices influence the home construction market?
     a. The demand for newly constructed homes will increase.
     b. The demand for newly constructed homes will decrease.
     c. The supply of newly constructed homes will increase.
*    d. The supply of newly constructed homes will decrease.
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152. If the United Auto Workers union can obtain a substantial wage increase for auto workers, there will
     be
     a. a decrease in the supply of automobiles, which is a shift to the right of the supply curve.
*    b. a decrease in the supply of automobiles, which is a shift to the left of the supply curve.
     c. an increase in the supply of automobiles, which is a shift to the right of the supply curve.
     d. an increase in the supply of automobiles, which is a shift to the left of the supply curve.
153. Suppose you are using a supply and demand diagram to study the market for air travel. What impact
     would an increase in the price of jet fuel have on the market for air travel?
     a. It would shift the supply curve for air travel to the right.
*    b. It would shift the supply curve for air travel to the left.
     c. It would shift the demand curve for air travel to the right.
     d. It would shift the demand curve for air travel to the left.
154. Which of the following would most likely increase the supply of beef?
*    a. lower prices of grains used to feed cattle
     b. lower prices for chicken, a substitute for beef
     c. new medical research suggesting that beef causes more serious health problems than was
         previously thought
     d. an increase in the cost of transporting beef products to the consumer market
155. How will a reduction in the price of cotton influence the market for blue jeans?
     a. The cost of producing blue jeans will fall, and the supply curve for blue jeans will shift to the
        left.
*    b. The cost of producing blue jeans will fall, and the supply curve for blue jeans will shift to the
        right.
     c. The cost of producing blue jeans will rise, and the supply curve for blue jeans will shift to the
        left.
     d. The cost of producing blue jeans will rise, and the supply curve for blue jeans will shift to the
        right.
156. Which of the following will lead to a decrease in supply (a shift of the supply curve to the left) for a
     good?
     a. an increase in the price of the good
     b. an increase in consumer incomes
*    c. an increase in the price of an important resource used to produce the good
     d. a technological advance that lowers the cost of producing the good
157. Which of the following events would be illustrated as a shift in the supply curve for handguns?
     (I) a decrease in the price of resources used in producing handguns
     (II) an improvement in technology, reducing the production cost of handguns
     (III) an increase in the price of rifles, a substitute product for handguns
     a. II only
     b. III only
*    c. I and II only
     d. I, II, and III
158. A technological improvement in producing good A would be illustrated in a supply and demand
     diagram as a shift in the
*    a. supply curve for A to the right.
     b. supply curve for A to the left.
     c. demand curve for A to the right.
     d. demand curve for A to the left.
                                         Chapter 3/Supply, Demand, and the Market Process            105


159. Which of the following would most likely cause the supply of wheat to increase?
     a. a decrease in the price corn, a substitute for wheat
*    b. a technological advance that lowers the cost of producing wheat
     c. an increase in the cost of producing wheat
     d. a change in consumer preferences, causing them to prefer plain white bread to whole-wheat
         bread
160. Which of the following would increase the supply of laptop computers?
     a. higher wage rates for the workers that produce laptop computers
*    b. a technological improvement that lowers the cost of producing laptop computers
     c. an increase in the price of computer chips used to produce laptop computers
     d. all of the above
161. If a major hurricane were to destroy the sugarcane crop in Louisiana, there would be
*    a. a decrease in the supply of sugarcane.
     b. an increase in the supply of sugarcane.
     c. a decrease in the demand for sugarcane.
     d. an increase in the demand for sugarcane.
162. What impact would a severe drought that destroys the wheat crop in several areas of the United
     States have on the market for wheat?
*    a. The supply of wheat would fall.
     b. The supply of wheat would rise.
     c. The demand for wheat would fall.
     d. The demand for wheat would rise.
163. Suppose a major civil war broke out in an important oil-producing nation. What impact would this
     have on the market for oil?
*    a. The supply of oil would fall.
     b. The supply of oil would rise.
     c. The demand for oil would fall.
     d. The demand for oil would rise.
164. Which of the following would decrease the supply of sugar?
     a. The demand for sugar increases.
     b. A technological advance lowers the cost of producing sugar.
     c. The price of artificial sweeteners rises dramatically.
*    d. The tariff (tax) on imported sugar increases.
165. Which of the following would reduce the supply of tennis shoes?
     a. an increase in the demand for tennis shoes
*    b. a new tax imposed on the producers of tennis shoes
     c. a reduction in the price of leather used to make tennis shoes
     d. all of the above
166. Which of the following will reduce the supply of motorcycles?
     a. an increase in the population age 16 to 35, the primary consumers of motorcycles
*    b. an increase in taxes imposed on motorcycle producers
     c. a technological improvement reducing the production costs of motorcycles
     d. a government study that reveals motorcycle riders, on average, live 10 years longer than those
         who don‟t ride motorcycles
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HOW MARKET PRICES ARE DETERMINED: SUPPLY AND DEMAND
INTERACT
167. (I) To an economist, a market is not a physical location but an abstract concept that encompasses the
     forces generated by the decisions of buyers and sellers.
     (II) Market prices are what bring into harmony the quantity demanded with the quantity supplied in
     markets.
     a. I is true; II is false.
     b. II is true; I is false.
     c. Both I and II are false.
*    d. Both I and II are true.
168. When the quantity demanded and quantity supplied in a market are equal, the market is said to be in
     a. fixation.
     b. excess supply.
*    c. equilibrium.
     d. excess demand.
169. If equilibrium is present in a market,
     a. there is generally either a shortage or a surplus.
*    b. quantity demanded equals quantity supplied.
     c. quantity demanded exceeds quantity supplied.
     d. quantity supplied exceeds quantity demanded.
170. Use the table below to choose the correct answer. The table is a schedule of the supply and demand
     for coffee (both given in thousands of pounds per month).
                Price per Pound        Quantity Demanded        Quantity Supplied
                       $6.00                   25                       9
                       $8.00                   20                      12
                     $10.00                    15                      15
                     $12.00                    10                      18
      The equilibrium market price of coffee would be
      a. $6 per pound.
      b. $8 per pound.
*     c. $10 per pound.
      d. $12 per pound.
                                         Chapter 3/Supply, Demand, and the Market Process          107


171. Use the table below to choose the correct answer. The table is a schedule of the supply and demand
     for ground hamburger meat (both given in thousands of pounds per month).
                Price per Pound       Quantity Demanded        Quantity Supplied
                     $0.50                     16                       1
                     $1.00                     13                       3
                     $1.50                     10                       5
                     $2.00                      7                       7
                     $2.50                      4                       9
                     $3.00                      1                      11
     The equilibrium market price of ground hamburger meat would be
     a. $1 per pound.
*    b. $2 per pound.
     c. $2.50 per pound.
     d. $3 per pound.
172. When there is excess demand for a product in a market,
     a. price will tend to fall.
*    b. price must be below the equilibrium price.
     c. price must be above the equilibrium price.
     d. producers will reduce output and sales will fall.
173. When there is excess supply of a product in a market,
     a. price will tend to rise.
*    b. price must be above the equilibrium price.
     c. producers will expand output and sales will rise.
     d. price must be below the equilibrium price.
174. The price of a good will tend to fall when
     a. there is excess demand for the good.
*    b. there is excess supply of the good.
     c. demand for the good increases.
     d. the supply of the good decreases.
175. The price of a good will tend to rise when
*    a. there is excess demand for the good.
     b. there is excess supply of the good.
     c. demand for the good decreases.
     d. the supply of the good increases.
176. When economists say an activity is consistent with economic efficiency, they mean
     a. a majority of citizens favor the activity.
*    b. the benefits that result from the activity exceed the costs.
     c. the number of people who gain from the activity exceeds the number on whom costs are
        imposed.
     d. the costs that result from the activity exceed the benefits.
177. If an economic action generates more costs than benefits, the action
     a. by definition increases the nation‟s economic welfare.
*    b. should not be undertaken from an efficiency standpoint.
     c. should be undertaken from an efficiency standpoint.
     d. is desirable from a public welfare standpoint, even though many individuals will be harmed.
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178. When property rights are well defined and markets are competitive, the
     a. market equilibrium violates the conditions for economic efficiency.
*    b. market equilibrium is consistent with economic efficiency.
     c. conditions necessary for economic efficiency no longer apply.
     d. quantity supplied will rarely equal the quantity demanded.
179. When property rights are well defined and markets are competitive,
     a. the total gains from trade (the combined area of producer and consumer surplus) are
        maximized at the market equilibrium.
     b. the market equilibrium is consistent with economic efficiency in that all units creating more
        benefit than cost have been produced.
     c. the market will automatically move toward the price and quantity where the quantity supplied
        and the quantity demanded are in balance.
*    d. all of the above are true.
180. Which of the following are true?
     a. Economists use the criterion of economic efficiency to judge the merit of alternative outcomes.
     b. Undertaking an economic action will be efficient if it produces more benefits than costs for the
         individuals of the economy.
     c. Undertaking an economic action will be inefficient if it produces more costs than benefits to
         the individuals.
*    d. All of the above are true.
181. When economists say that market equilibrium is consistent with economic efficiency, they mean
     a. the total gains from trade (the combined area of producer and consumer surplus) are smaller
        than potentially could be the case at a different price and quantity.
*    b. all units creating more benefit than cost have been produced.
     c. some units have been produced that cost more than the benefits they create.
     d. consumers and producers have made decisions without properly taking into account the market
        price.
182. The condition that is present when all units creating more benefit than cost have been produced in a
     market is known as
*    a. economic efficiency.
     b. demand stabilization.
     c. supply coordination equilibrium.
     d. the Smith condition.

