Figure 1-7 shows how supply and demand might shift in response to specific event

Question

Figure 1-7 shows how supply and demand might shift in response to specific events. D1 and S1 represent initial demand and supply curves; D2 and S2 represent the shifted demand and supply curves. Use Figure 1-7 to answer the following question(s).

3. Refer to Figure 1-7. If steak and potatoes are complements, when the price of steak rises, what happens in the market for potatoes?
A) Panel (a)
B) Panel (b)
C) Panel (c)
D) Panel (d)
E) None Of The Above

4. Refer to Figure 1-7. What happens in the market for rice if buyers of rice expect the price of rice to fall?
A) Panel (a)
B) Panel (b)
C) Panel (c)
D) Panel (d)
E) None Of The Above

5. Refer to Figure 1-7. What happens in the market for used clothing, an inferior good, following a decrease in income?
A) Panel (a)
B) Panel (b)
C) Panel (c)
D) Panel (d)
E) None Of The Above

6. Suppose consumer income increases. If iPods are normal goods, the equilibrium price of an iPod will ________, and producer surplus in the iPod marked will ________.
A) decrease; decrease
B) increase; increase
C) decrease; increase
D) increase; decrease

E) None Of The Above

7. An economically efficient output level is achieved when
A) the marginal benefit of the last unit produced equals the marginal cost of producing that unit.
B) the marginal benefit of the last unit produced is greater than the marginal cost of producing that unit.
C) the marginal benefit of the last unit produced is less than the marginal cost of producing that unit.
D) total benefit must exceed total cost.
E) None Of The Above

8. Suppose the price of cotton falls. In the market for garments, the equilibrium price will ________ and the consumer surplus in the garment market will ________.
A) decrease, decrease
B) increase, increase
C) decrease, increase
D) increase, decrease
E) None Of The Above

9. What is the term that defines a legally established maximum price that may be charged for a product?
A) price floor
B) price ceiling
C) subsidy
D) tariff
E) None Of The Above

Explanation / Answer

1 - It's D, an increase in price of a complementary good will reduce demand and have no direct effect on supply. 2 - It's B, if a input cost goes up ceteris paribus supply goes down. 3 - D, same reason as #1 4 - Possibly D, it depends on the time horizon, if the buyers value waiting for price to go down as opposed to having the good the demand will go down, this is especially true if there are many substitute goods. If however it is a good the buyer needs and can't be substituted there will be no effect. 5 - C as income goes down the demand for inferior goods goes up. 6 - B, ceteris paribus if consumer income goes up demand for the normal good will go up, price will go up, and there will be more producer surplus and less consumer surplus. 7 - A, markets are efficient when Marginal Revenue = Marginal Cost (MB=MC) 8 - C, if a input cost goes down supply will increase and price will go down leading to more consumer surplus. 9 - B, a maximum price is a price ceiling

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