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Chapter 4

The Market Forces of Supply and Demand


MULTIPLE CHOICE
.

Which of the following shows the workings of supply and demand?


a. A cold snap hits Florida, resulting in higher orange juice prices in supermarkets.
b. A warm summer in New England results in lower hotel prices in the Caribbean.
c. A war breaks out in the Middle East, causing gasoline prices in the United States to rise.
d. All of the above are correct.
ANSWER:d.
All of the above are correct.
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1

Which of the following are the words most commonly used by economists?
a. supply and demand
b. entrepreneurial ability
c. scarcity and human wants
d. prices and exchange
ANSWER: a.
supply and demand
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2

In a free market, who determines how much of a good will be sold and the price at which it is sold?
a. suppliers
b. demanders
c. the government
d. both suppliers and demanders
ANSWER: d. both suppliers and demanders
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3

A market is
a. a place where only buyers come together.
b. a place where only sellers meet.
c. a group of demanders and suppliers of a particular good or service.
d. a group of people with common desires.
ANSWER: c.
a group of demanders and suppliers of a particular good or service.
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4

Who is it that ultimately determines the demand for a product or service?


a. the government
b. those who buy the product or service
c. the producers who create the product or service
d. those who supply the raw materials used in the production of the good or service
ANSWER: b.
those who buy the product or service
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2Chapter 4/The Market Forces of Supply and Demand


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A competitive market is
a. a market in which there are many buyers and many sellers so that each has a negligible impact
on price.
b. a market where consumers cannot freely interact with sellers.
c. a market where suppliers are under no government restrictions.
d. a market with many buyers but few sellers.
ANSWER: a.
a market in which there are many buyers and many sellers so that each has a negligible
impact on price.
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6

Generally, the market for ice cream would be considered


a. a monopolistic market.
b. a competitive market.
c. more organized than an auction.
d. a market where individual sellers have significant pricing power.
ANSWER: b.
a competitive market.
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7

Firms that sell their products in a competitive market have limited pricing power because
a. sellers have reason to charge more than their competitors.
b. each buyer has a significant influence on the price of the product.
c. other sellers are offering very similar products.
d. None of the above are correct.
ANSWER: c.
other sellers are offering very similar products.
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8

If a seller in a competitive market chooses to charge more than the market price, then
a. buyers will tend to make their purchases elsewhere.
b. the owners of the raw materials used in production would raise the prices for the raw
materials.
c. other sellers would also raise their price.
d. buyers would tend to buy more from this seller.
ANSWER: a.
buyers will tend to make their purchases elsewhere.
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9

If buyers and/or sellers are price takers, then individually


a. they can somewhat influence the market price.
b. they have ultimate control over market price.
c. buyers will be able to find prices lower than those determined in the market.
d. they have no influence on market price because there are so many in the market.
ANSWER: d. they have no influence on market price because there are so many in the market.
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Chapter 4/The Market Forces of Supply and Demand3


.

11

There are thousands of wheat farmers who produce and sell wheat and there are millions of
consumers who use wheat and wheat products. The market for wheat would be considered
a. perfectly competitive.
b. monopolistic.
c. oligopolistic.
d. monopolistically competitive.

ANSWER: a.
perfectly competitive.
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.

As a seller, you would be considered part of a perfectly competitive market if


a. your actions are quickly followed by competitors.
b. your pricing has no impact on the amount you can sell.
c. your actions essentially have no effect on the market price.
d. increases in the price of your product have an impact on the market price.
ANSWER: c.
your actions essentially have no effect on the market price.
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12

A monopoly is
a. a market with few sellers.
b. a market with one seller.
c. a market with one buyer.
d. a market where the government sets the price.
ANSWER: b.
a market with one seller.
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13

Which of the following would be an example of a monopoly?


a. a local cable television company
b. local cement companies
c. a bakery in a large city
d. a potato farmer
ANSWER: a.
a local cable television company
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14

A market with only a few sellers would be


a. a monopoly.
b. a competitive market.
c. an oligopoly.
d. a monopolistically competitive market.
ANSWER: c.
an oligopoly.
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4Chapter 4/The Market Forces of Supply and Demand


.

Which of the following would be an example of an oligopolistic market?


a. a domestic wheat market
b. air travel
c. the software industry
d. electrical power for residential consumers
ANSWER: b.
air travel
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16

A market with many sellers offering similar but slightly different products is called
a. a monopoly.
b. oligopolistic.
c. monopolistically competitive.
d. perfectly competitive.
ANSWER: c.
monopolistically competitive.
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17

If a seller is supplying a product that is slightly different than that of many close competitors and is
able to charge a different price than competitors, then the seller
a. is a monopolist.
b. is producing a homogeneous product.
c. will eventually have to decrease the price.
d. is participating in a monopolistically competitive market.
ANSWER: d. is participating in a monopolistically competitive market.
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18

When we are studying the behavior of buyers, we are studying


a. supply.
b. demand.
c. government regulation.
d. an entire market.
ANSWER: b.
demand.
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19

Which of the following would NOT be a determinant of demand?


a. the price of related goods
b. income
c. tastes
d. the prices of the inputs used to produce the good
ANSWER: d. the prices of the inputs used to produce the good
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Chapter 4/The Market Forces of Supply and Demand5


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If a good is normal, then an increase in income will result in


a. no change in the demand for the good.
b. a decrease in the demand for the good.
c. an increase in the demand for the good.
d. a lower market price.
ANSWER: c.
an increase in the demand for the good.
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21

If the price of a substitute to good X increases, then


a. the demand for good X will increase.
b. the market price of good X will decrease.
c. the demand for good X will decrease.
d. the demand for good X will not change.
ANSWER: a.
the demand for good X will increase.
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22

Suppose that a decrease in the price of X results in less of good Y sold. This would mean that X and
Y are
a. complementary goods.
b. substitute goods.
c. unrelated goods.
d. normal goods.
ANSWER: b.
substitute goods.
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23

Suppose you like banana cream pie made with vanilla pudding. Assuming all other things are
constant, you notice that the price of bananas is higher. How would your demand for vanilla
pudding be affected by this?
a. It would decrease.
b. It would increase.
c. It would be unaffected.
d. There is insufficient information given to answer the question.
ANSWER: a.
It would decrease.
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24

A higher price for batteries would tend to


a. increase the demand for flashlights.
b. decrease the demand for electricity.
c. increase the demand for electricity.
d. increase the demand for batteries.
ANSWER: c.
increase the demand for electricity.
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6Chapter 4/The Market Forces of Supply and Demand


.

If a decrease in income increases the demand for a good, then


a. the good is a substitute good.
b. the good is a complement good.
c. the good is a normal good.
d. the good is an inferior good.
ANSWER: d. the good is an inferior good.
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26

Which of the following is a determinant of demand?


a. the price of a substitute good
b. the price of a complement good
c. the price of the good next month
d. all of the above
ANSWER: d. all of the above
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27

What will happen in the rice market if buyers are expecting higher prices in the near future?
a. The demand for rice will increase.
b. The demand for rice will decrease.
c. The demand for rice will be unaffected.
d. The supply of rice will increase.
ANSWER: a.
The demand for rice will increase.
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28

Holding all else constant, a higher price for ski lift tickets would be expected to
a. increase the number of skiers.
b. decrease ski sales.
c. decrease the demand for other winter recreational activities.
d. decrease the supply of ski resorts.
ANSWER: b.
decrease ski sales.
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29

A demand schedule is a
a. table showing the relationship between the price of a good and the quantity supplied.
b. table showing the relationship between income and the quantity of the good demanded.
c. table showing the relationship between the price of a good and the quantity buyers are willing
and able to purchase.
d. table showing the relationship between the determinants of demand and the quantity
demanded.
ANSWER: c.
table showing the relationship between the price of a good and the quantity buyers are
willing and able to purchase.
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Chapter 4/The Market Forces of Supply and Demand7


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A demand curve is
a. the downward-sloping line relating the price of the good with the quantity demanded.
b. the upward-sloping line relating price with quantity supplied.
c. the curve that relates income with quantity demanded.
d. None of the above answers is correct.
ANSWER: a.
the downward-sloping line relating the price of the good with the quantity demanded.
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31

The movement from point A to point B on the graph would be caused by


a. an increase in price.
b. a decrease in price.
c. a decrease in the price of a substitute good.
d. an increase in income.
ANSWER: b.
a decrease in price.
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32

The movement from point A to point B on the graph shows


a. a decrease in demand.
b. an increase in demand.
c. an increase in quantity demanded.
d. a decrease in quantity demanded.
ANSWER: c.
an increase in quantity demanded.
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When we move up or down a given demand curve,


a. only price is held constant.
b. all nonprice determinants of demand are assumed to be constant.
c. income and the price of the good are held constant.
d. all determinants of quantity demanded are held constant.
ANSWER: b.
all nonprice determinants of demand are assumed to be constant.
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8Chapter 4/The Market Forces of Supply and Demand


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Ceteris paribus is a Latin phrase that literally means


a. other things being equal.
b. after this therefore because of this.
c. to respond slowly to a change in price.
d. Theres no such thing as a free lunch.
ANSWER: a.
other things being equal.
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The term ceteris paribus refers to


a. a central market price.
b. a real world situation in which every variable is held constant.
c. a hypothetical situation in which some variables are assumed to be constant.
d. a situation in which only the price is held constant.
ANSWER: c.
a hypothetical situation in which some variables are assumed to be constant.
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36

Which of the following would NOT shift the demand curve for a good or service?
a. a change in income
b. a change in the price of a related good
c. a change in expectations about the price of the good or service
d. a change in the price of the good or service
ANSWER: d. a change in the price of the good or service
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37

If the number of buyers in the market decreases,


a. the demand in the market will increase.
b. the supply in the market will increase.
c. the demand in the market will decrease.
d. the supply in the market will decrease.
ANSWER: c.
the demand in the market will decrease.
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38

Sally tells you that she thinks the price of her favorite stationery will increase in the near future. She
will probably respond by
a. decreasing her current demand for the stationery.
b. increasing her current demand for the stationery.
c. not changing her demand for stationery currently.
d. currently refusing to buy anymore stationery.
ANSWER: b.
increasing her current demand for the stationery.
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Chapter 4/The Market Forces of Supply and Demand9


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A market demand is
a. a vertical summation of individual demand curves.
b. a horizontal summation of individual demand curves.
c. not responsive to change in tastes and preferences.
d. determined solely by the number of buyers and sellers in the market.
ANSWER: b.
a horizontal summation of individual demand curves.
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40

A market demand curve reflects


a. the fact that the level of income is inversely related to quantity demanded.
b. how quantity demanded changes when the number of buyers changes.
c. how much all buyers are willing and able to buy at each possible price.
d. when the buyers are willing to buy the most.
ANSWER: c.
how much all buyers are willing and able to buy at each possible price.
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41

The table shows individual demand schedules for a market.