HOW MARKETS RESPOND TO CHANGES IN DEMAND AND SUPPLY
183. If the demand for a good decreased, what would be the effect on the equilibrium price and quantity?
     a. Price would increase, and quantity would decrease.
*    b. Price would decrease, and quantity would decrease.
     c. Price would increase, and quantity would increase.
     d. Price would decrease, and quantity would increase.
184. If we observe a decrease in the price of a good and a decrease in the amount of the good bought and
     sold, this could be explained by
     a. an increase in the supply of the good.
     b. an increase in the demand for the good.
*    c. a decrease in the demand for the good.
     d. a decrease in the supply of the good.
                                         Chapter 3/Supply, Demand, and the Market Process              109


185. If the demand for a good increased, what would be the effect on the equilibrium price and quantity?
     a. Price would increase, and quantity would decrease.
     b. Price would decrease, and quantity would decrease.
*    c. Price would increase, and quantity would increase.
     d. Price would decrease, and quantity would increase.
186. If we observe an increase in the price of a good and an increase in the amount of the good bought
     and sold, this could be explained by
     a. an increase in the supply of the good.
*    b. an increase in the demand for the good.
     c. a decrease in the demand for the good.
     d. a decrease in the supply of the good.
187. Between 1994 and 2004, the monthly charge for cellular phone service decreased from $120 per
     month to $30 per month. At the same time, the number of subscribers increased from less than 10
     million to more than 75 million. Which of the following provides the best explanation for these
     changes?
     a. an increase in consumer income between 1994 and 2004
     b. a reduction in the price of residential phone service, a substitute for cellular phone service
     c. an increase in the wages of workers in the cellular phone industry
*    d. technological improvements that reduced the cost of supplying cellular phone service
188. If the supply of a good decreased, what would be the effect on the equilibrium price and quantity?
*    a. Price would increase, and quantity would decrease.
     b. Price would decrease, and quantity would decrease.
     c. Price would increase, and quantity would increase.
     d. Price would decrease, and quantity would increase.
189. If we observe an increase in the price of a good and a decrease in the amount of the good bought
     and sold, this could be explained by
     a. an increase in the supply of the good.
     b. an increase in the demand for the good.
     c. a decrease in the demand for the good.
*    d. a decrease in the supply of the good.
190. If we observe a decrease in the price of a good and an increase in the amount of the good bought
     and sold, this could be explained by
*    a. an increase in the supply of the good.
     b. an increase in the demand for the good.
     c. a decrease in the demand for the good.
     d. a decrease in the supply of the good.
191. How would a decrease in consumer income affect the market for new automobiles?
     a. Demand would decrease, leading to an increase in price and a reduction in quantity sold.
*    b. Demand would decrease, leading to a reduction in price and a reduction in quantity sold.
     c. Demand would increase, leading to an increase in price and an increase in quantity sold.
     d. Demand would increase, leading to a reduction in price and an increase in quantity sold.
192. If there is a decrease in demand for lettuce, we would expect
     a. both the price and quantity sold to increase.
*    b. both the price and quantity sold to decrease.
     c. the price to decrease and the quantity sold to increase.
     d. the price to increase and the quantity sold to decrease.
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193. Which of the following would most likely cause both a decrease in the price of plasma screen TVs
     and a decrease in the number sold?
     a. an increase in the supply of plasma screen TVs
     b. an increase in the demand for plasma screen TVs
     c. a decrease in the supply of plasma screen TVs
*    d. a decrease in the demand for plasma screen TVs
194. Which of the following is the most likely effect of lower apple juice prices on the price and quantity
     purchased of orange juice, a substitute product?
     a. The price of orange juice will increase, and the quantity purchased will fall.
     b. The price of orange juice will fall, and the quantity purchased will increase.
     c. The price of orange juice will increase, and the quantity purchased will increase.
*    d. The price of orange juice will fall, and the quantity purchased will fall.
195. Each year around Valentine‟s Day, we would expect
     a. the demand for roses to increase.
     b. the price of roses to increase.
     c. the quantity of roses sold to increase.
*    d. all of the above.
196. If the demand for beer increases, what would be the effect on the equilibrium price and quantity of
     beer?
     a. Price would increase, and quantity would decrease.
     b. Price would decrease, and quantity would decrease.
*    c. Price would increase, and quantity would increase.
     d. Price would decrease, and quantity would increase.
197. A recent study suggested that moderate wine drinking may actually benefit one‟s health. If this
     information leads to an increased demand for wine, we would expect
*    a. both the price and quantity of wine sold to increase.
     b. both the price and quantity of wine sold to decrease.
     c. the price to decrease and the quantity of wine sold to increase.
     d. the price to increase and the quantity of wine sold to decrease.
198. After a hurricane in Florida knocked out the regional water supply for several days, the demand for
     bottled water increased sharply. In a market economy, how will this increase in demand affect the
     equilibrium price and quantity of bottled water?
     a. Price will increase, and quantity will decrease.
     b. Price will decrease, and quantity will decrease.
     c. Price will decrease, and quantity will increase.
*    d. Price will increase, and quantity will increase.
199. An increase in the demand for tattoos will lead to a
*    a. higher price and a larger quantity sold.
     b. lower price and a larger quantity sold.
     c. higher price and a smaller quantity sold.
     d. lower price and a smaller quantity sold.
200. How will an increase in the price of coffee affect the market for cocoa, a substitute good?
     a. The supply of cocoa will increase, leading to a reduction in the price of cocoa.
     b. The supply of cocoa will decrease, leading to an increase in the price of cocoa.
*    c. The demand for cocoa will increase, leading to an increase in the price of cocoa.
     d. The demand for cocoa will decrease, leading to a reduction in the price of cocoa.
                                          Chapter 3/Supply, Demand, and the Market Process            111


