Economics (McConnell), AP Edition, 20th Edition Chapter (1).docx

Chapter 3: Demand, Supply, and Market Equilibrium Multiple-Choice Questions 1. Which situation is the best example of the Law of Demand? (A) When the price of books increases, consumers buy fewer books. (B) When wages of autoworkers rise, automakers raise the price of cars. (C) When the price of computers falls, demand for computer games increases. (D) When the productivity of bricklayers rises, demand for bricklayers falls. (E) When consumer incomes rise, consumers buy more televisions. (A) The Law of Demand says that at lower prices, people buy more and at higher prices, people buy less. (B) involves lower supply; (C) discusses complements; (D) incorrectly discusses a relationship in the labor market; (E) involves a change in demand rather than a change in quantity demanded. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Supply and Demand AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Law of Demand 2. Each of the following could result in an increased demand for bicycles EXCEPT (A) the price of gasoline increases significantly (B) the price of bicycle helmets increases significantly (C) the local government develops several bicycle trails in the area (D) consumer incomes increase (E) the number of children in the community increases (B) Bicycles and helmets are complements; if the price of helmets increases significantly, demand for bicycles would be expected to fall. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Determinants of Supply and Demand AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Changes in Demand 3. If demand for Product X decreases when the price of Product Y decreases, then (A) Products X and Y are not related (B) Products X and Y are both inferior goods (C) Products X and Y are complements (D) Products X and Y are substitutes (E) Product X is a normal good, while Product Y is an inferior good (D) When the price of Product Y falls, consumers reduce demand for Product X and increase their quantity demanded for Product Y, a substitute. Difficulty: Easy Style: Conceptual AP Economics Curricular Requirement Microeconomics: Determinants of Supply and Demand AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Changes in Demand 4. Assume steak is a normal good and bologna is an inferior good. If consumer incomes fall (A) the prices for steak and bologna both will increase (B) the prices for steak and bologna both will decrease (C) the price for steak will increase and the price for bologna will decrease (D) the price for steak will decrease and the price for bologna will increase (E) the prices for steak and bologna will both remain unchanged (D) When incomes fall, demand for normal goods falls, while demand for inferior goods rises. Prices move with the changes in demand. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Determinants of Supply and Demand AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Changes in Demand 5. Which of these situations would cause an increase in the supply of jeans? (A) The cost of cotton used to produce jeans increases. (B) The number of firms producing jeans decreases. (C) Producers improve productivity with computerized sewing machines. (D) Consumers increase their demand for jeans. (E) The government imposes a per-unit tax on the production of jeans. (C) Higher productivity allows firms to produce more at every price. Beware of answers like D; increased demand causes a change in quantity supplied (a move along the supply curve) but not a shift in the supply curve. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Determinants of Supply and Demand AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Changes in Supply 6. A short-run increase in the cost of production will cause (A) the supply curve to shift to the left (B) the supply curve to shift to the right, while demand will shift to the left (C) the demand curve to shift to the left, while supply will shift to the right (D) both the supply and demand curves to shift to the left (E) the demand curve to shift to the left (A) A change in the cost of production is one of the factors that can shift the supply curve; it does not cause any change in the demand curve. Difficulty: Easy Style: Conceptual AP Economics Curricular Requirement Microeconomics: Determinants of Supply and Demand AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Changes in Supply 7. What would cause the price of jellybeans to rise in the market? (A) Consumers reduce their demand for jellybeans, so firms must raise their prices to compensate for the lost product sales. (B) The cost of the sugar required to make jellybeans falls. (C) The incomes of jellybean consumers fall. (D) Consumers change their preference to buy healthier foods, so their demand for jellybeans falls. (E) The government imposes a per-unit tax on the sale of jellybeans. (E) Per-unit taxes raise production costs, lowering supply. Beware of answers like A; if demand falls, firms must lower their prices, not raise them. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Determinants of Supply and Demand AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Changes in Supply, Demand, and Equilibrium 8. When ducks are slaughtered for meat, their feathers can be used in the production of pillows. Given this relationship, if the demand for duck meat rises (A) the price of feather pillows falls (B) the supply of feather pillows falls (C) the demand for feather pillows rises (D) the price of duck meat falls (E) the supply of duck meat rises (A) Because duck meat and feathers are harvested together, the increase in the quantity of duck meat supplied will result in a greater supply of feathers, reducing the cost of pillow production. The increase in feather pillow supply lowers the price of feather pillows. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Determinants of Supply and Demand AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Changes in Supply, Demand, and Equilibrium 9. Which of the following curve shifts would definitely cause both the equilibrium price and equilibrium quantity to increase? Supply Demand (A) Increase Decrease (B) Decrease Decrease (C) No change Decrease (D) Increase No change (E) No change Increase (E) An increase in demand definitely causes both price and quantity to increase. A is eliminated because both cause price to fall; B is eliminated because both cause quantity to fall. C and D cannot create the result. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Market Equilibrium AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Changes in Supply, Demand, and Equilibrium 10. In a competitive shoe market, if consumer incomes rise at the same time that the cost of production rises for shoes, one definite result would be (A) an increase in the quantity of shoes sold (B) an increase in the price of shoes (C) an increase in the profits of shoemakers (D) a decrease in the demand for slippers (a substitute for shoes) (E) a decrease in the supply of slippers (a substitute for shoes) (B) Because the increase in demand (caused by higher incomes) and the decrease in supply (caused by higher costs of production) both result in higher prices, the combination will definitely cause the price to increase. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Market Equilibrium AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Changes in Supply, Demand, and Equilibrium 11. The purpose of a price ceiling is to (A) help producers by setting a minimum legal price for a product (B) raise revenue for the federal government (C) create a surplus of the product to be saved for future use (D) help consumers by lowering the legal price of the product (E) ensure that enough of the product is produced to fully meet demand (D) A maximum legal price below equilibrium may help some consumers by lowering prices, but the price ceiling causes a shortage. Difficulty: Easy Style: Conceptual AP Economics Curricular Requirement Microeconomics: Price and Quantity Controls Book Section: Price Ceilings 12. An effective price floor for rice will cause (A) a decrease in the quantity of rice supplied (B) a long-run shortage of rice (C) a decrease in the quantity of rice demanded (D) the supply curve for rice to shift to the right (E) the price of rice to fall (C) A price floor raises the price of rice, and as a result, consumers are not as willing or able to buy as much rice. Difficulty: Easy Style: Conceptual AP Economics Curricular Requirement Microeconomics: Price and Quantity Controls Book Section: Price Floors 13. A drought occurs in wheat-exporting regions of Russia at the same time as new medical research extols the immediate health benefits of eating wheat-based products. This would most likely cause equilibrium price and quantity to Price Quantity (A) Increase Increase (B) Increase Decrease (C) Increase Indeterminate (D) Decrease Decrease (E) Decrease Remain the same (C) If demand shifts to the right (increases) and supply shifts to the left (decrease in output due to the drought), equilibrium price will increase but equilibrium quantity will be indeterminate. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Market Equilibrium AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Changes in Supply, Demand, and Equilibrium 14. A tariff on sugar imports will (A) cause the price of sugar to increase and the production of sugar to increase (B) cause the price of sugar to increase and the production of sugar to decrease (C) cause the price of sugar to decrease and the production of sugar to increase (D) cause the price of sugar to decrease and the production of sugar to be uncertain (E) cause the price of sugar to be uncertain and the production of sugar to decrease (B) An import tax on sugar will reduce production and, as a result, the price of sugar will increase. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Determinants of Supply and Demand Book Section: Changes in Supply 15. As a result of forces in the market for bananas, the equilibrium price of bananas increases while the equilibrium quantity of bananas becomes uncertain. In this case, (A) the demand for bananas increases while the supply of bananas decreases (B) the demand for bananas and the supply of bananas both increase (C) the demand for bananas and the supply of bananas both decrease (D) the demand for bananas decreases while the supply of bananas increases (E) the demand for bananas increases while the quantity supplied of bananas increases (A) If the demand for bananas increases (shifts rightward) while the supply of bananas decreases (shifts leftward), the equilibrium price of bananas would have to increase. However, if the demand curve shifted rightward relatively more than the supply curve shifted leftward, then equilibrium quantity would increase. But if the supply curve were to shift leftward more than the demand curve shifted rightward, the equilibrium quantity would decrease. Therefore, if the demand curve increases while the supply curve decreases, equilibrium price increases but equilibrium quantity is uncertain. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Market Equilibrium AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Changes in Supply, Demand, and Equilibrium 16. If raspberries and blackberries are substitutes and a new crop disease were to limit the harvest of raspberries, then (A) the prices of blackberries and raspberries would be uncertain (B) the price of blackberries would increase but the price of raspberries would decrease (C) the price of blackberries would increase but the price of raspberries would be uncertain (D) the price of blackberries would be uncertain but the price of raspberries would increase (E) the prices of blackberries and raspberries would increase (E) Due to the leftward shift of the supply curve for raspberries caused by the onset of disease, the price of raspberries would increase. Because blackberries and raspberries are substitutes, consumers who wanted raspberries would see that the price of raspberries had increased and would instead increase their demand for blackberries. This would shift the demand curve for blackberries to the right and cause the market price for blackberries to increase, as well. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Income and Substitution Effects AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Changes in Supply, Demand, and Equilibrium 17. Assume drivers of private cars are required to buy private auto insurance. If the cost of private auto insurance were to increase, then (A) the demand for private cars would decrease and the demand for public transportation would remain constant (B) the demand for private cars would decrease and the demand for public transportation would increase (C) the demand for private cars would decrease and the supply of public transportation would increase (D) the demand for private cars and the demand for public transportation would decrease (E) the demand for private cars and the supply of public transportation would increase (B) If the cost of private auto insurance were to increase, the demand curve for private cars would decrease (shift leftward), as the cost of a complementary good (auto insurance) has increased. If the cost of owning a private car increases, then the demand for a substitute good or service will increase. In this case, the demand for public transportation will shift rightward (increase) due to the increased cost of owning and driving a private car. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Determinants of Supply and Demand AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Changes in Supply, Demand, and Equilibrium 18. As income increases, consumers will purchase increasing amounts of higher-priced premium quality meat and lower amounts of processed ground meat, primarily because (A) premium quality meat and processed ground meat are normal goods (B) premium quality meat and processed ground meat are substitutes (C) premium quality meat is a normal good and processed ground meat is substitute good (D) premium quality meat is substitute good and processed ground meat is an inferior good (E) premium quality meat is a normal good and processed ground meat is an inferior good (E) This is a classic case of the income effect. A good that varies directly with income is a normal (superior) good. A good that varies inversely with income is an inferior good. In this case, as income increases, consumers buy increasing amounts of premium quality meat, thus making it a normal good. As their income increases, consumers buy less processed ground meat, making it an inferior good. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Supply and Demand AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Changes in Demand 19. Which of the following would increase the supply of cell phones? I. The government levies a per-unit tax on the producers of cell phones. II. The number of cell phone producers increases. III. Technological advances lower the per-unit cost of cell phone production. IV. The cost of cell phone components increases. (A) I only (B) II only (C) I and IV only (D) II and III only (E) II, III, and IV only (D) Both an increase in the number of cell phone producers (II) and technological advances lowering the per-unit costs of cell phone production (III) increase the supply curve for cell phones (supply curve shifts rightward). Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Determinants of Supply and Demand AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Determinants of Supply 20. All of the following would change the demand for theater tickets to a particular play EXCEPT (A) a change in consumer incomes (B) a poor reviews by theater critics (C) a severe weather forecast for the evening of the performance (D) a decrease in theater ticket prices for the play (E) a new, competing play opens at an adjacent theater (D) If the price of the theater ticket changes, then there is an increase or decrease in the quantity demanded but there is no shift (increase or decrease) in the demand curve itself. All of the other choices would shift the demand curve. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Determinants of Supply and Demand AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Determinants of Demand 21. According to the Law of Demand, if the price of pizza increases, (A) the demand for pizza will increase (B) the demand for pizza will decrease (C) the quantity of pizza demanded will increase (D) the quantity of pizza demanded will decrease (E) the change in the market for pizza cannot be determined (D) A change in the price of the product will change the quantity of the product demanded with a movement along the demand curve. At a higher price, consumers buy a decreased quantity. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Microeconomics: Supply and Demand AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Law of Demand 22. Market demand consists of (A) the government’s demand for products in the market (B) a business’s demand for public goods (C) the sum of all individual demands for a product (D) entrepreneurs’ willingness to start new businesses (E) an individual consumer’s demand for a product in the market (C) Producers consider the total demand for products in the market in determining output and price. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Individual and Market Demand Curves AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Market Demand 23. Assume the market price of gasoline is $4.00 per gallon. If the government establishes a price ceiling of $5.00 per gallon (A) the quantity of gasoline demanded will increase (B) the quantity of gasoline demanded will decrease (C) the quantity of gasoline supplied will increase (D) the quantity of gasoline supplied will decrease (E) the quantity of gasoline demanded and supplied will not change (E) A price ceiling of $5.00 is not effective because it is higher than the equilibrium price; therefore, the market is not affected by the price ceiling and remains at equilibrium Difficulty: Medium Style: Application AP Economics Curricular Requirement Microeconomics: Price and Quantity Controls Book Section: Price Ceilings 24. According to the Law of Supply (A) producers offer more of a product as its price increases (B) producers increase the price as supply decreases (C) as the price increases, consumers buy less (D) as more businesses enter the industry, price decreases (E) producers sell more at lower prices (A) An increase in price gives businesses an incentive to increase the quantity supplied, so there is a direct relationship between price and quantity supplied. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Supply and Demand AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Law of Supply 25.When a competitive market is in equilibrium, it achieves allocative efficiency, meaning that (A) businesses are producing products at their lowest per-unit cost (B) the market is producing the mix of goods most highly valued by society (C) each household receives an equivalent amount of the product (D) businesses are producing at a cost that leaves them no normal profit (E) government has set the price it determines to be most efficient for society (B) Allocative efficiency occurs when resources are not over-allocated or under-allocated in the production of a product. The correct amounts of a variety of goods are produced to meet the demands of consumers. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Microeconomics: Consumer Surplus, Producer Surplus, and Allocative Efficiency Book Section: Efficient Allocation Free-Response Questions 1. Farmers sell sweet corn and green beans, which are substitute products, from roadside stands in competitive markets. Now assume the surgeon general announces results of a study indicating the consumption of corn causes diabetes in humans. (a) Using a correctly labeled supply and demand graph for sweet corn, show the effect of the announcement on each of the following in the short run. (i) Price (ii) Output (iii) Explain the reason for this effect. (b) Using a separate, correctly labeled supply and demand graph for green beans, show the effect of the announcement on each of the following in the short run. (i) Price (ii) Output (iii) Explain the reason for this effect. (c) Now assume that butter, a complement of sweet corn, is sold in a competitive market. In a third, correctly labeled supply and demand graph for butter, show the effect of the announcement on each the following in the short run. (i) Price (ii) Output (iii) Explain the reason for this effect. 2. Assume that milk is sold in a competitive market, which is currently at equilibrium where the store sells 250 gallons of milk per week at a price of $3 per gallon. (a) Redraw the graph above to show how an increase in the cost of cattle feed will affect the equilibrium price and quantity of milk. Explain. (b) Now assume the government has imposed an effective price ceiling in the milk market. Redraw the graph above and indicate each of the following. (i) The correct position of an effective price ceiling (ii) The new quantity demanded as a result of the price ceiling (iii) The new quantity supplied as a result of the price ceiling (c) What economic problem will result from the price ceiling? Free-Response Explanations 1. 12 points (4 + 4 + 4) (a) 4 points: 1 point is earned for a correctly labeled graph with equilibrium price and quantity. 1 point is earned for showing a leftward shift of the demand curve. 1 point is earned for showing that equilibrium price and quantity decrease. 1 point is earned for explaining that consumer tastes changed to no longer desire corn. (b) 4 points: 1 point is earned for a correctly labeled graph with equilibrium price and quantity. 1 point is earned for showing a rightward shift of the demand curve. 1 point is earned for showing that equilibrium price and quantity increase. 1 point is earned for explaining that because demand for corn fell, demand for the corn substitute (green beans) would increase. (c) 4 points: 1 point is earned for a correctly labeled graph with equilibrium price and quantity. 1 point is earned for showing a leftward shift of the demand curve. 1 point is earned for showing that equilibrium price and quantity decrease. 1 point is earned for explaining that because corn and butter are complements, a decrease in demand for corn also results in a decrease in demand for butter. Difficulty: Medium Style: Applied AP Economics Curricular Requirement Microeconomics: Determinants of Supply and Demand AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Changes in Supply, Demand, and Equilibrium 2. 7 points (3 + 3 + 1) (a) 3 points: 1 point is earned for showing a leftward shift of the supply curve. 1 point is earned for showing that price increases and quantity decreases. 1 point is earned for explaining that the higher cost of milk production reduces the supply of milk, because some dairy farmers will reduce production or leave the industry. (b) 3 points: 1 point is earned for showing a price ceiling at a price lower than the equilibrium price of $3. 1 point is earned for showing a higher quantity demanded at the price ceiling. 1 point is earned for showing a lower quantity supplied at the price ceiling. (c) 1 point: 1 point is earned for stating that a shortage is the economic problem. Difficulty: Medium Style: Applied AP Economics Curricular Requirement Microeconomics: Price and Quantity controls AP Economics Curricular Requirement Macroeconomics: Demand, Supply, and Market Equilibrium Book Section: Application: Government-Set Prices