Price of the Good


$0.00
0.50
1.00
1.50
2.00
2.50

Quantities Demanded
John
Sally
25
22
20
20
15
18
10
16
5
14
0

12

Jane
10
6
2
0
0

Billy
5
4
3
2
1

Refer to the table shown. When the price of the good is $1.00, the quantity demanded in this market
would be
a. 38 units.
b. 18 units.
c. 15 units.
d. 5 units.
ANSWER: a.
38 units.
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42

Refer to the table shown. If the price increases from $1.00 to $1.50,
a. the market demand increases by 20 units.
b. the quantity demanded in the market decreases by 10 units.
c. individual demands will increase.
d. the quantity demanded in the market increases by 5 units.
ANSWER: b.
the quantity demanded in the market decreases by 10 units.
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10Chapter 4/The Market Forces of Supply and Demand


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Suppose that the American Medical Association announces that men who shave their heads are less
likely to die of heart failure. We could expect
a. the current demand for razors to decrease.
b. the current demand for combs to increase.
c. the current demand for razors to increase.
d. the demand for hair dye for men to increase.
ANSWER: c.
the current demand for razors to increase.
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44

Suppose that scientists find evidence that proves chocolate pudding increases hair growth in men
who are balding. We would expect to see
a. no change in the demand for chocolate pudding.
b. a decrease in the demand for chocolate pudding.
c. an increase in the demand for chocolate pudding.
d. a decrease in the supply of chocolate pudding.
ANSWER: c.
an increase in the demand for chocolate pudding.
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45

When the price of a good or service changes,


a. there is a movement along a stable demand curve.
b. demand shifts in the opposite direction.
c. demand shifts in the same direction.
d. supply shifts in the opposite direction.
ANSWER: a.
there is a movement along a stable demand curve.
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46

Suppose that John receives a pay increase. We would expect


a. Johns demand for normal goods to remain unchanged.
b. Johns demand for inferior goods to decrease.
c. Johns demand for luxury goods to decrease.
d. Johns demand for normal goods to decrease.
ANSWER: b.
Johns demand for inferior goods to decrease.
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47

Doug likes tomatoes today more than he did yesterday.


a. Doug is now willing to pay more than before for tomatoes.
b. Doug must have received an increase in income.
c. Doug must now consider tomatoes a luxury.
d. The supply of tomatoes must have increased.
ANSWER: a.
Doug is now willing to pay more than before for tomatoes.
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Chapter 4/The Market Forces of Supply and Demand11


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The downward-sloping demand curve reflects which of the following?


a. The price is positively related to quantity supplied.
b. There is an inverse relationship between price and quantity demanded.
c. There is a direct relationship between price and quantity demanded.
d. When the price falls, buyers willingly buy less.
ANSWER: b.
There is an inverse relationship between price and quantity demanded.
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49

What is the law of demand?


a. When the price of a good or service rises, buyers respond by purchasing more.
b. When income levels increase, buyers respond by purchasing more.
c. When buyers tastes for the good increase, they purchase more of the good.
d. When the price of a good falls, buyers respond by purchasing more.
ANSWER: d. When the price of a good falls, buyers respond by purchasing more.
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50

An increase in the number of scholarships issued for college education would


a. increase the supply of education.
b. decrease the supply of education.
c. increase the demand for education.
d. decrease the demand for education.
ANSWER: c.
increase the demand for education.
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51

On the graph, the movement from D to D1 is called


a. a decrease in demand.
b. an increase in demand.
c. a decrease in quantity demanded.
d. an increase in quantity demanded.
ANSWER: a.
a decrease in demand.
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12Chapter 4/The Market Forces of Supply and Demand


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On the graph, the movement from D to D1 could be caused by


a. an increase in price.
b. a decrease in the price of a complement.
c. an increase in technology.
d. a decrease in the price of a substitute.
ANSWER: d. a decrease in the price of a substitute.
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53

If the demand curve shifts from D1 to D on the graph, this means that
a. firms would be willing to supply less than before.
b. people are less willing to buy the product at any price than before.
c. people are now more willing to buy the product at any price than before.
d. the price of the product has decreased, causing consumers to buy more of the product.
ANSWER: c.
people are now more willing to buy the product at any price than before.
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54

The side of the market that deals with the willingness and ability to produce and sell is
a. demand.
b. competition.
c. supply.
d. a monopoly.
ANSWER: c.
supply.
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55

One reason why government taxes on cigarettes imposed on sellers reduces smoking is that
a. cigarette companies are successful in passing much of the tax on to consumers.
b. cigarette companies do not pass much of the tax on to consumers.
c. there are many good substitutes for cigarettes.
d. None of the above answers is correct.
ANSWER: a.
cigarette companies are successful in passing much of the tax on to consumers.
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56

The relationship between price and quantity supplied is


a. positive, or direct.
b. negative, or inverse.
c. nonexistent.
d. the same as the relationship between price and quantity demanded.
ANSWER: a.
positive, or direct.
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Chapter 4/The Market Forces of Supply and Demand13


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Other things equal, when the price of a good rises, the quantity supplied of the good also rises. This
is
a. the law of increasing costs.
b. the law of diminishing returns.
c. the law of supply.
d. the law of demand.
ANSWER: c.
the law of supply.
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58

If the number of sellers in a market increases,


a. the demand in that market will increase.
b. the supply in that market will decrease.
c. the supply in that market will increase.
d. the demand in that market will not change.
ANSWER: c.
the supply in that market will increase.
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59

Suppose you make jewelry. If the price of gold falls, we would expect
a. you to be willing and able to produce more jewelry than before at each possible price.
b. you to be willing and able to produce less jewelry than before at each possible price.
c. you will face a greater demand for your jewelry.
d. you will face a weaker demand for your jewelry.
ANSWER: a.
you to be willing and able to produce more jewelry than before at each possible price.
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60

A technological advancement
a. will shift the demand curve to the right.
b. will shift the demand curve to the left.
c. will shift the supply curve to the right.
d. will shift the supply curve to the left.
ANSWER: c.
will shift the supply curve to the right.
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61

A dress manufacturer is expecting higher prices for dresses in the near future. We would expect
a. the dress manufacturer to supply more dresses now.
b. the demand for this manufacturers dresses to fall.
c. the dress manufacturer to supply fewer dresses now.
d. the demand for this manufacturers dresses to rise.
ANSWER: c.
the dress manufacturer to supply fewer dresses now.
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62

Holding the nonprice determinants of supply constant, a change in price would


a. result in a change in supply.
b. result in a movement along a stable supply curve.
c. result in a shift of demand.
d. have no effect on the quantity supplied.
ANSWER: b.
result in a movement along a stable supply curve.
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14Chapter 4/The Market Forces of Supply and Demand


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A supply curve slopes upward because


a. an increase in price gives producers incentive to supply a larger quantity.
b. an increase in input prices increases supply.
c. a decrease in input prices decreases supply.
d. as more is produced, per unit costs of production fall.
ANSWER: a.
an increase in price gives producers incentive to supply a larger quantity.
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64

The movement from point A to point B on the graph would be caused by


a. an increase in the price of the good.
b. a decrease in the price of the good.
c. an increase in technology.
d. an increase in input prices.
ANSWER: a.
an increase in the price of the good.
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65

The movement from point A to point B on the graph is called


a. a decrease in supply.
b. an increase in supply.
c. a decrease in the quantity supplied.
d. an increase in the quantity supplied.
ANSWER: d. an increase in the quantity supplied.
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66

In a market, to find the total amount supplied at a particular price,


a. we must add up all of the amounts firms are willing and able to supply at that price.
b. we need the demand for the good.
c. the tastes and preferences of buyers must be established.
d. the income level of buyers would need to be determined.
ANSWER: a.
we must add up all of the amounts firms are willing and able to supply at that price.
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Chapter 4/The Market Forces of Supply and Demand15


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Suppose that there is an increase in input prices. We would expect


a. supply to increase.
b. supply to decrease.
c. supply could increase or decrease.
d. supply to remain unchanged.
ANSWER: b.
supply to decrease.
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68