201. Which of the following is the most likely effect of higher chicken prices on the price and quantity
     purchased of beef, a substitute product?
     a. The price of beef will increase, and the quantity purchased will fall.
     b. The price of beef will fall, and the quantity purchased will increase.
*    c. The price of beef will increase, and the quantity purchased will increase.
     d. The price of beef will fall, and the quantity purchased will fall.
202. If Georgia experiences a late frost that damages the peach crop, we should expect the
     a. supply curve for peaches to shift to the right and the price of peaches to fall.
*    b. supply curve for peaches to shift to the left and the price of peaches to rise.
     c. demand curve for peaches to shift to the left and the price of peaches to fall.
     d. demand curve for peaches to shift to the right and the price of peaches to rise.
203. Suppose a new law requires all piercing studios to pass tougher licensing tests and to begin using
     more costly sterilization methods. Other things constant, this law would cause
     a. an increase in the supply of piercings and a lower price for piercings.
     b. an increase in the supply of piercings and a higher price for piercings.
*    c. a decrease in the supply of piercings and a higher price for piercings.
     d. a decrease in the supply of piercings and a lower price for piercings.
204. Which of the following will most likely result from a destruction of half of the Florida orange crop
     due to a hard freeze?
     a. a decrease in the demand for oranges
     b. an increase in the supply of oranges
     c. an increase in the quantity of oranges bought and sold
*    d. an increase in the price of oranges
205. During a major war between two oil producing nations, there would likely be
*    a. an increase in the price of oil because the supply of oil would decrease.
     b. an increase in the price of oil because the supply of oil would increase.
     c. a decrease in the price of oil because the supply of oil would decrease.
     d. a decrease in the price of oil because the supply of oil would increase.
206. How would a decrease in the cost of production affect the market for new automobiles?
     a. Supply would decrease, leading to an increase in price and a reduction in quantity sold.
     b. Supply would decrease, leading to a reduction in price and a reduction in quantity sold.
     c. Supply would increase, leading to an increase in price and an increase in quantity sold.
*    d. Supply would increase, leading to a reduction in price and an increase in quantity sold.
207. Which of the following would reduce the price of DVD players and increase the quantity sold?
     a. an increase in the demand for DVD players
     b. a decrease in the demand for DVD players
     c. a decrease in the supply of DVD players
*    d. an increase in the supply of DVD players
208. How would a decrease in the price of the feed grains used to feed cattle affect the market for beef?
     a. The demand for beef would increase, increasing beef prices.
     b. The demand for beef would decrease, decreasing beef prices.
*    c. The supply of beef would increase, decreasing beef prices.
     d. The supply of beef would decrease, increasing beef prices.
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209. Suppose a new technology is discovered for making beer that allows the same amount of beer to be
     produced with only half as much barley and hops. What will happen in the beer market?
     a. The supply of beer will decrease, and the price will increase.
     b. The supply of beer will decrease, and the price will decrease.
     c. The supply of beer will increase, and the price will increase.
*    d. The supply of beer will increase, and the price will decrease.
210. After the September 11, 2001 terrorist attacks, many Americans wanted to show their patriotism by
     displaying the American flag. How did this increased desire to express patriotism influence the
     market for American flags during the months following the attacks?
*    a. an increase in the demand for American flags that resulted in a higher price for flags and a
          larger equilibrium quantity bought and sold
     b. a decrease in the demand for American flags that resulted in a lower price for flags and a
          smaller equilibrium quantity bought and sold
     c. an increase in the supply of American flags that resulted in a lower price for flags and a larger
          equilibrium quantity bought and sold
     d. a decrease in the supply of American flags that resulted in a higher price for flags and a smaller
          equilibrium quantity bought and sold
211. Following the September 11, 2001 terrorist attacks, the price of American flags increased, and many
     more were bought and sold than usual. This would be illustrated graphically as
*    a. an increase in the demand for American flags.
     b. a decrease in the demand for American flags.
     c. an increase in the supply of American flags.
     d. a decrease in the supply of American flags.
212. Not long after the destruction of the World Trade Center office complex on September 11, 2001, the
     price of the remaining office rental space in New York City increased. Which of the following best
     explains why the price of office rental space in New York City would have been impacted by this
     event?
     a. An increase in the demand for office rental space resulted in a higher price.
     b. A decrease in the demand for office rental space resulted in a lower price.
     c. An increase in the supply of office rental space resulted in a lower price.
*    d. A decrease in the supply of office rental space resulted in a higher price.
213. As a result of the September 11, 2001 terrorist attacks, many people became reluctant to fly in
     airplanes. As a result, all major airlines cut their airfares dramatically. Which of the following best
     explains this within the framework of supply and demand?
     a. An increase in the demand for air travel resulted in a higher price and a larger equilibrium
          quantity.
*    b. A decrease in the demand for air travel resulted in a lower price and a smaller equilibrium
          quantity.
     c. An increase in the supply of air travel resulted in a lower price and a larger equilibrium
          quantity.
     d. A decrease in the supply of air travel resulted in a higher price and a smaller equilibrium
          quantity.
214. Following the terrorist attacks of September 11, 2001, many individuals became reluctant to fly in
     airplanes. How did this increased fear of flying affect the travel industry?
     a. The demand for air travel decreased.
     b. The demand for alternative forms of transportation such as train and bus service increased.
     c. The demand for hotel rooms and other tourist related attractions decreased.
*    d. All of the above are correct.
                                           Chapter 3/Supply, Demand, and the Market Process               113


215. Which of the following would most likely increase the price of automobiles?
     a. a decrease in the price of steel used to produce automobiles
     b. an increase in the price of gasoline
     c. a decrease in consumer income
*    d. the United Auto Workers union obtaining a substantial wage increase for auto workers
216. Which of the following would increase the price of fitness equipment?
     a. a reduction in consumer income
*    b. a major study indicating that a 30-minute workout each day improved health more than was
         previously thought to be the case
     c. a decrease in the price of steel used to produce the equipment
     d. all of the above
217. Which of the following is most likely to lead to an increase in the rental price of apartments near
     your campus?
     a. lower property taxes on apartment buildings
*    b. an unexpected increase in enrollment at your college
     c. lower prices for the bricks used in the construction of apartments
     d. the building of a new large dormitory on the college campus
218. Which of the following is most likely to result in higher prices of tickets at movie theatres near your
     campus?
*    a. an unexpected increase in enrollment at your college
     b. lower electricity rates that reduces the cost of keeping the theater at a comfortable temperature
     c. higher prices for video tape and DVD movie rentals in the stores near your campus
     d. an increase in tuition at your school that lowers enrollment
219. Which of the following would decrease the price of packaged hot dogs?
     a. an increase in the price of hot dog buns, a complement to packaged hot dogs
     b. a decrease in the price of hamburger meat, a substitute for packaged hot dogs
     c. a technological advance that lowers the cost of producing packaged hot dogs
*    d. all of the above
220. Which of the following will most likely decrease the current price of personal computers?
*    a. a technological advance that decreases the production costs of personal computers
     b. an increase in consumer income
     c. development of new software that makes it easier for more people to use personal computers
     d. the expectation that the price of personal computers will increase during the next six months
221. Which of the following would most likely cause the price of wheat to decline?
     a. an increase in the production costs of corn, a substitute for wheat
*    b. a decrease in the price of soybeans, a substitute for wheat
     c. an increase in the price of fertilizer, a resource used to produce wheat
     d. a sandwich craze among Americans, causing increased demand for whole-wheat bread
222. If there is a decrease in both the supply and demand for a good, which of the following will
     necessarily occur?
     a. The price of the good will increase.
     b. The price of the good will decrease.
     c. The equilibrium quantity will increase.
*    d. The equilibrium quantity will decrease.
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223. If there is an increase in both the supply and demand for a good, which of the following will
     necessarily occur?
     a. The price of the good will increase.
     b. The price of the good will decrease.
*    c. The equilibrium quantity will increase.
     d. The equilibrium quantity will decrease.
224. If there is both a decrease in the supply of a good and an increase in demand for a good, which of
     the following will necessarily occur?
*    a. The price of the good will increase.
     b. The price of the good will decrease.
     c. The equilibrium quantity will increase.
     d. The equilibrium quantity will decrease.
225. If there is both an increase in the supply of a good and a decrease in demand for a good, which of
     the following will necessarily occur?
     a. The price of the good will increase.
*    b. The price of the good will decrease.
     c. The equilibrium quantity will increase.
     d. The equilibrium quantity will decrease.

