Econ Principles of Microeconomics John Lovett. Chapter 4 Review
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1 Chapter 4 Review Readings Chapter 4, all Outline I. Markets Definitions & notes II. Demand: the buyers side of the market A. Definition B. The Law of Demand C. A change in Demand vs only a change in uantity Demanded III. Supply: the sellers side of the market A. Definition B. The Law of Supply C. Why does the law of supply exist? E. A change in Supply vs only a change in uantity Supplied IV. utting it together: The interaction of Supply and Demand A. Equilibrium B. Market Equilibrium V. Changes in Equilibrium: Shifts of one Curve A. What shifts Demand? B. What shifts Supply? C. Examples: shifts of one curve VI. Changes in Equilibrium: Shifts of both Curves VII. Application: The Recent Energy Crisis Text and Study Guide uestions uestions for Review (from the text, p 85) all roblems and Applications (from the text, p 85-87) all 1
2 Other roblems When doing # s 1-14, keep things simple and ignore secondary effects. In other words, only shift one curve. 1. Assume the market for frog legs (the other white meat) is initially in equilibrium. Market for Frog Legs Now, assume the New England Journal of Medicine releases a report stating; eating frog legs is associated with lower rates of cancer & heart disease, & improved memory. c. In red pen, shift the appropriate curve or curves. d. Indicate & label the new equilibrium price ( E ) and quantity ( E ). e. What happened to equilibrium price? (increase, decrease, no change) f. What happened to equilibrium quantity? (increase, decrease, no change) g. Which determinant of demand, if any, changed? h. Which determinant of supply, if any, changed? i. Which changed, demand ( D) or only quantity demanded (only D )? j. Which changed, supply ( S) or only quantity supplied (only S )? 2. Assume the market for air travel on the east Mkt for East Coast Air Travel coast is initially in equilibrium. Now, assume the price of aviation fuel rises significantly. d. Indicate & label the new equilibrium price ( E ) and quantity ( E ). g. Which determinant of demand, if any, changed? h. Which determinant of supply, if any, changed? i. Which changed, demand ( D) or only quantity demanded (only D )? j. Which changed, supply ( S) or only quantity supplied (only S )? 2
3 Market for East Coast Air Travel 3. Assume the market for air travel on the east coast is initially in equilibrium. Now, assume the price of riding Amtrak, another way to travel on the east coast, falls. d. Indicate & label the new E and E. g. Which changed, demand ( D) or only quantity demanded (only D )? h. Which changed, supply ( S) or only quantity supplied (only S )? Market for Catfish 4. Assume the market for Catfish is initially in equilibrium. Now, assume that because of low profits, many Catfish farmers leave the industry. d. Indicate & label the new E and E. g. Which changed, demand ( D) or only quantity demanded (only D )? h. Which changed, supply ( S) or only quantity supplied (only S )? Market for Coffee 5. Assume the market for Coffee is initially in equilibrium. Now, assume that a freeze destroys much of the South American coffee crop. d. Indicate & label the new E and E. 3
4 Mkt for Coffee in Happy Valley 6. Assume the market for coffee in Happy Valley, a college town, is initially in equilibrium. Now, assume that the spring semester ends and most of the students leave town. d. Indicate & label the new E and E. g. Which determinant of demand, if any, changed? h. Which determinant of supply, if any, changed? Market for Luxury Cars 7. Assume the market for Luxury Cars (a normal or luxury good )is initially in equilibrium. Now, assume that average incomes fall because of a recession. d. Indicate & label the new E and E. 8. Assume the market for Read/Write -ROM devices is initially in equilibrium. Mkt for Read/Write CD-ROM Devices Now, assume that the price of writeable CD- ROMs falls. (Note: Assume that writeable CD- ROMs & Read/Write CD-ROM devices are always made by different companies.) d. Indicate & label the new E and E. e. Which determinant of demand, if any, changed? f. Which determinant of supply, if any, changed? 4
5 9. Assume the market for (already built) housing in Market for Housing in Annapolis Annapolis is initially in equilibrium. price ( E ) and quantity ( E ). Now, assume that the price of housing in Arnold, a nearby community, falls greatly. d. Indicate & label the new E and E. g. Which determinant of demand, if any, changed? h. Which determinant of supply, if any, changed? 1. Assume the market anti-freeze is initially in Market for Anti-Freeze equilibrium. Then, 2 plants which produce most of the world s ethylene glycol, a major ingredient in anti-freeze, burn down. d. Indicate & label the new E and E. e. Which changed, demand ( D) or only quantity demanded (only D )? f. Which changed, supply ( S) or only quantity supplied (only S )? 11. Assume the market for used clothing (an inferior Market for Used Clothing good) is initially in equilibrium. price ( E ) and quantity ( E ). Now, assume that average incomes rise because of an economic boom. d. Indicate & label the new E and E. e. Which changed, demand ( D) or only quantity demanded (only D )? f. Which changed, supply ( S) or only quantity supplied (only S )? 5