An increase in the price of a good would


a. increase the supply.
b. increase the amount purchased by buyers.
c. decrease the supply.
d. give producers an incentive to produce more.
ANSWER: d. give producers an incentive to produce more.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
69

Wheat is the main input in the production of flour. If the price of wheat increases, all else equal, we
would expect
a. the supply of flour to be unaffected.
b. the supply of flour to decrease.
c. the supply of flour to increase.
d. the demand for flour to decrease.
ANSWER: b.
the supply of flour to decrease.
TYPE: M KEY1: C SECTION: 3 OBJECTIVE: 3 RANDOM: Y
70

An increase in the price of oranges would


a. lead to an increased supply of oranges.
b. lead to a movement up the supply curve for oranges.
c. lead to an increased demand for oranges.
d. lead to a reduction in the prices of inputs used in orange production.
ANSWER: b.
lead to a movement up the supply curve for oranges.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
71

All else constant, an increase in the number of cattle delivered to an auction to be marketed would
a. represent an increase in demand for cattle at the auction.
b. represent an increase in the supply of cattle at the auction.
c. represent a decrease in the number of sellers at the auction.
d. have no effect on the demand or supply at the auction.
ANSWER: b.
represent an increase in the supply of cattle at the auction.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
72

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16Chapter 4/The Market Forces of Supply and Demand

On the graph, the movement from S to S1 is called


a. a decrease in supply.
b. an increase in supply.
c. a decrease in quantity supplied.
d. an increase in quantity supplied.
ANSWER: b.
an increase in supply.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
73

On the graph, the movement from S to S1 could be caused by


a. a decrease in the price of the good.
b. an increase in income.
c. an improvement in technology.
d. an increase in input prices.
ANSWER: c.
an improvement in technology.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
74

The unique point at which the supply and demand curves intersect is called
a. market unity.
b. equilibrium.
c. cohesion.
d. an agreement.
ANSWER: b.
equilibrium.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
75

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Chapter 4/The Market Forces of Supply and Demand17


.

The price where quantity supplied equals quantity demanded is called


a. the equilibrium price.
b. the monopoly price.
c. the coordinating price.
d. All of the above are correct.
ANSWER: a.
the equilibrium price.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
76

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


a. the price is below the equilibrium price.
b. the market can be in equilibrium.
c. sellers are producing more than buyers wish to buy.
d. All of the above answers are correct.
ANSWER: a.
the price is below the equilibrium price.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
77

At the equilibrium price,


a. everyone in the market has been satisfied.
b. it is possible for there to be a shortage.
c. firms have an incentive to increase production.
d. buyers have an incentive to buy more.
ANSWER: a.
everyone in the market has been satisfied.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
78

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18Chapter 4/The Market Forces of Supply and Demand

According to the graph, equilibrium price and quantity are


a. $7, 20.
b. $7, 60.
c. $5, 40.
d. $3, 60.
ANSWER: c.
$5, 40.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
79

According to the graph, at a price of $7,


a. there would be a shortage of 40 units.
b. there would be a surplus of 40 units.
c. there would be a surplus of 20 units.
d. the market would be in equilibrium.
ANSWER: b.
there would be a surplus of 40 units.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM:Y
80

According to the graph, at a price of $3,


a. there would be a shortage of 40 units.
b. there would be a surplus of 40 units.
c. there would be a surplus of 20 units.
d. the market would be in equilibrium.
ANSWER: a.
there would be a shortage of 40 units.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
81

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Chapter 4/The Market Forces of Supply and Demand19


.

According to the graph, at the equilibrium price,


a. 20 units would be supplied and demanded.
b. 40 units would be supplied and demanded.
c. 60 units would be supplied and demanded.
d. 60 units would be supplied, but only 20 would be demanded.
ANSWER: b.
40 units would be supplied and demanded.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
82

According to the graph, at a price of $7,


a. a surplus would exist and the price would tend to fall.
b. a surplus would exist and the price would tend to rise.
c. a shortage would exist and the price would tend to fall.
d. the market would be in equilibrium.
ANSWER: a.
a surplus would exist and the price would tend to fall.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
83

PRICE
$10
$8
$6
$4
$2

QUANTITY DEMANDED
10
20
30
40
50

QUANTITY SUPPLIED
100
80
60
40
20

In the table shown, the equilibrium price and quantity would be


a. $2, 50.
b. $4, 40.
c. $8, 80.
d. $10, 100.
ANSWER: b.
$4, 40.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
84

In the table shown, if the price were $8,


a. a surplus of 30 units would exist and price would tend to fall.
b. a surplus of 60 units would exist and price would tend to rise.
c. a surplus of 60 units would exist and price would tend to fall.
d. a shortage of 30 units would exist and price would tend to rise.
ANSWER: c.
a surplus of 60 units would exist and price would tend to fall.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
85

In the table shown, if the price were $2,


a. a shortage of 30 units would exist and price would tend to fall.
b. a surplus of 60 units would exist and price would tend to rise.
c. a surplus of 60 units would exist and price would tend to fall.
d. a shortage of 30 units would exist and price would tend to rise.
ANSWER: d. a shortage of 30 units would exist and price would tend to rise.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
86

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20Chapter 4/The Market Forces of Supply and Demand

Refer to the graph shown. In this market, equilibrium price and quantity would be
a. $15, 400.
b. $20, 600.
c. $25, 500.
d. $25, 800.
ANSWER: b.
$20, 600.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
87

Refer to the graph shown. If price is $25, quantity demanded would be


a. 400.
b. 500.
c. 600.
d. 800.
ANSWER: b.
500.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
88

Refer to the graph shown. If price is $15, quantity supplied would be


a. 200.
b. 400.
c. 500.
d. 700.
ANSWER: b.
400.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
89

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Chapter 4/The Market Forces of Supply and Demand21


.

Refer to the graph shown. If the price is $25,


a. there would be a surplus of 300.
b. there would be a surplus of 200.
c. there would be a shortage of 200.
d. the market would be in equilibrium.
ANSWER: a.
there would be a surplus of 300.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
90

Refer to the graph shown. If the price is $10,


a. there would be a shortage of 200.
b. there would be a surplus of 200.
c. there would be a surplus of 600.
d. there would be a shortage of 600.
ANSWER: d. there would be a shortage of 600.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
91

Refer to the graph shown. At a price of $15


a. quantity demanded < quantity supplied.
b. quantity demanded = quantity supplied.
c. quantity demanded > quantity supplied.
d. none of the above
ANSWER: c.
quantity demanded > quantity supplied.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
92

Refer to the graph shown. At a price of $20


a. the market would be in equilibrium.
b. 600 units would be bought and sold.
c. there would be no pressure for price to change.
d. All of the above are true.
ANSWER: d. All of the above are true.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
93

When the price is higher than the equilibrium price,


a. a shortage will exist.
b. buyers desire to purchase more than is produced.
c. sellers desire to produce and sell more than buyers wish to purchase.
d. quantity demanded equals quantity supplied.
ANSWER: c.
sellers desire to produce and sell more than buyers wish to purchase.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
94

When there is a surplus in a market,


a. there is downward pressure on price.
b. there is upward pressure on price.
c. the market could still be in equilibrium.
d. there are too many buyers chasing too few goods.
ANSWER: a.
there is downward pressure on price.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
95

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22Chapter 4/The Market Forces of Supply and Demand


.

When there is a shortage in a market,


a. there is downward pressure on price.
b. there is upward pressure on price.
c. the market could still be in equilibrium.
d. the price must be above equilibrium.
ANSWER: b.
there is upward pressure on price.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
96

At the equilibrium price


a. there can still be upward or downward pressure on price.
b. there will be no pressure on price to rise or fall.
c. sellers would eventually require a higher price.
d. buyers would not be willing to purchase the output sellers desire to sell.
ANSWER: b.
there will be no pressure on price to rise or fall.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
97

Comparative statics involves


a. comparing the old equilibrium and the new equilibrium.
b. the estimating of buyer reluctance to pay the market price.
c. comparisons of varying prices.
d. the estimating of the friction that develops between buyer and seller.
ANSWER: a.
comparing the old equilibrium and the new equilibrium.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
98

Which of the following is NOT one of the steps in analyzing how some event affects a market?
a. Determine the names of the market participants.
b. Decide whether the curve shifts to the right or to the left.
c. Determine whether the event shifts the supply, the demand, or both curves.
d. Use a supply-demand diagram to examine how the shift(s) affect the equilibrium.
ANSWER: a.
Determine the names of the market participants.
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
99

A shift in the supply curve is called


a. a change in supply.
b. a movement along the supply curve.
c. a change in the quantity supplied.
d. All of the above are correct.
ANSWER: a.
a change in supply.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
100

A shift in the demand curve is called


a. a change in demand.
b. a movement along the demand curve.
c. a change in the quantity demanded.
d. All of the above are correct.
ANSWER: a.
a change in demand.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
101

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Chapter 4/The Market Forces of Supply and Demand23


.