INVISIBLE HAND PRINCIPLE
226. “He [the producer] intends only his gain, and he is in this, as in many other cases, led by an invisible
     hand to promote an end which was no part of his intention.” What famous economist made this
     statement?
     a. Alfred Marshall
     b. Friedrich Hayek
*    c. Adam Smith
     d. David Ricardo
227. In his book The Wealth of Nations, this famous economist argued that economic activity was
     directed by an “invisible hand.”
     a. Alfred Marshall
     b. Milton Friedman
*    c. Adam Smith
     d. David Ricardo
228. “He [the producer] intends only his gain, and he is in this, as in many other cases, led by an invisible
     hand to promote an end which was no part of his intention.” What is the “invisible hand” referred to
     in this statement?
     a. the elasticity of the market demand curve
     b. the power of government when decisions are made democratically
     c. the guidelines and regulations set for his industry by the government
*    d. the incentive structure accompanying market prices
229. “When directed by competitive market prices, self-interested individuals will tend to pursue
     activities that also promote the general welfare of society.” This statement most clearly reflects the
     a. fallacy of composition.
     b. law of comparative advantage.
*    c. invisible hand principle.
     d. law of demand.
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230. The invisible hand principle, as developed by Adam Smith in The Wealth of Nations, states that
     a. government control over economic activity is essential for the talents of individuals to be
          directed toward their highest valued use.
     b. the economic wealth of a nation is determined by a nation‟s holdings of precious metals, such
          as gold and silver.
     c. public policy should prohibit domestic producers from selling their goods to foreigners.
*    d. competitive markets will bring individual self-interest and the public interest into harmony.
231. According to Adam Smith‟s invisible hand principle, productive actions that promote the general
     welfare of society will be undertaken when
     a. political representatives are elected democratically.
*    b. competitive markets direct the actions of self-interested individuals.
     c. the selfish instincts of individuals are controlled.
     d. workers are able to organize and develop strong unions.
232. According to the invisible hand principle, competitive markets generally
*    a. bring the self-interest of individuals into harmony with the efficient allocation of resources,
         even though centralized planning of economic activities is absent.
     b. bring the self-interest of individuals into harmony with the efficient allocation of resources
         when the behavior of individuals is directed by democratic centralized planning.
     c. require central direction; otherwise, the actions of self-interested individuals will conflict with
         the general interests of society.
     d. promote the economic welfare of self-interested producers at the expense of unorganized
         groups such as consumers and taxpayers.
233. Adam Smith‟s invisible hand principle stresses
     a. that benevolence is a powerful motivator that encourages individuals to engage in productive
        economic activity.
*    b. the tendency of the competitive market process to direct self-interested individuals into
        activities that enhance the economic welfare of society.
     c. the potential of government regulation as a means of bringing the self interest of individuals
        into harmony with the economic welfare of society.
     d. the tendency of self-interested individuals to pursue activities that benefit themselves but harm
        the overall economic welfare of society.
234. Which of the following most accurately describes the invisible hand concept?
     a. Wise central planning by government is necessary for the efficient use of resources.
     b. In a democratic setting, majority rule will result in the efficient use of resources.
*    c. In a market setting, when individuals pursue their own interests, they simultaneously tend to
         promote the public interest.
     d. In a market setting, when individuals pursue their own interests, they tend to engage in
         activities that lower the overall economic welfare of society.
235. Which of the following is a major implication of the invisible hand concept?
*    a. When directed by competitive market prices, the actions of self-interested individuals will tend
         to promote overall economic prosperity.
     b. Prosperity cannot be achieved unless the selfish nature of people can be changed.
     c. Competition is harmful to the health of an economy because it results in wasteful duplication.
     d. Government-operated firms tend to have higher efficiency and lower costs than private sector
         firms.
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236. At a store like Wal-Mart, they do not have an employee who stands near the checkout lines and
     allocates shoppers between the lines. It is also apparent that the allocation of shoppers between
     checkout lines that would serve the best interest of all shoppers getting home quicker is to roughly
     equalize the length of the lines. This is an example of a case where
     a. individuals acting in their own narrow self-interest generally refuse to select the shortest line,
          and thus the overall best interest of shoppers could be better served with central direction from
          an employee.
*    b. individuals acting in their own narrow self-interest select the shortest line, and the result of
          these selfish actions is an outcome that simultaneously promotes the best interest of all
          shoppers.
     c. individuals clearly display irrational behavior by selecting the shortest line.
     d. the best interest of all shoppers is not served by individuals acting in their own self-interest.
237. Market prices are
     a. conveyors of information.
     b. determined by the interactions of supply and demand in voluntary exchange.
     c. indicators of the relative scarcity of resources and products.
*    d. all of the above.
238. Which of the following is a function performed by market prices?
     a. Market prices communicate information to buyers and sellers.
     b. Market prices coordinate the decisions of buyers and sellers.
     c. Market prices motivate entrepreneurs to produce those products that are currently most desired
         relative to their costs of production.
*    d. All of the above are functions performed by market prices.
239. Under competitive conditions, market prices
     a. generally convey little information about the value and cost of goods.
     b. do not usually have much of an effect on the decisions of individuals.
     c. are incapable of coordinating the actions of buyers and sellers.
*    d. generally bring the self-interest of individuals into harmony with the general welfare.
240. Price is important in a market economy because it
     a. eliminates imbalances between supply and demand.
     b. serves as the rationing mechanism for the limited supplies of goods and services.
     c. coordinates the choices of consumers and producers and brings them into harmony.
*    d. is all of the above.
241. Market prices generally promote social cooperation because they
*    a. clarify the options available to people and encourage individuals to help others in exchange for
         income.
     b. encourage government officials to levy taxes to provide people with the necessities of life.
     c. eliminate scarcity by allowing prices to rise.
     d. reward only altruistic actions, whereby, people seek to help others without the expectation of
         personal gain.
242. Market prices provide information to consumers, helping them coordinate their activities so long as
*    a. competition is present and buyers and sellers are free to choose mutually agreeable prices.
     b. prices are not allowed to rise too high, causing a shortage.
     c. prices are legally kept equal in all markets, preventing unfair price increases in markets with
         shortages and unfair price decreases when a market surplus is present.
     d. the government carefully screens producers and effectively keeps inefficient producers out of
         the market.
                                          Chapter 3/Supply, Demand, and the Market Process            117


243. Which of the following is necessary for the invisible hand of market prices to work properly?
     a. buyers and sellers who generally tend to disregard their own self-interest
     b. democratic political procedures and highly regulated markets
     c. price controls that restrict the movement of market prices
*    d. competition and property rights that are well-defined and enforced
244. Which of the following is the best illustration of the “invisible hand” in action?
     a. The government creates a food stamp program to help low-income families.
*    b. There are always enough gasoline stations on a busy highway, so you don‟t have to worry
         about running out of gas because you can‟t find a gas station.
     c. You received a poor grade on an exam because you failed to study.
     d. The police always seem to be around when you‟re speeding.
245. In 1986, the price of coffee increased sharply because of a major earthquake and weather-induced
     crop failures. As a result, conservation was immediately practiced mainly by those consumers who
     a. were committed to environmental conservation.
     b. were most aware of the world market situation for coffee from reading the newspaper.
     c. happened to follow world weather patterns.
*    d. considered the prices of products when they made decisions about buying them.
246. When oil prices increased to record levels in the 1970s, salaries dramatically increased for
     petroleum geologists skilled in finding oil. Those geologists who moved from other areas to the
     higher paying jobs were
     a. seeking to profit from society‟s needs rather than following the guidance of the invisible hand,
          which would have led them to seek jobs serving society rather than jobs with higher pay.
*    b. following the guidance of the invisible hand and probably serving society‟s best interests as
          well as their own.
     c. causing oil prices to rise even more by moving to jobs with higher salaries.
     d. helping themselves but hurting the economy.
247. When an unusually bad frost reduces the apple crop in Washington state, the price of canned apple
     juice may rise immediately in supermarkets, even though the juice on the shelves was made from
     last year‟s plentiful crop. The invisible hand theory tells us that the profit-seeking merchants who
     raise their prices in such situations
     a. are hurting the economy, since the juice now on the shelves was produced at a lower cost.
*    b. are profiting by rationing the juice, which is now more scarce to the consumers willing to pay
           the most for the now more limited supply.
     c. are ignoring the motivating function of prices, which the invisible hand theory holds should be
           set according to the cost paid by the merchant.
     d. will not actually profit since they are ignoring a basic economic rule: Only raise prices when
           consumer demand increases.
248. When experts first predicted major weather-related coffee crop failures in Central and South
     America in 1986, the price of coffee already on grocery shelves in the United States increased
     sharply. When coffee became temporarily more scarce, the usefulness to society of “coffee
     conservation” increased. The immediate sharp price increase (which soon leveled off) gave
     consumers an incentive to
     a. buy all the coffee they could at the higher prices and hoard it, since there was obviously a
          shortage.
     b. drink as much coffee as possible at the higher price.
*    c. start conserving coffee immediately and switch to other beverages if it was easy to do so.
     d. ignore the price of coffee and drink it as they normally would.
118       Chapter 3/Supply, Demand, and the Market Process


249. When a conflict arises in a major oil-exporting area of the world, such as the Middle East, the price
     of gasoline already in the storage tanks at local gas stations usually increases. Which of the
     following best explains this occurrence?
     a. Gas station owners anticipate consumers will buy more gasoline as gasoline prices increase.
     b. Gas station owners are attempting to repeal the laws of supply and demand.
*    c. Gas station owners anticipate higher replacement costs for their supply of gasoline and,
          therefore, raise their prices in response to this higher expected cost.
     d. A decline in consumer demand generally causes gas station owners to raise their prices.
250. Following the September 11, 2001 terrorist attacks, many Americans wanted to display the
     American flag to show their patriotism. This increase in demand caused an increase in the price of
     American flags. Which of the following would result from this increase in the price of American
     flags?
     a. Consumers who already had an American flag stored away somewhere would have a stronger
          incentive to find it rather than go out to purchase a new one.
     b. Producers of other types of flags would have an incentive to change their equipment so they
          were able to begin producing and selling American flags.
     c. Consumers would have an incentive to restrain their urge to purchase a large number of flags,
          and thus, the existing supply of flags for sale was able to satisfy a larger number of buyers.
*    d. All of the above would be caused by the price increase.

GRAPHIC QUESTIONS
Figure 1




251. Which of the following is true regarding the market for steak shown in Figure 1?
     a. If the price of steak were $2 per pound, producers would want to supply less steak than
         consumers would want to buy.
     b. If the price of steak were $4 per pound, producers would want to supply more steak than
         consumers would want to buy.
     c. If the price of steak were $3 per pound, producers would want to supply the same amount of
         steak that consumers would want to buy.
*    d. All of the above are true regarding the market for steak shown in the figure.
                                          Chapter 3/Supply, Demand, and the Market Process                119


Figure 2




252. Given the supply and demand conditions illustrated in Figure 2, the equilibrium price of steak is
     a. $2 per pound.
     b. $4 per pound.
*    c. $6 per pound.
     d. $8 per pound.

