ECON 5515 Practice Exam 1

1. A price ceiling that sets the price of a good below market equilibrium will cause:

a shortage

If Goods R and S are complements in production, if the price of Good R increases, this will cause a(n) ________ the supply curve for Good S.

Decrease in / leftward shift of the supply curve for Good S

A technological advancement in the production of LED light bulbs will result in ________.

supply.

An increase in supply; supply shifts right; equilibrium price falls and quantity rises

If the price of hot dogs increases, this will cause a(n) ________ the demand curve for hot dog buns and a(n) ________ in the equilibrium price of hot dog buns.

Decrease in demand for buns and decrease in equilibrium price of buns

The market demand curve for a good shifts when there is a change in any of the following factors EXCEPT

The price of the good itself

If input prices increase, all else equal,

Supply decreases; supply shifts left; equilibrium price rises and quantity falls

Demand relation: Qd = 680 - 9P + 0.006M - 4PR. From this relation it is apparent that the good is:

a normal good bc Look at income coefficient. M has a positive sign, so when income rises, demand rises.

Same demand relation again: Qd = 680 - 9P + 0.006M - 4PR. From this relation it is apparent that the good is:

A complement to Good R bc Look at the related good coefficient. PR has a negative sign, so when the price of related good R rises, demand for this good falls. That means they are used together.

Engagement rings are in equilibrium. Political unrest in South Africa shuts down diamond mines. South Africa is the primary supplier of diamonds. What happens?

Supply decreases, price rises, quantity falls bc Diamonds are an input for engagement rings. Less diamonds means higher input scarcity/costs, so supply of engagement rings decreases.

Which is not considered a factor that influences supply?

Usually consumer income, consumer tastes/preferences, or price of substitute goods in consumption

Improvement in technology used to produce Blu-ray disc players. What happens to equilibrium price and quantity?

Equilibrium price decreases; equilibrium quantity increases

U.S. auto production costs are rising, and prices of Japanese-made autos are decreasing. What happens to price and quantity of U.S.-made autos?

Equilibrium quantity decreases; equilibrium price is indeterminate/uncertain

Which will make demand more inelastic with respect to price?

Fewer substitutes, necessity, small portion of budget, short time period

As price decreases and we move down along a linear demand curve, price elasticity of demand will:

Decrease / become less elastic

Generic drugs on the market tend to ________ price elasticity of demand for brand-name drugs.

increase

Drought reduced wheat available by 20%. Price elasticity of demand is 0.25. How much must price rise to clear the market?

Price must rise by 80% bc Use elasticity formula: Elasticity = % change in quantity demanded / % change in price. So 0.25 = 20% / X. X = 20 ÷ 0.25 = 80.

Pepsi price increases from $0.40 to $0.50 and quantity demanded decreases from 100 to 50. Using averaging equation, elasticity is:

3 in absolute value, or -3 if using sign bc Use midpoint formula. %ΔQ = -50 / 75 = -66.7%. %ΔP = 0.10 / 0.45 = 22.2%. Elasticity = -66.7 / 22.2 = -3.

Over the elastic portion of a demand curve, a decrease in price causes:

Total revenue to increase bc Elastic means quantity responds more than price. If price falls, quantity rises enough that total revenue increases.

Rank from most elastic to least elastic: fruit, apples, Granny Smith apples.

Granny Smith apples, apples, fruit bc The more specific the good, the more substitutes it has, so the more elastic it is.

If a 10% increase in income causes a 15% increase in quantity demanded, the good is a ________ good with income elasticity of ________.

Normal good with income elasticity of 1.5; if “luxury” is an option, choose luxury good bc Income elasticity = 15% ÷ 10% = 1.5. Positive means normal. Greater than 1 often means luxury.