Whenever the price of a good changes,


a. there is a change in supply and demand.
b. there is only a change in supply.
c. there would be a movement along a supply curve and/or demand curve.
d. there would be no effect in the market.
ANSWER: c.
there would be a movement along a supply curve and/or demand curve.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
102

Suppose there is an earthquake that destroys several corn canneries. Which of the following would
NOT occur as a direct result of this event?
a. Sellers would not be willing to produce and sell as much as before at each relevant price.
b. The supply would decrease.
c. Buyers would not be willing to buy as much as before at each relevant price.
d. The equilibrium price would rise.
ANSWER: c.
Buyers would not be willing to buy as much as before at each relevant price.
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
103

Suppose that the number of buyers in a market increases and a technological advancement occurs
also. What would we expect to happen in the market?
a. The equilibrium price would increase, but the impact on the amount sold in the market would
be ambiguous.
b. The equilibrium price would decrease, but the impact on the amount sold in the market would
be ambiguous.
c. Both equilibrium price and equilibrium quantity would increase.
d. Equilibrium quantity would increase, but the impact on equilibrium price would be
ambiguous.
ANSWER: d. Equilibrium quantity would increase, but the impact on equilibrium price would be
ambiguous.
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
104

Suppose that the incomes of buyers in a particular market for a normal good declines and there is
also a reduction in input prices. What would we expect to occur in this market?
a. The equilibrium price would increase, but the impact on the amount sold in the market would
be ambiguous.
b. The equilibrium price would decrease, but the impact on the amount sold in the market would
be ambiguous.
c. Both equilibrium price and equilibrium quantity would increase.
d. Equilibrium quantity would increase, but the impact on equilibrium price would be
ambiguous.
ANSWER: b.
The equilibrium price would decrease, but the impact on the amount sold in the market
would be ambiguous.
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
105

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24Chapter 4/The Market Forces of Supply and Demand


.

Suppose that demand decreases AND supply decreases. What would you expect to occur in the
market for the good?
a. Equilibrium price would increase, but the impact on equilibrium quantity would be
ambiguous.
b. Equilibrium price would decrease, but the impact on equilibrium quantity would be
ambiguous.
c. Both equilibrium price and equilibrium quantity would increase.
d. Equilibrium quantity would decrease, but the impact on equilibrium price would be
ambiguous.
ANSWER: d. Equilibrium quantity would decrease, but the impact on equilibrium price would be
ambiguous.
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
106

Suppose that demand increases AND supply decreases. What would happen in the market for the
good?
a. Equilibrium price would increase, but the impact on equilibrium quantity would be
ambiguous.
b. Equilibrium price would decrease, but the impact on equilibrium quantity would be
ambiguous.
c. Both equilibrium price and quantity would increase.
d. Both equilibrium price and quantity would decrease.
ANSWER: a.
Equilibrium price would increase, but the impact on equilibrium quantity would be
ambiguous.
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
107

Which of the following would result in an increase in equilibrium price and an ambiguous change
in equilibrium quantity?
a. an increase in supply and demand
b. an increase in supply and a decrease in demand
c. a decrease in supply and demand
d. a decrease in supply and an increase in demand
ANSWER: d. a decrease in supply and an increase in demand
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
108

When supply and demand both increase,


a. equilibrium price will increase.
b. equilibrium price will decrease.
c. equilibrium price may increase, decrease, or remain unchanged.
d. equilibrium quantity may increase, decrease, or remain unchanged.
ANSWER: c.
equilibrium price may increase, decrease, or remain unchanged.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
109

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Chapter 4/The Market Forces of Supply and Demand25


.

A weaker demand together with a stronger supply would necessarily result in


a. a lower price.
b. a higher price.
c. an increase in equilibrium quantity.
d. a decrease in equilibrium quantity.
ANSWER: a.
a lower price.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
110

In a free market system, what is the mechanism for rationing scarce resources?
a. sellers
b. buyers
c. prices
d. the government
ANSWER: c.
prices
TYPE: M KEY1: D SECTION: 5 OBJECTIVE: 5 RANDOM: Y
111

In a free market system, what coordinates the actions of millions of people with their varying
abilities and desires?
a. producers
b. consumers
c. prices
d. the government
ANSWER: c.
prices
TYPE: M KEY1: D SECTION: 5 OBJECTIVE: 5 RANDOM: Y
112

If there is a shortage of farm laborers, we would expect


a. the wages of farm laborers to decrease.
b. the wages of farm laborers to increase.
c. the prices of farm commodities to decrease.
d. a decrease in the demand for substitutes of farm labor.
ANSWER: b.
the wages of farm laborers to increase.
TYPE: M KEY1: D SECTION: 5 OBJECTIVE: 5 RANDOM: Y
113

In market economies,
a. prices guide economic decisions and thereby allocate scarce resources.
b. prices ensure that quantity supplied and quantity demanded are in balance.
c. prices influence how much of a good buyers choose to purchase and how much sellers choose
to produce.
d. All of the above answers are correct.
ANSWER: d. All of the above answers are correct.
TYPE: M KEY1: D SECTION: 5 OBJECTIVE: 5 RANDOM: Y
114

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26Chapter 4/The Market Forces of Supply and Demand


.

Which of the following would cause both the equilibrium price and equilibrium quantity of number
two grade potatoes (an inferior good) to increase?
a. an increase in consumer income
b. greater government restrictions on agricultural chemicals
c. a decrease in consumer income
d. fewer government restrictions on agricultural chemicals
ANSWER: c.
a decrease in consumer income
TYPE: M KEY1: D SECTION: 5 OBJECTIVE: 5 RANDOM: Y
TRUE/FALSE
115

. Supply and demand are the concepts that economists use most often.
ANSWER: T
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y
116

. Supply and demand determine prices, and prices allocate the economys scarce resources.
ANSWER: T
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y
117

. A market is a group of buyers and sellers of a particular product.


ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
118

A competitive market is a market in which there are enough buyers and sellers so that each has a
negligible impact on the market price.
ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
119

. In a perfectly competitive market, buyers and sellers are price setters.


ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
120

. All markets in the U.S. economy are perfectly competitive.


ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
121

. The wheat market is a good example of perfect competition.


ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
122

. If a good or service has only one seller, it is called a monopoly.


ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
123

. A market with many sellers offering slightly different products is called an oligopoly.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
124

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Chapter 4/The Market Forces of Supply and Demand27


. A market with just a few sellers is said to be monopolistically competitive.
ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
125

. The computer software industry is an example of monopolistic competition.


ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
126

. A local telephone company might be a monopolist.


ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
127

. The stock market is an oligopoly.


ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
128

The quantity demanded of a product is the amount that buyers are willing and able to purchase at a
particular price.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
129

Other than price, determinants of individual demand include income, prices of related goods,
tastes, expectations, and supply.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
130

. The quantity demanded of a product is positively related to the price.


ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
131

The law of demand states that other things equal, when the price of a good rises, the quantity
demanded of the good falls.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
132

. If the demand for a good falls when income falls, the good is called an inferior good.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
133

When a fall in the price of one good reduces the demand for another good, the two goods are called
substitutes.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
134

When an increase in the price of one good raises the demand for another good, the two goods are
called complements.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
135

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28Chapter 4/The Market Forces of Supply and Demand


. Corn Flakes and Wheaties are complementary goods.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
136

. Baseballs and baseball bats are substitute goods.


ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
137

. The Latin phrase ceteris paribus means other things changing.


ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
138

. Demand curves are usually upward-sloping.


ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
139

. The market demand is the average of all of the individual demands for a particular good or service.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
140

. Individual demand curves are summed horizontally to obtain the market demand curve.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
141

. Whenever a determinant of demand changes, other than price, the demand curve shifts.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
142

An increase in income will cause a rightward shift in the demand curve if the good is a normal
good.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
143

If the Surgeon General of the United States announces that eating oatmeal reduces heart disease,
there is likely to be a leftward shift in the demand curve for Quaker Oats.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
144

. If the price of tea increases, there is likely to be a rightward shift in the demand for coffee.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
145

. If the price of VCRs falls, there is likely to be a leftward shift in the demand for video tape rentals.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
146

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Chapter 4/The Market Forces of Supply and Demand29


.

A reduction in the price of a product and an increase in the number of buyers in the market affect
the demand curve in the same general way.
ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
147

A movement along a demand curve is called a change in quantity demanded, and a shift of a
demand curve is called a change in demand.
ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
148

The quantity supplied of a good or service is the amount that sellers are willing and able to sell at a
particular price.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
149

In addition to price, the determinants of individual supply include input prices, technology, and
expectations.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
150

. The price of a good and the quantity supplied are negatively related.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
151

The law of supply states that other things equal, when the price of a good rises, the quantity
supplied of the good falls.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
152

If a company making frozen orange juice expects the price of their product to be higher next month,
they will supply more to the market this month.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
153

A table showing how the quantity supplied varies with the price, other things equal, is a supply
schedule, and the graph of the supply schedule is called a supply curve.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
154

A supply curve slopes upward because, ceteris paribus, a higher price means a greater quantity
supplied.
ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
155

. A market supply curve is found by summing vertically all of the individual supply curves.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
156

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30Chapter 4/The Market Forces of Supply and Demand


. Changes in any determinant of supply will have no effect on the position of the supply curve.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
157

A movement along a supply curve is called a change in supply while a shift of the curve is called a
change in quantity supplied.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
158

If there is an improvement in the technology of producing a product, the supply curve for that
product will shift to the left.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
159

. A reduction in an input price will cause a change in quantity supplied, but not a change in supply.
ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
160

. Equilibrium in a market is found where the supply curve and the demand curve intersect.
ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
161

. At the equilibrium price, quantity demanded is equal to quantity supplied.


ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
162

. The market clearing price will always be lower than the equilibrium price.
ANSWER: F
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
163

. If the market price is below the equilibrium price, there will be a surplus and the price will rise.
ANSWER: F
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
164

. If the market price is below the equilibrium price, there will be a shortage and the price will rise.
ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
165

. Surpluses drive price up while shortages drive price down.