Figure 3




253. In Figure 3, if the initial demand for margarine were D1, the impact of an increase in the price of
     margarine from $0.35 to $0.40 per pound on consumer purchases would be illustrated as
     a. a shift in the demand curve to D2.
     b. a shift in the demand curve to D3.
*    c. a movement upward to the left along the original demand curve D1.
     d. none of the above.
120       Chapter 3/Supply, Demand, and the Market Process


Figure 4




254. In Figure 4, if the initial demand for margarine were D1, the impact of a decrease in the price of
     butter, a substitute good for margarine, would be illustrated as
     a. a shift in the demand curve to D2.
*    b. a shift in the demand curve to D3.
     c. a movement downward to the right along the original demand curve D1.
     d. none of the above.

Figure 5




255. Figure 5 shows conditions in the market for beef. A reduction in the price of the grain used to feed
     cattle results in
     a. the supply curve for beef shifting to the left resulting in higher beef prices and a lower quantity
           sold.
*    b. the supply curve for beef shifting to the right resulting in lower beef prices and a higher
           quantity sold.
     c. the demand curve for beef shifting to the left resulting in lower beef prices and a lower quantity
           sold.
     d. the demand curve for beef shifting to the right resulting in higher beef prices and a higher
           quantity sold.
                                           Chapter 3/Supply, Demand, and the Market Process             121


Figure 6




256. In Figure 6, if the initial demand for margarine were D1, an increase in the price of butter, which is a
     substitute for margarine, would tend to cause which of the following changes in the market for
     margarine?
*    a. a shift in the demand curve from D1 to D2
     b. a shift in the demand curve from D2 to D1
     c. a movement along demand curve D1 from a to b
     d. a movement along demand curve D1 from b to a

Figure 7




257. In Figure 7, suppose D1 and S1 indicate initial conditions in the market for ice cream. Which of the
     following changes would tend to cause a shift from S1 to S2 in the market for ice cream?
     a. an increase in the price of sugar, an ingredient used to produce ice cream
     b. a decrease in the price of frozen yogurt, a substitute for ice cream
     c. abnormally hot weather that temporarily increases consumer desire for ice cream
*    d. a decrease in the price of milk, an ingredient used to produce ice cream
122       Chapter 3/Supply, Demand, and the Market Process


Figure 8




258. In Figure 8, suppose D1 and S1 indicate the initial conditions in the market for ice cream. Which of
     the following changes would tend to cause the shift from D1 to D2 in the market for ice cream?
     a. a decrease in the price of sugar, an ingredient used to produce ice cream
*    b. an increase in the price of frozen yogurt, a substitute for ice cream
     c. abnormally cold weather that decreased consumer desire for ice cream
     d. an increase in the price of milk, an ingredient used to produce ice cream

Use the figure below to answer the following questions.
Figure 9




259. The market for margarine was initially in equilibrium at point e. Other things constant, an increase
     in the price of butter, a close substitute for margarine, would likely move the equilibrium in this
     market toward point
     a. r.
     b. s.
*    c. t.
     d. u.
                                          Chapter 3/Supply, Demand, and the Market Process             123


260. The market for margarine was initially in equilibrium at point e. Other things constant, a decrease in
     the price of soybean oil, an important ingredient used to produce margarine, would likely move the
     equilibrium in this market toward point
     a. r.
*    b. s.
     c. t.
     d. u.


Use the figure below to answer the following questions.
Figure 10




261. The gasoline market was initially in equilibrium at point e. Other things constant, an increase in the
     price of crude oil, an important ingredient used to produce gasoline, would likely move the
     equilibrium in this market toward point
     a. r.
     b. s.
     c. t.
*    d. u.
262. The gasoline market was initially in equilibrium at point e. Other things constant, a technological
     advancement that significantly increased the fuel efficiency of automobiles would likely move the
     equilibrium in this market toward point
*    a. r.
     b. s.
     c. t.
     d. u.
124        Chapter 3/Supply, Demand, and the Market Process


Figure 11




263. In Figure 11, if the initial demand and supply for soybeans were D1 and S1, how would a decrease in
     the cost of producing soybeans affect the market for soybeans?
     a. Demand would increase to D2, price would increase to P2, and the quantity would increase to S.
*    b. Supply would increase to S2, price would decrease to P0, and the quantity would increase to S.
     c. Both demand and supply would increase so the price would remain at P1, but the quantity
          would increase to T.
     d. None of the above would occur.

Use the figure below to answer the following questions.
Figure 12




264. In Figure 12, if D and S represent the demand and supply for gasoline, what is the equilibrium price
     and quantity?
     a. price, $1; quantity, 20
*    b. price, $2; quantity, 30
     c. price, $3; quantity, 40
     d. price, $4; quantity, 50
                                         Chapter 3/Supply, Demand, and the Market Process            125


265. Given the demand (D) and supply (S) for gasoline in Figure 12, if the price of gasoline were $1 per
     gallon,
*    a. consumers would wish to purchase more than was being supplied.
     b. producers would be supplying more than consumers wished to purchase.
     c. the quantity consumers wished to purchase would equal the quantity that producers wished to
          supply.
     d. there would be a tendency for the price of gasoline to fall.
266. Given the demand (D) and supply (S) for gasoline in Figure 12, if the price of gasoline were $3 per
     gallon,
     a. consumers would wish to purchase more than was being supplied.
*    b. producers would be supplying more than consumers wished to purchase.
     c. the quantity consumers wished to purchase would equal the quantity that producers wished to
          supply.
     d. there would be a tendency for the price of gasoline to rise.

Figure 13




267. Figure 13 illustrates the conditions of demand and supply in the market for compact discs. Indicate
     the equilibrium price and quantity.
     a. price, $20; quantity, 2,000
*    b. price, $15; quantity, 3,000
     c. price, $10; quantity, 2,000
     d. price, $10; quantity, 4,000
126        Chapter 3/Supply, Demand, and the Market Process


Figure 14




268. In Figure 14, suppose D1 and S1 indicate initial conditions in the market for kitchen cabinets. Which
     of the following would tend to cause the supply curve to shift from S1 to S2?
     a. the invention of “folding” plates and cups that take up substantially less storage space in the
          kitchen
     b. a decrease in consumer income
*    c. a decrease in the price of wood, a resource used to produce kitchen cabinets
     d. an increase in the price of steel hinges, a resource used to produce kitchen cabinets

Figure 15




269. In Figure 15, suppose D1 and S1 indicate initial conditions in the market for ice cream. Which of the
     following changes would tend to shift this market from D1 to D2?
     a. an increase in the price of milk, an ingredient used to produce ice cream
*    b. an increase in the price of frozen yogurt, a substitute for ice cream
     c. a decrease in the price of sugar, an ingredient used to produce ice cream
     d. a decrease in consumer income
                                          Chapter 3/Supply, Demand, and the Market Process            127


Use the figure below to answer the following questions.
Figure 16




270. The market for margarine was initially in equilibrium at point e. Other things constant, a decrease in
     the price of butter, a close substitute for margarine, would likely move the equilibrium in this
     market toward point
*    a. r.
     b. s.
     c. t.
     d. u.
271. The market for margarine was initially in equilibrium at point e. Other things constant, an increase
     in the price of soybean oil, an important ingredient used to produce margarine, would likely move
     the equilibrium in this market toward point
     a. r.
     b. s.
     c. t.
*    d. u.
128        Chapter 3/Supply, Demand, and the Market Process


Use the figure below to answer the following questions.
Figure 17




272. The gasoline market was initially in equilibrium at point e. Other things constant, a decrease in the
     price of crude oil, an important ingredient used to produce gasoline, would likely move the
     equilibrium in this market toward point
     a. r.
*    b. s.
     c. t.
     d. u.
273. The gasoline market was initially in equilibrium at point e. Other things constant, an increase in the
     popularity and use of Sport Utility Vehicles (SUVs) that consume more gasoline per mile driven
     than most other types of cars would likely move the equilibrium in this market toward point
     a. r.
     b. s.
*    c. t.
     d. u.