ANSWER: F
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
166

A shortage will occur at any price below equilibrium price and a surplus will occur at any price
above equilibrium price.
ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
167

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Chapter 4/The Market Forces of Supply and Demand31


. It is not possible for demand and supply to shift at the same time.
ANSWER: F
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
168

. The price of any good adjusts until quantity demanded equals quantity supplied.
ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
169

. The analysis of a change in the equilibrium in a market is called comparative statics.


ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
170

. Analyzing how an event affects a market can be accomplished in three steps.


ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
171

. The behavior of buyers and sellers drive markets toward equilibrium.


ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
172

If the number of buyers of video tapes increases, other things equal, there will be an increase in the
equilibrium price of video tapes and a decrease in the equilibrium quantity sold.
ANSWER: F
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
173

If a drought hits the Midwest, ceteris paribus, the equilibrium price of corn will increase and the
equilibrium quantity of corn sold will decrease.
ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
174

. In a market economy, prices determine who produces each good and how much is produced.
ANSWER: T
TYPE: T KEY1: D SECTION: 5 OBJECTIVE: 5 RANDOM: Y
175

. Anyone willing to pay the market price for a resource may have it.
ANSWER: T
TYPE: T KEY1: D SECTION: 5 OBJECTIVE: 5 RANDOM: Y
176

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32Chapter 4/The Market Forces of Supply and Demand


SHORT ANSWER
.

What characteristics or requirements must be met for a market to be considered as each of the
following?
1. perfectly competitive
2. a monopoly
3. an oligopoly
4. monopolistic competition
ANSWER: (1)
The goods being offered for sale must all be the same. The buyers and sellers must be so
numerous that no single buyer or seller influences the market price.
(2)
A monopoly is a market in which there is only one seller.
(3)
An oligopoly is a market in which there are only a few sellers, and the sellers do not
always compete aggressively.
(4) Monopolistic competition is a market containing many sellers offering slightly different products.
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
177

When we list the determinants of demand, we do not include supply as one of the determinants.
Why is that?
ANSWER: Supply is not a determinant of demand because changes in supply per se do not directly cause
or shifts of the demand curve. Changes in supply affect price, and changes in price affect
quantity demanded.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y
178

For each of the following industries, determine whether the market structure is perfect competition,
monopolistic competition, oligopoly, or monopoly.
a. the broadcast television networks
b. local telephone service
c. fast food in a city
d. soft drinks
e. municipal water
f.
existing (previously issued) U.S. Treasury bonds
g. the automobile industry
h. the textbook industry
ANSWER: a.
Since there are only a few large broadcast television networks, the industry is an
oligopoly.
b. Local telephone service is usually a monopoly, with only one seller.
c. The fast food industry in a city is monopolistically competitive, with many sellers and
differentiated products.
d. The soft drink industry is best described as an oligopoly, with just a few producers.
e. Municipal water is usually a monopoly, with only one seller.
f.
The U.S. Treasury bond market is close to perfectly competitive, with a large number of
participants buying and selling the same product.
g. The automobile industry is best described as an oligopoly, with just a few large producers.
h. The textbook industry is best described as monopolistically competitive, with many producers
selling differentiated products. Recently, however, mergers and acquisitions have moved the
industry toward oligopoly.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y
179

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Chapter 4/The Market Forces of Supply and Demand33


.

180

For each of the following situations in the wheat market, determine whether the quantity demanded
changes, or the demand curve shifts, and determine the direction of the change.

a. consumer income increases


b. the price of wheat increases
c. science determines that eating wheat causes high blood pressure
d. the price of oats increases
e. in June, insects destroy part of the wheat crop in North Dakota
ANSWER: a.
An increase in consumer income will cause a rightward shift in the demand curve,
assuming that wheat is a normal good.
b. An increase in the price of wheat will cause a decrease in the quantity demanded.
c. Consumers tastes will shift away from wheat, causing the demand curve to shift to the left.
d. Since oats and wheat are substitute goods, an increase in the price of oats will cause a
rightward shift in the demand for wheat.
e. Destruction of part of the growing wheat crop will cause consumers to expect higher prices in
the future. They will demand more wheat now and the demand curve will shift to the right.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y
. What are the determinants of individual demand and individual supply?
ANSWER: The determinants of individual demand are price, income, prices of related goods, tastes, and
expectations. The determinants of individual supply are price, input prices, technology, and
expectations.
TYPE: S KEY1: D SECTION: 2 & 3 OBJECTIVE: 2 & 3 RANDOM: Y
181

. Explain the meaning of the following terms: normal good, inferior good, substitutes, complements.
ANSWER: If a good is a normal good, the demand for it falls when income falls. If a good is an inferior
good, the demand for it rises when income falls. Two goods are substitutes if a fall in the price
of one of them reduces the demand for the other. Two goods are complements if a fall in the
price of one of them increases the demand for the other.
TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
182

183

Given the following demand schedule, graph Dianes demand curve for Gatorade.

Price of Gatorade
$1.50
1.25
1.00
.75
.50
.25
ANSWER:

Quarts of Gatorade Demanded


0
10
20
30
40
50

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34Chapter 4/The Market Forces of Supply and Demand

TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 2 GRAPH FORMAT: M ANSWER RANDOM: Y


.

184

Given the following information about three consumers monthly demand, construct a market
demand curve for potato chips. What would happen to demand if Ryan decided to buy
popcorn and not buy chips? Show this change on your graph.
Price per bag
$.25
.50
.75
1.00
1.25
1.50

Ryans Demand
7
6
5
4
3
2

Rustys Demand Regans Demand


10
6
8
5
6
4
4
3
2
2
0
1

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Chapter 4/The Market Forces of Supply and Demand35


ANSWER:

TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 2 GRAPH FORMAT: M ANSWER GRAPH: RANDOM: N


. Why is the ceteris paribus assumption so important when constructing a demand or supply curve?
ANSWER: Ceteris paribus means other things being equal. When we draw a demand (or supply) curve,
we show the relationship between quantity demanded (or quantity supplied) and price, and
hold all other factors which might affect demand (or supply), other than price, constant.
TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
185

What is the difference between a change in demand and a change in quantity demanded?
Graph your answer.
ANSWER: A change in demand refers to a shift in the demand curve. A change in quantity demanded
refers to a movement along a fixed demand curve.
186

TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y

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36Chapter 4/The Market Forces of Supply and Demand


.

For each of the following changes, determine whether there will be a movement along the demand
curve (a change in quantity demanded) or a shift in the demand curve (a change in demand).
a. a change in the price of a related good
b. a change in tastes
c. a change in the number of buyers
d. a change in price
e. a change in expectations
f.
a change in income
ANSWER: A change in price causes a change in quantity demanded. All of the other changes listed shift
the demand curve.
TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y
187

188

Given the following supply schedule, graph Steves supply of potatoes.

Price of Potatoes
$5.00
4.00
3.00
2.00
1.00
ANSWER:

Hundredweights of Potatoes Supplied


100
80
60
40
20

TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 3 GRAPH FORMAT: M ANSWER RANDOM: Y


.

For each of the following situations in the wheat market, determine whether the quantity supplied
of wheat changes, or whether the supply curve shifts, and determine the direction of the change:
a. the number of wheat farmers falls, ceteris paribus
b. Professor Dewey develops a more productive variety of wheat seed and markets it at the same
price as existing seed.
c. the cost of fertilizer increases
d. Japan signs a trade agreement, promising to buy large quantities of U.S. wheat in the future.
ANSWER: a.
A reduction in the number of sellers will cause the supply curve to shift to the left.
189

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Chapter 4/The Market Forces of Supply and Demand37


b.
c.
d.

This technological improvement will cause the supply curve to shift to the right.
An increase in the price of an input will cause the supply curve to shift to the left.
U.S. farmers will expect the price of wheat to rise in the future, so the supply curve will shift to
the left.
TYPE: S KEY1: C SECTION: 3 OBJECTIVE: 3 RANDOM: Y
.

What will happen to supply or quantity supplied under each of the following situations?
a. the price of the product falls
b. technology improves
c. input prices rise
d. expectations change - you expect the price of your product to rise next month
ANSWER: a.
A change in price will cause a movement along the supply curve, or a decrease in
quantity supplied.
b. The supply curve will shift to the right.
c. The supply curve will shift to the left.
d. The supply curve will shift to the left.
TYPE: S KEY1: C SECTION: 3 OBJECTIVE: 3 RANDOM: Y
190

191

Given the following table, graph the demand and supply curves for flashlights. Make certain to
label equilibrium price and equilibrium quantity.

Price/flashlight
$5
4
3
2
1
ANSWER:

Quantity Demanded/month
2,000
4,000
7,000
11,000
15,000

Quantity Supplied/month
12,000
10,000
7,000
4,000
1,000

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38Chapter 4/The Market Forces of Supply and Demand


TYPE: S KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
. What does the term equilibrium mean when applied to a market?
ANSWER: The equilibrium in a market is the point at which the supply and demand curves intersect. At
the equilibrium price, quantity supplied is equal to quantity demanded.
TYPE: S KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
192

Given the graph shown, determine at what price(s) a surplus will exist. At what price(s) will a
shortage exist?
ANSWER: A surplus will exist at any price above the equilibrium price of $4. A shortage will exist at any
price below equilibrium price.
TYPE: S KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
193

Suppose that the equilibrium price in a market is $10, but the existing market price is $8. What will
happen in the market? What if the existing market price is $15?
ANSWER: If the existing market price is below the equilibrium price, there will be a shortage of the good
and the market price will rise until it reaches equilibrium. If the existing market price is above
the equilibrium price, there will be a surplus of the good and the market price will fall until it
reaches equilibrium.
TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
194

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Chapter 4/The Market Forces of Supply and Demand39


.