COURSEBOOK: MULTIPLE CHOICE QUESTIONS
274. If the price of tickets to the World Series were set below the equilibrium price,
     a. the quantity demanded would be smaller than the quantity supplied.
     b. the demand for World Series tickets would be highly responsive to the price.
     c. there would be no transactions between buyers and sellers of the tickets.
*    d. the number of persons seeking to obtain tickets to World Series games would be greater than
           the number of tickets available.
275. Which of the following would cause the price of automobiles to rise?
     a. a decrease in the wages of autoworkers
     b. a reduction in the price of bus travel
     c. an increase in the price of gasoline
*    d. an increase in consumer income
                                           Chapter 3/Supply, Demand, and the Market Process             129


276. Which of the following would be the best example of consumer surplus?
*    a. Jane pays $30 a month for phone service even though it is worth $70 to her.
     b. Sam refuses to pay $10 for a haircut because it is only worth $8 to him.
     c. Fred buys a car for $4,000, the maximum amount that he would be willing to pay for it.
     d. When Sue purchases a candy bar for $.50, she uses a $20 bill to pay for it.
277. If cigars and cigarettes are substitute goods, an increase in the price of cigars would result in
*    a. an increase in the demand for cigarettes.
     b. a decrease in the price of cigarettes.
     c. a decrease in the demand for cigarettes.
     d. a decrease in the demand for cigars.
278. Which of the following would most likely cause the current demand for video cassette recorders
     VCRs to fall?
     a. an increase in consumer income
     b. an increase in the price of VCRs
     c. an increase in the price of laser disc players, a substitute good
*    d. the expectation that the price of VCRs will decrease sharply during the next six months
279. Which of the following would be most likely to cause the demand for Miller beer to increase?
*    a. an increase in the price of Budweiser beer
     b. a decrease in consumer income
     c. a decrease in the price of barley used to make Miller beer
     d. a decrease in the price of Miller beer
280. (I) The height of the demand curve for a commodity indicates the maximum amount the consumer
     would be willing to pay for each unit of the good. (II) The height of the supply curve for a
     commodity indicates the minimum price the seller would accept for each unit of the good.
     a. I is true; II is false.
     b. I is false; II is true.
     c. Both I and II are false.
*    d. Both I and II are true.
281. All things constant, a decrease in bus, train, and airplane fares will
*    a. shift the demand curve for automobiles to the left.
     b. cause a movement along the demand curve for automobiles.
     c. shift the demand curve for automobiles to the right.
     d. have no impact on the demand curve for automobiles.
282. If coffee and cream are complements, a decrease in the price of coffee will cause
     a. the demand for cream to decrease.
*    b. the demand for cream to increase.
     c. the demand for coffee to increase.
     d. no change in the demand for cream; only quantity demanded would be affected.
283. If the market price is above the equilibrium price, there will be a tendency for price to decrease,
     causing
     a. the quantity demanded to decrease and the quantity supplied to increase until they are equal.
*    b. the quantity demanded to increase and the quantity supplied to decrease until they are equal.
     c. both quantity demanded and quantity supplied to decrease until they are equal.
     d. both quantity demanded and quantity supplied to increase until they are equal.
130       Chapter 3/Supply, Demand, and the Market Process


284. According to the law of supply, as the price of a good decreases,
     a. buyers will buy more of the good.
     b. sellers will produce more of the good.
     c. buyers will buy less of the good.
*    d. sellers will produce less of the good.
285. John advertises his used car for $3,000 in the newspaper. He would be willing to sell his used car
     for as low as $2,000. He is offered $2,600 for it from a buyer and accepts it. In this trade, John
     receives
     a. producer surplus of $3,000.
     b. producer surplus of $2,600.
*    c. producer surplus of $600.
     d. consumer surplus of $400.
286. Economic efficiency requires that
     a. individuals take all actions within their power.
     b. only long-lasting, high-quality products be produced.
     c. income be distributed equally among individuals.
*    d. all economic activity generating more benefits than costs to individuals in the economy be
         undertaken.
287. If the demand for beer increased, what would be the effect on the equilibrium price and quantity of
     beer?
     a. price increases, quantity decreases
     b. price decreases, quantity decreases
*    c. price increases, quantity increases
     d. price decreases, quantity increases
                                          Chapter 3/Supply, Demand, and the Market Process            131


Figure 18




288. In Figure 18, there are two triangular areas indicated by the letters A and B. Which of the following
     is true?
*    a. A represents consumer surplus; B represents producer surplus.
     b. A represents producer surplus; B represents consumer surplus.
     c. Both areas A and B represent consumer surplus.
     d. Both areas A and B represent producer surplus.
289. “Falling consumer income from the recent recession has hurt automakers in more ways than one.
     Not only have sales of new cars fallen, but car prices have fallen as well. As a result, the major
     automakers have announced cutbacks in production and layoffs of workers.” Which of the
     following places these statements in the proper economic terminology within the context of the
     supply and demand model? [Note: It may help to graph this first.]
     a. a decrease in demand and a decrease in supply
*    b. a decrease in demand and a decrease in quantity supplied
     c. a decrease in quantity demanded and a decrease in quantity supplied
     d. a decrease in quantity demanded and a decrease in supply
290. “If gasoline were taxed, the price of gasoline would rise. Consequently, the demand for gasoline
     would fall, causing the price to fall to the original level.” This statement is
     a. essentially correct.
     b. incorrect—after the demand falls, the price would fall but to some level higher than the original
          level.
*    c. incorrect—demand and quantity demanded are confused. The price increase would reduce
          quantity demanded, not demand.
     d. incorrect—after the demand falls, the price would fall but to some level lower than the original
          level.
291. Over the past 20 years, both the quantity of health care provided and health care prices have been
     rising rapidly. Economic theory would suggest that the observed data could best be explained as
     a. an increase in supply, while demand remained relatively constant.
     b. a decrease in both supply and demand.
*    c. an increase in demand, while supply remained relatively constant.
     d. a sharp increase in both supply and demand.
132       Chapter 3/Supply, Demand, and the Market Process


292. A decrease in the supply of a good will
     a. decrease the demand for the good.
     b. cause the price of the good to fall.
*    c. lead to an increase in the price of the good.
     d. increase the quantity of the good bought and sold.
293. Which of the following would most likely decrease the price of beef?
*    a. lower prices of grains used to produce cattle feed
     b. higher prices for chicken, a substitute for beef
     c. a cow disease that destroys millions of cattle (and makes their meat unfit for consumption)
         before they are ready for market
     d. an increase in consumer income
294. A decrease in the price of flour will shift the supply curve for donuts
     a. leftward, causing the equilibrium price to increase and quantity to decrease.
     b. leftward, causing the equilibrium price and quantity to decrease.
*    c. rightward, causing the equilibrium price to decrease and equilibrium quantity to increase.
     d. rightward, causing the equilibrium price and quantity to increase.
295. When Adam Smith said economic activity was directed by an “invisible hand,” he was referring to
     the fact that
     a. competitive markets motivate altruistic individuals to pursue productive activities that only
          serve their private interests.
*    b. when economic activity is directed by competitive markets, the actions of self-interested
          individuals will generally serve the public interest.
     c. invisible forces will lead to economic chaos unless wise central planning directs economic
          activity.
     d. scarcity is largely the result of invisible forces that would be eliminated if individuals were free
          to pursue their own self-interests.
296. A hurricane damaged much of the housing in Miami. Shortly thereafter, the price of plywood rose
     significantly. The events suggest that
     a. a decrease in the supply of plywood caused the price of plywood to rise.
     b. an increase in the supply of plywood caused the price of plywood to rise.
     c. a decrease in the demand for plywood caused the price of plywood to rise.
*    d. an increase in the demand for plywood caused the price of plywood to rise.
297. If the demand for a good increases, which of the following will generally occur in a market setting?
     a. The price of the good will decrease.
     b. The supply of the good will increase.
*    c. The quantity supplied will increase.
     d. Producer profits will fall.

ON-LINE PRACTICE QUESTIONS
298. Which of the following factors would cause the demand curve for a normal good to increase (shift
     to the right)?
     a. an increase in the price of the good
     b. a decrease in the price of the good
*    c. an increase in the price of a substitute good
     d. an increase in the price of a complementary good
                                           Chapter 3/Supply, Demand, and the Market Process               133


299. According to economic theory, which of the following would most likely cause the demand curve
     for French wines to increase?
     a. a drop in the price of California wines
     b. an increase in the price of French wines
     c. a drop in the price of French wines
*    d. an increase in the price of California wines
300. According to economic theory, which of the following would most likely cause the demand curve
     for hamburgers to decrease?
*    a. a drop in the price of hot dogs
     b. an increase in the price of hamburgers
     c. a drop in the price of hamburgers
     d. a technological advance reducing the production cost of making hamburgers
301. If an increase in the price of hot chocolate decreases the demand for marshmallows, this indicates
     that
     a. hot chocolate and marshmallows are substitutes.
*    b. hot chocolate and marshmallows are complements.
     c. hot chocolate is an inferior good.
     d. marshmallows are inferior goods.
302. If an increase in the price of peaches reduces the demand for cream, this indicates that peaches and
     cream are
     a. normal goods.
     b. inferior goods.
*    c. complements.
     d. substitutes.
303. A business loss indicates that an entrepreneur has
     a. enhanced the value of the resources used to produce a good or service.
     b. produced a good that consumers will not buy.
     c. produced a good that has no value.
*    d. produced a good that consumers value less than the cost of the resources used to produce it.
304. To be economically successful, the entrepreneur must
     a. obtain financial assistance from the government.
     b. manage the firm efficiently, since efficient management is the sole route to economic profit.
     c. use personal financial capital to avoid interest payments that would drive up costs.
*    d. transform or rearrange resources in a manner that increases their market value.
305. If a large percentage increase in the price of a good results in a small percentage increase in the
     quantity supplied of the good, supply is said to be
     a. of unitary elasticity.
*    b. relatively inelastic.
     c. relatively elastic.
     d. perfectly inelastic.
306. If a small percentage increase in the price of a good results in a large percentage increase in the
     quantity supplied of the good, supply is said to be
     a. of unitary elasticity.
     b. relatively inelastic.
*    c. relatively elastic.
     d. perfectly inelastic.
134       Chapter 3/Supply, Demand, and the Market Process