195

Given the following table for 19" color TVs, graph both the demand and supply curves. Label
equilibrium price and quantity. Now assume that a TV is a normal good and income rises.
Consumers are now willing and able to purchase 500 more TVs per month at every price. Show
this change on your graph and explain what has happened to equilibrium price and quantity
as a result.

Price of TVs Quantity Demanded/month Quantity Supplied/month


$200
1,000
2,500
180
1,200
2,200
160
1,400
1,900
140
1,600
1,600
120
1,800
1,300
100
2,000
1,000
ANSWER: The equilibrium price would originally be $140 and the equilibrium quantity would be 1,600.
When demand increases by 500 due to an increase in income, the new equilibrium price would
be $160 and the new equilibrium quantity would be 1,900.

TYPE: S KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y GRAPH:


.

If an event occurred which changed a market equilibrium, how would an economist go about
analyzing the change in equilibrium?
ANSWER: Analyzing changes in equilibrium is called comparative statics. The three steps in doing
comparative statics are:
(1) Decide whether the event shifts the supply curve or the demand curve.
(2) Decide which direction the curve shifts.
(3) Use the supply-and-demand diagram to see how the shift changes the equilibrium.
196

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40Chapter 4/The Market Forces of Supply and Demand


TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
.

Other things being equal, explain the effect each of the following will have on either the demand or
supply of corn. Explain also what the effect will be on equilibrium price and quantity.
1. Corn is now considered by doctors to be the most healthy vegetable.
2. There is a decline in the amount of land used to grow corn.
3. Producers expect the price of corn to fall in the future.
4. The price of peas, a substitute for corn, goes up.
5. Corn is a normal good and incomes fall.
6.
The price of fertilizer rises.
ANSWER: 1.
Demand increases - Equilibrium price increases - Equilibrium quantity increases
2. Supply decreases - Equilibrium price increases - Equilibrium quantity decreases
3. Supply increases - Equilibrium price decreases - Equilibrium quantity increases
4. Demand increases - Equilibrium price increases - Equilibrium quantity increases
5. Demand decreases - Equilibrium price decreases - Equilibrium quantity decreases
6.
Supply decreases - Equilibrium price increases - Equilibrium quantity decreases
TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
197

198

Fill in the accompanying table, showing whether equilibrium price and equilibrium quantity go up,
down or stay the same.
No Change in Supply

An Increase in Supply

A Decrease in Supply

No Change in Supply

An Increase in Supply

A Decrease in Supply

No Change in
Demand

P same
Q same

P down
Q up

P up
Q down

An Increase in
Demand

P up
Q up

P ambiguous
Q up

P up
Q ambiguous

A Decrease in
Demand

P down
Q down

P down
Q ambiguous

P ambiguous
Q Down

No Change in
Demand
An Increase in
Demand
A Decrease in
Demand
ANSWER:

TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y

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Chapter 4/The Market Forces of Supply and Demand41


.

Graph each of the following changes and explain what would happen to equilibrium price and
quantity.
1. Demand increases and Supply increases
2. Demand increases and Supply decreases
3. Demand decreases and Supply decreases
4.
Demand decreases and Supply increases
ANSWER:
1.
Equilibrium price is ambiguous and equilibrium quantity increases.
199

2.

Equilibrium price increases and equilibrium quantity is ambiguous.

3.

Equilibrium price is ambiguous and equilibrium quantity decreases.

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42Chapter 4/The Market Forces of Supply and Demand


4.

Equilibrium price decreases and equilibrium quantity is ambiguous.

TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y


.

In the former Soviet Union, prices were set by a group of planners, and usually remained
unchanged for several years. If a price system like this were introduced in the U.S. economy,
what effect would it have on buyers, sellers, and market equilibrium?
ANSWER: If prices were fixed by planners, and could not adjust to eliminate excess supply or excess
demand, it would only be by accident that the market would ever reach an equilibrium.
Instead, there would be persistent excess demand or excess supply, and either buyers would be
unable to buy the quantities they were able and willing to buy at the legal price, or sellers
would be unable to sell the quantities they were able and willing to sell at the legal price. This
would create incentives for buyers and sellers to find ways to buy and sell at prices higher or
lower than the legal price, probably leading to illegal or black markets.
TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
200

201

Suppose we are analyzing the market for hot chocolate. What will be the impact on the equilibrium
price and quantity of each of the following events affecting the hot chocolate market?

a. winter starts and the weather turns sharply colder


b. the price of coffee falls
c. the price of whipped cream falls
d. the price of cocoa beans increases
e. consumer income falls because of a recession
f.
the Surgeon General of the U.S. announces that hot chocolate cures acne
g. population increases
h. a better method of harvesting cocoa beans is introduced
ANSWER: a.
People demand more hot chocolate in colder weather. The demand curve will shift to the
right, and equilibrium market price and quantity will both increase.

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Chapter 4/The Market Forces of Supply and Demand43


b.

Coffee and hot chocolate are substitutes. A decrease in the price of coffee will cause the
demand curve for hot chocolate to shift to the left. Equilibrium price and quantity of hot
chocolate will fall.
c. For many people, whipped cream and hot chocolate are complements. If the price of whipped
cream falls, the demand curve for hot chocolate will shift to the right, and the equilibrium price
and quantity of hot chocolate will increase.
d. Since cocoa beans are an important input in making hot chocolate, an increase in the price of
cocoa beans will cause the supply curve of hot chocolate to shift to the left. Equilibrium price
will increase and equilibrium quantity will decrease.
e. Assuming that hot chocolate is a normal good, when consumer income falls, the demand curve
for hot chocolate will shift to the left. Equilibrium price and quantity will fall.
f.
The announcement from the Surgeon General will cause consumers to prefer more hot
chocolate and the demand curve will shift to the right. Equilibrium price and quantity will
increase.
g. When population increases, the number of buyers of hot chocolate increases, causing the
demand curve to shift to the right. Equilibrium price and quantity will increase.
h. This technological improvement will cause the supply curve for cocoa beans to shift to the
right, lowering the equilibrium price of cocoa beans, an input in hot chocolate. The supply
curve of hot chocolate will shift to the right, lowering equilibrium price and raising equilibrium
quantity.
TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
.

The news that oat bran helped reduce serum cholesterol caused people to prefer to eat more
oatmeal. This change in preference would be expected to cause the demand curve for oats to
shift to the right, and equilibrium price and quantity of oats to increase. What effects might be
felt in other markets?
ANSWER: If the price of oats rises, demand for the substitutes for oats, particularly other small grains,
will also rise, causing the demand curves in those markets to shift to the right and equilibrium
prices and quantities to increase. Increases in the prices of small grains will cause an increase in
the demand for land and other inputs to produce those grains, causing increases in equilibrium
prices and quantities of those inputs. Over time, the movement of more resources into the
production of small grains will shift supply curves to the right and help moderate the initial
price increases. If eating more oats causes a reduction in heart disease, ceteris paribus, there will
be a decrease in the long run in the demand for goods and services used to treat heart disease,
reducing the equilibrium prices and quantities of those goods and services, etc.
TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
202

. How important are prices in allocating resources in a market economy?


ANSWER: Prices play the key role in the allocation of resources in a market economy, providing the
signals to which buyers and sellers respond. In turn, the combined actions of buyers and sellers
determine the forces of supply and demand which move prices toward equilibrium in the
market. In the end, the buyers who are willing to pay the most obtain the scarce goods and
services, and the sellers who are able to produce the goods and services at the lowest cost
obtain the sales. Prices play a similar role in the allocation of resources to the production of
alternative goods and services, with those producers who are willing to pay the most obtaining
the scarce resources. Without the allocative role of prices in rationing scarce goods and
services, there would be no automatic mechanism to guide the allocation of resources.
203

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44Chapter 4/The Market Forces of Supply and Demand


TYPE: S KEY1: C SECTION: 5 OBJECTIVE: 5 RANDOM: Y

Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.

ANSWER: d.
All of the above are correct.
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
1

ANSWER: a.
supply and demand
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
2

ANSWER: d.
both suppliers and demanders
TYPE: M KEY1: D OBJECTIVE: 1 RANDOM: Y
3

ANSWER: c.
a group of demanders and suppliers of a particular good or service.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
4

ANSWER: b.
those who buy the product or service
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
5

ANSWER: a. a market in which there are many buyers and many sellers so that each has a negligible
impact on price.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
6

ANSWER: b.
a competitive market.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
7

ANSWER: c.
other sellers are offering very similar products.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
8

ANSWER: a.
buyers will tend to make their purchases elsewhere.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
9

ANSWER: d.
they have no influence on market price because there are so many in the market.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
10

ANSWER: a.
perfectly competitive.
TYPE: M KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y
11

ANSWER: c.
your actions essentially have no effect on the market price.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
12

ANSWER: b.
a market with one seller.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
13

ANSWER: a.
a local cable television company
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
14

ANSWER: c.
an oligopoly.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
15

ANSWER: b.
air travel
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
16

ANSWER: c.
monopolistically competitive.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
17

ANSWER: d.
is participating in a monopolistically competitive market.
TYPE: M KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
18

ANSWER: b.
demand.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
19

ANSWER: d.
the prices of the inputs used to produce the good
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
20

21

ANSWER: c.

an increase in the demand for the good.

TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y

ANSWER: a.
the demand for good X will increase.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
22

ANSWER: b.
substitute goods.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y
23

ANSWER: a.
It would decrease.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y
24

ANSWER: c.
increase the demand for electricity.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
25

ANSWER: d.
the good is an inferior good.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
26

ANSWER: d.
all of the above
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
27

ANSWER: a.
The demand for rice will increase.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
28

ANSWER: b.
decrease ski sales.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
29

ANSWER: c. table showing the relationship between the price of a good and the quantity buyers are
willing and able to purchase.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
30

ANSWER: a. the downward-sloping line relating the price of the good with the quantity demanded.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y

31

ANSWER: b.
a decrease in price.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
32

ANSWER: c.
an increase in quantity demanded.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
33

ANSWER: b.
all nonprice determinants of demand are assumed to be constant.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
34

ANSWER: a.
other things being equal.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
35

ANSWER: c.
a hypothetical situation in which some variables are assumed to be constant.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
36

ANSWER: d.
a change in the price of the good or service
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
37

ANSWER: ANSWER: c. the demand in the market will decrease.


TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
38

ANSWER b.
increasing her current demand for the stationery.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
39

ANSWER: b.
a horizontal summation of individual demand curves.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
40

41

ANSWER: c.

how much all buyers are willing and able to buy at each possible price.

TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y

ANSWER: a.
38 units.
TYPE: M KEY1: T SECTION: 2 OBJECTIVE: 2 INSTRUCTION: 1 RANDOM: N

42

ANSWER: b.
the quantity demanded in the market decreases by 10 units.
TYPE: M KEY1: T SECTION: 2 OBJECTIVE: 2 INSTRUCTION: 1 RANDOM: N

43

ANSWER: c.
the current demand for razors to increase.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y
44

ANSWER: c.
an increase in the demand for chocolate pudding.
TYPE: M KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y
45

ANSWER: a.
there is a movement along a stable demand curve.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
46

ANSWER: b.
Johns demand for inferior goods to decrease.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
47

ANSWER: : a.
Doug is now willing to pay more than before for tomatoes.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
48

ANSWER: b.
There is an inverse relationship between price and quantity demanded.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
49

ANSWER: d.
When the price of a good falls, buyers respond by purchasing more.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
50

ANSWER: c.
increase the demand for education.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y

51

ANSWER: a.
a decrease in demand.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
52

ANSWER: d.
a decrease in the price of a substitute.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
53

ANSWER: c.
people are now more willing to buy the product at any price than before.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
54

ANSWER: c.
supply.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
55

ANSWER: a.
cigarette companies are successful in passing much of the tax on to consumers.
TYPE: M KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
56

ANSWER: a.
positive, or direct.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
57

ANSWER: c.
the law of supply.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
58

ANSWER: c.
the supply in that market will increase.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
59

ANSWER: a.
you to be willing and able to produce more jewelry than before at each possible price.
TYPE: M KEY1: C SECTION: 3 OBJECTIVE: 3 RANDOM: Y
60

ANSWER: c.
will shift the supply curve to the right.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
61

ANSWER: c.
the dress manufacturer to supply fewer dresses now.
TYPE: M KEY1: C SECTION: 3 OBJECTIVE: 3 RANDOM: Y
62

ANSWER: b.
result in a movement along a stable supply curve.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
63

ANSWER: a.
an increase in price gives producers incentive to supply a larger quantity.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y

64

ANSWER a.
an increase in the price of the good.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
65

ANSWER: d.
an increase in the quantity supplied.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
66

ANSWER: a. we must add up all of the amounts firms are willing and able to supply at that price.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
67

ANSWER: b.
supply to decrease.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
68

ANSWER: d.
give producers an incentive to produce more.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
69

ANSWER: b.
the supply of flour to decrease.
TYPE: M KEY1: C SECTION: 3 OBJECTIVE: 3 RANDOM: Y
70

ANSWER: b.
lead to a movement up the supply curve for oranges.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
71

ANSWER: b.
represent an increase in the supply of cattle at the auction.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
72

ANSWER: b.
an increase in supply.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
73

ANSWER: c.
an improvement in technology.
TYPE: M KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
74

ANSWER: b.
equilibrium.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
75

ANSWER: a.
the equilibrium price.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
76

ANSWER: a.
the price is below the equilibrium price.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
77

ANSWER: a.
everyone in the market has been satisfied.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
78

ANSWER: c.
$5, 40.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
79

ANSWER: b.
there would be a surplus of 40 units.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
80

ANSWER: a.
there would be a shortage of 40 units.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
81

ANSWER: b.
40 units would be supplied and demanded.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
82

ANSWER: a.
a surplus would exist and the price would tend to fall.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
83

ANSWER: ANSWER: b. $4, 40.


TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
84

ANSWER: c.
a surplus of 60 units would exist and price would tend to fall.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
85

ANSWER: d.
a shortage of 30 units would exist and price would tend to rise.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
86

ANSWER: b.
$20, 600.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
87

ANSWER: b.
500.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
88

ANSWER: b.
400.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
89

ANSWER: a.
there would be a surplus of 300.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
90

ANSWER: d.
there would be a shortage of 600.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
91

92

ANSWER: c.

quantity demanded > quantity supplied.

TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y

ANSWER: d.
All of the above are true.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
93

ANSWER: c.
sellers desire to produce and sell more than buyers wish to purchase.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
94

ANSWER: a.
there is downward pressure on price.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
95

ANSWER: b.
there is upward pressure on price.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
96

ANSWER: b.
there will be no pressure on price to rise or fall.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
97

ANSWER: a.
comparing the old equilibrium and the new equilibrium.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
98

ANSWER: a.
Determine the names of the market participants.
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
99

ANSWER: a.
a change in supply.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
100

ANSWER: a.
a change in demand.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
101

ANSWER: c.
there would be a movement along a supply curve and/or demand curve.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
102

ANSWER: c.
Buyers would not be willing to buy as much as before at each relevant price.
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
103

ANSWER: d.
Equilibrium quantity would increase, but the impact on equilibrium price would be
ambiguous.
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
104

ANSWER: b.
The equilibrium price would decrease, but the impact on the amount sold in the market
would be ambiguous.
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
105

ANSWER: d.
Equilibrium quantity would decrease, but the impact on equilibrium price would be
ambiguous.
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
106

ANSWER: a.
Equilibrium price would increase, but the impact on equilibrium quantity would be
ambiguous.
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
107

ANSWER: d.
a decrease in supply and an increase in demand
TYPE: M KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
108

ANSWER: c.
equilibrium price may increase, decrease, or remain unchanged.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
109

ANSWER: a.
a lower price.
TYPE: M KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
110

ANSWER: c.
prices
TYPE: M KEY1: D SECTION: 5 OBJECTIVE: 5 RANDOM: Y
111

112

ANSWER: c.

prices

TYPE: M KEY1: D SECTION: 5 OBJECTIVE: 5 RANDOM: Y

ANSWER: b.
the wages of farm laborers to increase.
TYPE: M KEY1: D SECTION: 5 OBJECTIVE: 5 RANDOM: Y
113

ANSWER: d.
All of the above answers are correct.
TYPE: M KEY1: D SECTION: 5 OBJECTIVE: 5 RANDOM: Y
114

ANSWER: c.
a decrease in consumer income
TYPE: M KEY1: D SECTION: 5 OBJECTIVE: 5 RANDOM: Y
115

ANSWER: T
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y
116

ANSWER: T
TYPE: T KEY1: D OBJECTIVE: 1 RANDOM: Y
117

ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
118

ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
119

ANSWER: : F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
120

ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
121

ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
122

ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
123

ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
124

ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
125

ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
126

ANSWER: T
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
127

ANSWER: F
TYPE: T KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
128

ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
129

ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
130

ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
131

ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
132

ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
133

ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
134

ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
135

ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
136

ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
137

ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
138

ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
139

ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
140

ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
141

ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
142

ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
143

ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
144

ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
145

ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
146

ANSWER: F
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
147

ANSWER: T
TYPE: T KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
148

ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
149

ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
150

ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
151

ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
152

ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y

153

ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
154

ANSWER: T
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
155

ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
156

ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
157

ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
158

ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
159

ANSWER: F
TYPE: T KEY1: D SECTION: 3 OBJECTIVE: 3 RANDOM: Y
160

ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
161

ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
162

ANSWER: F
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
163

ANSWER: F
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
164

ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
165

ANSWER: F
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
166

ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
167

ANSWER: F
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
168

ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
169

ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
170

ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
171

ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
172

ANSWER: F
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
173

ANSWER: T
TYPE: T KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
174

ANSWER: T
TYPE: T KEY1: D SECTION: 5 OBJECTIVE: 5 RANDOM: Y
175

ANSWER: T
TYPE: T KEY1: D SECTION: 5 OBJECTIVE: 5 RANDOM: Y
176

ANSWER: (1) The goods being offered for sale must all be the same. The buyers and sellers
must be so numerous that no single buyer or seller influences the market price.
(2) A monopoly is a market in which there is only one seller.
(3) An oligopoly is a market in which there are only a few sellers, and the sellers do not always
compete aggressively.
(4) Monopolistic competition is a market containing many sellers offering slightly different
products.
TYPE: S KEY1: D SECTION: 1 OBJECTIVE: 1 RANDOM: Y
177

Supply is not a determinant of demand because changes in supply per se do not directly cause or
shifts of the demand curve. Changes in supply affect price, and changes in price affect quantity
demanded.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y
178

179

f.