307. Which of the following would most likely shift the supply curve to the left for X-Box video games?
     a. an increase in the price of X-Box video games
     b. a decrease in the price of computer chips used to make X-Box games
     c. a decrease in the demand for X-Box games
*    d. an increase in the price of electronic components used to produce the X-Box games
308. Economic efficiency requires that
     a. individuals produce at a high level.
     b. only long-lasting, high-quality products be produced.
     c. income be distributed equally among consumer units.
*    d. all economic activity generating more benefits than costs to individuals in the economy be
         undertaken.
309. Which of the following goods are substitutes?
*    a. Pepsi and Coke
     b. hamburgers and French fries
     c. beer and pretzels
     d. ketchup and French fries
310. Which of the following goods are complements?
     a. apples and oranges
     b. Pepsi and Coke
*    c. hamburgers and French fries
     d. Chevrolets and Fords
311. Which of the following is most likely to lead to an increase in demand for and the price of
     residential housing in your area?
     a. lower wages for construction workers in the area
*    b. the rapid growth of income in the area
     c. higher lumber prices
     d. a reduction in the rental price of apartments in the area
312. As a result of the events of September 11, 2001, passengers became more reluctant to fly and there
     was a substantial increase in air travel security. How did the increased fear of flying and the higher
     cost of providing air travel security affect the market for air travel?
     a. Demand increased and supply decreased, causing the price of air travel to rise.
     b. Demand decreased and supply increased, causing a reduction in the price of air travel.
     c. Demand increased, supply decreased, and therefore, the net impact on the price of air travel
          was uncertain.
*    d. Demand decreased, supply decreased, and therefore, the net impact on the price of air travel
          was uncertain.
313. Which of the following would cause the demand for chicken to increase?
     a. a decrease in consumer income
*    b. higher beef prices
     c. an increase in the price of chicken feed
     d. a heat wave that killed a large number of chickens
314. If entrepreneurs are going to make a profit, they must
     a. be able to purchase resources at lower prices than their competitors.
     b. produce a lower quality product than rival firms.
     c. figure out how to charge higher prices than other firms in the market.
*    d. supply products that consumers value more highly than the cost of the resources required for
          their production.
                                          Chapter 3/Supply, Demand, and the Market Process             135


315. If a business firm is making losses, this indicates that it
     a. is producing a product that consumers do not value.
*    b. is combining resources in a way that reduces their value.
     c. needs to produce a larger output.
     d. needs to raise its price and produce a lower quality product.
316. Which of the following is true of profits and losses?
*    a. Profits direct entrepreneurs toward production of goods that are highly valued relative to their
         cost, while losses direct them away from wealth-reducing activities.
     b. Profits indicate that the firm is charging prices that are too high, while losses indicate that the
         firm needs to raise its prices.
     c. Profits indicate that the consumer is getting a bad deal, while losses indicate that the consumer
         values the product highly relative to its cost.
     d. Profits indicate that the suppliers of resources are underpaid, while losses indicate they are
         overpaid.
317. When an economy goes into a recession, incomes generally fall and the price of resources like
     lumber often declines. How would the combination of lower incomes and lower lumber prices
     impact the market for housing?
     a. Demand would increase, supply would decrease, and housing prices would rise.
*    b. Demand would decrease, supply would increase, and housing prices would fall.
     c. Both demand and supply would decrease, and the impact on housing prices would be uncertain.
     d. Both demand and supply would increase, and the impact on housing prices would be uncertain.
318. If apples and oranges are substitutes,
*    a. an increase in the price of apples will increase the demand for oranges.
     b. an increase in the price of oranges will decrease the demand for apples.
     c. an increase in the price of oranges will decrease the quantity of apples demanded.
     d. an increase in the price of apples will shift the demand curve for oranges to the left.
319. Suppose the price of lumber used to make furniture increases while the price of plastic remains
     constant. Which of the following is most likely to occur?
     a. an increase in the demand of and higher prices for wood furniture products
     b. an increase in the supply of and lower prices for wood furniture products
*    c. a decrease in the supply of and higher prices for wood furniture products
     d. a decrease in the demand for plastic furniture products
320. Which of the following would cause an increase in the price of gasoline and an expansion in the
     equilibrium quantity?
     a. an increase in the price of crude oil, a key ingredient required for the production of gasoline
     b. the introduction of a miracle carburetor that substantially improves the gas mileage of
          automobiles
     c. a recession that substantially reduces the income of households
*    d. an increase in the popularity and use of Sport Utility Vehicles that consume a lot of gasoline
          per mile driven
321. Which of the following would cause an increase in the price of gasoline and a reduction in the
     equilibrium quantity exchanged in the gasoline market?
*    a. an increase in the price of crude oil, a key ingredient required for the production of gasoline
     b. the introduction of a miracle carburetor that substantially improves the gas mileage of
          automobiles
     c. a recession that substantially reduces the income of households
     d. an increase in the popularity and use of Sport Utility Vehicles that consume a lot of gasoline
          per mile driven
136       Chapter 3/Supply, Demand, and the Market Process


322. Which of the following would tend to cause an increase in the price and expansion in the
     equilibrium quantity in the market for processed ground coffee?
*    a. an increase in the price of tea, a substitute for coffee
     b. a reduction in the price of the beans used to produce coffee
     c. an increase in the price of the beans used to produce coffee
     d. publication of several scientific articles indicating that consumption of coffee makes people
          more prone to heart attacks
323. The invisible hand principle suggests that when competition is present and property rights are
     protected and enforced,
*    a. market prices will direct self-interested individuals toward activities that promote economic
          prosperity.
     b. the demand curve for consumer goods will generally be more inelastic in the long run than in
          the short run.
     c. the profitability of large firms will generally be greater than that of smaller firms.
     d. government regulation will encourage firms to use resources more efficiently.
324. When competition is present and property rights protected and enforced, market prices will
     a. discourage profit-seeking business firms from producing efficiently.
     b. direct entrepreneurs toward production of goods that are inferior in quality.
*    c. encourage self-interested individuals to develop skills that are expected to be valuable in the
        future.
     d. always decrease.
325. Which of the following would tend to cause a reduction in the price and expansion in the
     equilibrium quantity in the market for processed ground coffee?
     a. an increase in the price of tea, a substitute for coffee
*    b. a reduction in the price of the beans used to produce coffee
     c. an increase in the price of the beans used to produce coffee
     d. publication of several scientific articles indicating that consumption of coffee makes people
          more prone to heart attacks
326. Which of the following would be most likely to cause a decrease in supply and an increase in prices
     at Burger King?
     a. an increase in the price of pizza, a substitute for the goods supplied by fast food restaurants
     b. the release of a study indicating that the Whopper is harmful to your health
     c. a reduction in the price of hamburger and chicken
*    d. an increase in the minimum wage of entry-level youthful workers that are often employed by
          Burger King
327. Economists would say that the demand for tacos is
     a. relatively inelastic because there are very few close substitutes available.
*    b. relatively elastic because there are many substitutes for tacos.
     c. increasing because of reports of Mad Cow Disease.
     d. relatively inelastic because its demand curve is flatter.
328. If the supply of a good increased, what would be the effect on the equilibrium price and quantity?
     a. Price would increase, and quantity would decrease.
     b. Price would decrease, and quantity would decrease.
     c. Price would increase, and quantity would increase.
*    d. Price would decrease, and quantity would increase.
                                          Chapter 3/Supply, Demand, and the Market Process             137