ANSWER: a.
Since there are only a few large broadcast television networks, the industry is an
oligopoly.
b. Local telephone service is usually a monopoly, with only one seller.
c. The fast food industry in a city is monopolistically competitive, with many sellers and differentiated
products.
d. The soft drink industry is best described as an oligopoly, with just a few producers.
e. Municipal water is usually a monopoly, with only one seller.
The U.S. Treasury bond market is close to perfectly competitive, with a large number of participants
buying and selling the same product.
g. The automobile industry is best described as an oligopoly, with just a few large producers.

h. The textbook industry is best described as monopolistically competitive, with many producers selling
differentiated products. Recently, however, mergers and acquisitions have moved the industry toward
oligopoly.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y

ANSWER: a. An increase in consumer income will cause a rightward shift in the demand curve,
assuming that wheat is a normal good.
b.
An increase in the price of wheat will cause a decrease in the quantity demanded.
c.
Consumers tastes will shift away from wheat, causing the demand curve to shift to the left.
d.
Since oats and wheat are substitute goods, an increase in the price of oats will cause a rightward shift
in the demand for wheat.
e.
Destruction of part of the growing wheat crop will cause consumers to expect higher prices in the
future. They will demand more wheat now and the demand curve will shift to the right.
TYPE: S KEY1: C SECTION: 1 OBJECTIVE: 1 RANDOM: Y
180

ANSWER: The determinants of individual demand are price, income, prices of related goods,
tastes, and expectations. The determinants of individual supply are price, input prices, technology,
and expectations.
TYPE: S KEY1: D SECTION: 2 & 3 OBJECTIVE: 2 & 3 RANDOM: Y
181

ANSWER: If a good is a normal good, the demand for it falls when income falls. If a good is an
inferior good, the demand for it rises when income falls. Two goods are substitutes if a fall in the
price of one of them reduces the demand for the other. Two goods are complements if a fall in the
price of one of them increases the demand for the other.
TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
182

183

ANSWER:

TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 2 GRAPH FORMAT: M ANSWER RANDOM: Y

184

ANSWER:

TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 2 GRAPH FORMAT: M ANSWER GRAPH: RANDOM: N

ANSWER: Ceteris paribus means other things being equal. When we draw a demand (or supply)
curve, we show the relationship between quantity demanded (or quantity supplied) and price, and
hold all other factors which might affect demand (or supply), other than price, constant.
TYPE: S KEY1: D SECTION: 2 OBJECTIVE: 2 RANDOM: Y
185

186

ANSWER: A change in demand refers to a shift in the demand curve. A change in quantity
demanded refers to a movement along a fixed demand curve.

TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y

ANSWER: A change in price causes a change in quantity demanded. All of the other changes
listed shift the demand curve.
TYPE: S KEY1: C SECTION: 2 OBJECTIVE: 2 RANDOM: Y
187

188

ANSWER:

TYPE: S KEY1: D SECTION: 3 OBJECTIVE: 3 GRAPH FORMAT: M ANSWER RANDOM: Y

189

ANSWER: a. A reduction in the number of sellers will cause the supply curve to shift to the left.
b.
This technological improvement will cause the supply curve to shift to the right.

c.
An increase in the price of an input will cause the supply curve to shift to the left.
d.
U.S. farmers will expect the price of wheat to rise in the future, so the supply curve will shift to the
left.
TYPE: S KEY1: C SECTION: 3 OBJECTIVE: 3 RANDOM: Y

ANSWER: a. A change in price will cause a movement along the supply curve, or a decrease in
quantity supplied.
b.
The supply curve will shift to the right.
c.
The supply curve will shift to the left.
d.
The supply curve will shift to the left.
TYPE: S KEY1: C SECTION: 3 OBJECTIVE: 3 RANDOM: Y
190

191

ANSWER:

TYPE: S KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y

ANSWER: The equilibrium in a market is the point at which the supply and demand curves
intersect. At the equilibrium price, quantity supplied is equal to quantity demanded.
TYPE: S KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
192

ANSWER: A surplus will exist at any price above the equilibrium price of $4. A shortage will exist
at any price below equilibrium price.
TYPE: S KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y
193

ANSWER: If the existing market price is below the equilibrium price, there will be a shortage of
the good and the market price will rise until it reaches equilibrium. If the existing market price is
above the equilibrium price, there will be a surplus of the good and the market price will fall until
it reaches equilibrium.
TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
194

195

ANSWER: The equilibrium price would originally be $140 and the equilibrium quantity would be
1,600. When demand increases by 500 due to an increase in income, the new equilibrium price
would be $160 and the new equilibrium quantity would be 1,900.

TYPE: S KEY1: D SECTION: 4 OBJECTIVE: 4 RANDOM: Y

ANSWER: Analyzing changes in equilibrium is called comparative statics. The three steps in doing
comparative statics are:
(1) Decide whether the event shifts the supply curve or the demand curve.
(2) Decide which direction the curve shifts.
(3) Use the supply-and-demand diagram to see how the shift changes the equilibrium.
TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
196

197

2.

ANSWER: : 1.
Demand increases - Equilibrium price increases - Equilibrium quantity increases
Supply decreases - Equilibrium price increases - Equilibrium quantity decreases

3.
Supply increases - Equilibrium price decreases - Equilibrium quantity increases
4.
Demand increases - Equilibrium price increases - Equilibrium quantity increases
5.
Demand decreases - Equilibrium price decreases - Equilibrium quantity decreases
6.
Supply decreases - Equilibrium price increases - Equilibrium quantity decreases
TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y

ANSWER:
No Change in SupplyAn Increase in SupplyA Decrease in Supply
No Change in Demand
198

P same
Q same
P down
Q up
P up
Q down
An Increase in Demand
P up
Q up
P ambiguous
Q up
P up
Q ambiguous
A Decrease in Demand
P down
Q down
P down
Q ambiguous
P ambiguous
Q Down
TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y

199

1.

ANSWER:
Equilibrium price is ambiguous and equilibrium quantity increases.

2.

Equilibrium price increases and equilibrium quantity is ambiguous.

3.

Equilibrium price is ambiguous and equilibrium quantity decreases.

4.

Equilibrium price decreases and equilibrium quantity is ambiguous.

TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y GRAPH:

ANSWER: If prices were fixed by planners, and could not adjust to eliminate excess supply or
excess demand, it would only be by accident that the market would ever reach an equilibrium.
Instead, there would be persistent excess demand or excess supply, and either buyers would be
unable to buy the quantities they were able and willing to buy at the legal price, or sellers would be
unable to sell the quantities they were able and willing to sell at the legal price. This would create
incentives for buyers and sellers to find ways to buy and sell at prices higher or lower than the legal
price, probably leading to illegal or black markets.
TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
200

ANSWER: a. People demand more hot chocolate in colder weather. The demand curve will shift to
the right, and equilibrium market price and quantity will both increase.
b.
Coffee and hot chocolate are substitutes. A decrease in the price of coffee will cause the demand curve
for hot chocolate to shift to the left. Equilibrium price and quantity of hot chocolate will fall.
c.
For many people, whipped cream and hot chocolate are complements. If the price of whipped cream
falls, the demand curve for hot chocolate will shift to the right, and the equilibrium price and quantity
of hot chocolate will increase.
d.
Since cocoa beans are an important input in making hot chocolate, an increase in the price of cocoa
beans will cause the supply curve of hot chocolate to shift to the left. Equilibrium price will increase
and equilibrium quantity will decrease.
e.
Assuming that hot chocolate is a normal good, when consumer income falls, the demand curve for
hot chocolate will shift to the left. Equilibrium price and quantity will fall.
f. The announcement from the Surgeon General will cause consumers to prefer more hot chocolate and the
demand curve will shift to the right. Equilibrium price and quantity will increase.
g. When population increases, the number of buyers of hot chocolate increases, causing the demand curve to
shift to the right. Equilibrium price and quantity will increase.
h. This technological improvement will cause the supply curve for cocoa beans to shift to the right, lowering
the equilibrium price of cocoa beans, an input in hot chocolate. The supply curve of hot chocolate will
shift to the right, lowering equilibrium price and raising equilibrium quantity.
TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
201

ANSWER: If the price of oats rises, demand for the substitutes for oats, particularly other small
grains, will also rise, causing the demand curves in those markets to shift to the right and
equilibrium prices and quantities to increase. Increases in the prices of small grains will cause an
increase in the demand for land and other inputs to produce those grains, causing increases in
equilibrium prices and quantities of those inputs. Over time, the movement of more resources into
the production of small grains will shift supply curves to the right and help moderate the initial
price increases. If eating more oats causes a reduction in heart disease, ceteris paribus, there will be a
decrease in the long run in the demand for goods and services used to treat heart disease, reducing
the equilibrium prices and quantities of those goods and services, etc.
TYPE: S KEY1: C SECTION: 4 OBJECTIVE: 4 RANDOM: Y
202

ANSWER: Prices play the key role in the allocation of resources in a market economy, providing
the signals to which buyers and sellers respond. In turn, the combined actions of buyers and
sellers determine the forces of supply and demand which move prices toward equilibrium in the
market. In the end, the buyers who are willing to pay the most obtain the scarce goods and
services, and the sellers who are able to produce the goods and services at the lowest cost obtain
the sales. Prices play a similar role in the allocation of resources to the production of alternative
goods and services, with those producers who are willing to pay the most obtaining the scarce
resources. Without the allocative role of prices in rationing scarce goods and services, there would
be no automatic mechanism to guide the allocation of resources.
TYPE: S KEY1: C SECTION: 5 OBJECTIVE: 5 RANDOM: Y
203