329. The Invisible Hand Principle suggests that
     a. market prices direct individuals to produce more goods.
     b. individuals pursuing their own interests detract from the economic well-being of society.
     c. there should be stronger governmental initiatives to ensure cooperation for the betterment of
         society.
*    d. market forces tend to channel the actions of self-interested individuals into activities that
         promote the general betterment of society.
330. The efficiency of market organization is dependent on which of the following:
     a. well-regulated supply and demand.
     b. the availability of low cost resources and high tariffs on foreign imports.
*    c. competitive markets and well-defined and enforced private property rights.
     d. government establishment of the invisible hand principle and the inelasticity of certain goods.
331. A movement along a demand curve
     a. is called a change in demand.
*    b. is the result of a change in the price of the good.
     c. can be caused by many things.
     d. means the product is inelastic.
332. Just before Valentine‟s Day, the price of roses increases dramatically. This is because
     a. self-interested individuals try to charge more for a good than consumers are willing to pay.
*    b. demand increases while the supply of roses remains relatively constant.
     c. the supply curve for roses is highly elastic.
     d. the demand for roses is relatively inelastic most of the year but becomes more elastic as
          demand increases.
333. Which of the following would lead to an increase in the demand for rental apartments in your area?
     a. a reduction in the rental price of apartments
*    b. a sharp increase in the number of out-of-town students attending the local college
     c. an increase in the cost of the materials used to construct apartment units
     d. an increase in unemployment and reduction in the income of people in your area
334. When the price of a good is above the equilibrium price,
     a. quantity demanded will exceed quantity supplied.
*    b. quantity supplied will exceed quantity demanded.
     c. the market will be in equilibrium.
     d. the firms in the market will be unable to cover their costs.
335. In the first few months after the September 11, 2001 terrorist attacks, many Americans were less
     willing to fly on airplanes. This would have caused the demand for air travel to
*    a. decrease, which is a shift to the left of the demand curve.
     b. decrease, which is a shift to the right of the demand curve.
     c. increase, which is a shift to the left of the demand curve.
     d. increase, which is a shift to the right of the demand curve.
336. A manufacturer invests $50 million in a factory to produce shirts. Suppose the firm earns $4 million
     in accounting profit per year. Assuming the money tied up in the factory could be earning a 10
     percent rate of interest in the bank, the manufacturer will bear an opportunity cost (in terms of
     forgone interest) of
     a. $1 million per year, which is more than the factory is earning in accounting profit.
     b. $1 million per year, which is less than the factory is earning in accounting profit.
*    c. $5 million per year, which is more than the factory is earning in accounting profit.
     d. $5 million per year, which is less than the factory is earning in accounting profit.
138       Chapter 3/Supply, Demand, and the Market Process


337. According to the law of supply, as the price of a good falls,
     a. buyers will buy more of the good.
     b. buyers will buy less of the good.
     c. sellers will produce more of the good.
*    d. sellers will produce less of the good.
338. A technological advance that reduces the cost of producing DVD players would
*    a. increase the supply of DVD players.
     b. increase the demand for DVD players.
     c. decrease the supply of DVD players.
     d. decrease the demand for DVD players.

CRITICAL THINKING QUESTIONS
339. Suppose a person defects from Cuba (a country that generally disregards the use of markets) to the
     United States and asks to see a market in action. Where would you take her? Did you give her a
     complete showing of this market?
     Answer
     Most students will provide answers such as the grocery store, a mall, or an automobile dealership,
     which are all good examples of the physical acts of trade and commerce. A physical “marketplace,”
     however, is just the beginning of what economists mean when they talk about a “market.” This
     question is useful in helping students understand that a market is not necessarily a place but a term
     used to describe a process. You may want to contrast the different types of markets mentioned such
     as supermarkets (posted prices), car dealerships (some price negotiation), and flea markets
     (relatively high levels of dickering).
340. Two students are walking by a department store window that has on display a $400 dress. The
     English major declares, “I want that dress but can‟t afford it.” The economics major replies, “No,
     you don‟t.” Explain the logic of this reply.
     Answer
     This is a version of the old economics joke that never elicits a student chuckle. The question
     addresses how economists fail to distinguish between “wants” and “needs.” Anyone who wants
     something, in an economic sense, will engage in activities to acquire it. The student could take a
     second job and earn enough money for the dress in three weeks. By not making an effort to acquire
     the dress, the student reveals that she values other goods, and/or her time, more than she does the
     dress.
341. Economists maintain that the price of a product has no effect on demand. How can this be true?
     Answer
     When constructing the demand curve, price is the independent variable that determines quantity
     demanded. Economists who use the word demand refer to this schedule, which reflects every
     possible price and its respective quantity demanded. Price affects quantity demanded, while other
     factors, such as consumers’ income, will influence the demand for the product.
342. Susan says, “If the price of wool coats goes up, suppliers will offer more of the coats for sale.” Brad
     replies, “It takes three months to harvest wool and employ all the steps necessary to produce a wool
     coat. Quantity supplied cannot possibly increase for three months.” Is Brad correct? Why or why
     not?
     Answer
     Brad is correct in noting the supply of wool coats is more elastic in the long run. Higher prices will
     bring more wool coats to the market in the future. But even in the short run, we likely will see an
     increase in the quantity of coats supplied. Wool destined for other uses, such as scarves, can be
                                           Chapter 3/Supply, Demand, and the Market Process             139


     redirected to producing coats. Manufacturing and delivery processes can be sped up, and more
     coats will be available for sale relatively quickly.
343. A question on an economics exam asks, “What happens in the market for jelly when the price of
     peanut butter increases?” Allison, an excellent student, shows the demand for jelly increasing. Is she
     necessarily wrong? Why or why not?
     Answer
     If we consider Allison’s answer wrong, we are implicitly assuming that peanut butter and jelly are
     complements and that the demand for jelly should decrease. But suppose Allison eats peanut butter
     sandwiches, or she eats jelly sandwiches (tastes are subjective); in this case, she views the goods as
     substitutes, and her answer is correct. Good exam writers need to make explicit what they want
     students to assume.
344. A terrible storm wipes out 70 percent of the peanut crop. Explain and show graphically how this
     will affect the market for peanut butter and the market for jelly, a complementary good.
     Answer
     Higher peanut prices will shift the supply curve for peanut butter to the left (a decrease in supply).
     A higher price and a lower quantity demanded will result. The demand for jelly will decrease in
     response to higher peanut butter prices. This leftward shift in the demand curve will reduce the
     price of jelly and the quantity supplied.
345. Sam lives in a town with a population of 3,000. He says, “This town really needs a pizza restaurant.
     People want pizza and would be willing to pay a lot for it, but no one will open a pizza place
     because they couldn‟t make any money.” Evaluate Sam‟s statement.
     Answer
     His statement clearly conflicts with the economic way of thinking. If there is money to be made
     selling pizza in Sam’s hometown, someone will come along to fill this unmet demand. If this proves
     profitable, other pizza restaurants are likely to open. On the other hand, if the town does not value
     pizza, the restaurant will lose money and soon close. Likely the town does not value pizza enough to
     support a restaurant. If it did, we would expect a pizza restaurant to be there.
346. A recent editorial in a local newspaper argues, “Consumers need to know more about products than
     just their price. They need to know how these prices are determined, who owns the businesses, and
     the wages of the workers.” Is the editorial writer correct? Why or why not?
     Answer
     What is missing from the editorial is a statement about what the consumer’s objectives are. If we
     allow that the consumer’s objective is to make an efficient choice (that is, to engage in a trade that
     creates value), all the consumer needs to know is the market price. The market price will reflect all
     the factors involved in the production and distribution of a product, without the consumer needing
     to know any of this specific information. A consumer would “need to know” other information only
     if it were relevant to some other (noneconomic) objective for example, the consumer wants to
     patronize only businesses run by fraternity brothers.
347. An agricultural economist reports that corn prices are very high this year and that corn growers are
     earning substantial profits. He concludes that government action is needed to direct more farmers to
     grow corn. Is such action necessary? Why or why not?
     Answer
     No government action is necessary to direct farmers to grow more corn. Farmers will see how
     profitable corn growing is and will plant next year’s crops accordingly. We would expect a lot more
     farmers to grow corn.
140       Chapter 3/Supply, Demand, and the Market Process


348. Around Easter time, the price of eggs rises. Some consumers complain about this and claim stores
     are „price gouging.‟ Are there any positive functions played by the higher price of eggs around
     Easter? What would happen if the price of eggs were not permitted to rise by law?
     Answer
     The price of eggs rises around Easter due to simple supply and demand. The positive side of this
     price increase is that it is what produces the increased quantity of eggs supplied to satisfy
     consumers around this time of year. If price were not permitted to rise, there would be a shortage of
     eggs around Easter.
349. “The operator of the tunnel that links Britain and France, Eurotunnel, said that commercial and
     tourist traffic using its car and coach shuttle service had fallen sharply in 2004, leading to a drop in
     operating revenues of 4%. Eurotunnel‟s chief executive, Jean-Louis Raymond, blamed cut-throat
     competition from budget airlines.” (news story, January 2005)
     a. If Mr. Raymond is correct, are the services of airlines and Eurotunnel substitutes or
          complements?
     b. Use demand and supply analysis to explain how lower airfares between Paris and London
          impact the market for the shuttle services of Eurotunnel.
    Answer
     a. substitutes
     b. The lower airfares shift the demand for the shuttle services to the left, leading to a reduction in
          both the number of units sold and the revenues derived from the service.

								
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