6 Market for Housing in Annapolis 12. Assume the market for (already built) housing in Annapolis is initially in equilibrium. price ( E ) and quantity ( E ). Now, assume Baltimore & D.C Metro lines are extended to Annapolis making it cheaper to commute. d. Indicate & label the new E and E. g. Which determinant of demand, if any, changed? h. Which determinant of supply, if any, changed? 13. Assume the market for coal in 18th Century England is initially in equilibrium. Then, new steam engines come into production and are used to pump water out of mines. These greatly reduce the cost of mining coal. d. Indicate & label the new E and E. g. Which changed, demand ( D) or only quantity demanded (only D )? h. Which changed, supply ( S) or only quantity supplied (only S )? 14. Assume the market for Catfish is in equilibrium. price ( E ) and quantity ( E ). Now, assume that because of high profits, many new catfish farmers enter the industry. d. Indicate & label the new E and E. Mkt for Coal in 18th Century England Market for Catfish 6
7 15. Assume that it s the 198 s and the market for natural gas is in equilibrium. Then, two things happen. 1) Unusually cold winters and shifting consumer preferences towards clean burning fuels cause the demand for natural gas to increase. 2) The federal government allows companies to drill in oil fields in the Gulf of Mexico which were previously off limits. This and new drilling technologies cause the supply of natural gas to increase. What happens to equilibrium price of natural gas? What happens to equilibrium quantity of natural gas? 16. Consider the market for fine hardwoods (teak, etc.) Assume the following two things happen things happen. 1) Consumer begin to like the natural look more. This causes the demand for fine hardwoods to increase. 2) Government restrictions and dwindling forests cause the supply of fine hardwoods to decrease. What happens to equilibrium price of fine hardwoods? What happens to equilibrium quantity of fine hardwoods? 17. Assume that the market for polyester is initially in equilibrium. Then polyester becomes highly unfashionable among consumers. At the same time, new technology has reduced the cost of producing a given amount of polyester. What s happening to the demand for polyester? What s happening to the supply of polyester? What happens to equilibrium price of polyester What happens to equilibrium quantity of polyester? 18. Assume that the market for slate pool tables is initially in equilibrium. Then cheaper composite i.e. not slate) pool table are made available to consumers. At the same time, the price of slate, used in manufacturing slate pool tables, is increasing. What s happening to the demand for slate pool tables? What s happening to the supply for slate pool tables? What happens to equilibrium price of slate pool tables? What happens to equilibrium quantity of slate pool tables? 19. Uncle Buck is having a bit of trouble with the Law of Supply. He states, I m good at building boats. However, I only have a small garage with a few tools. It takes me a week and costs about 1, to build 1 boat. If I had more space and tools I could set up an assembly line and build 21 boats a week for only 6 a piece. I am willing to sell more boats at a lower price and my supply curve slopes down. Is Buck correct? Clearly explain why or why not? Explain Buck s observations; lower price & lower quantity, using a supply and demand curve diagram. 7
8 # s 2 23: Assume the market for Charcoal (an energy source) was initially in equilibrium in England. Then one thing happens. The price of coal falls drastically. Assume both the demand for, and the supply of, charcoal is neither perfectly vertical or perfectly horizontal. Further, assume that producers of coal will never produce charcoal and vice versa. Keep things simple and do not 2. What happens to the equilibrium price of charcoal? a. increase b. decrease c. uncertain 21. What happens to the equilibrium quantity of charcoal? a. increase b. decrease c. uncertain 22. What happens to the buyers side of the market for charcoal? a. no change b. only a decrease in quantity demanded c. only an increase in quantity demanded d. a decrease in demand e. an increase in demand 23. What happens to the sellers side of the market for charcoal? a. no change b. only a decrease in quantity supplied c. only an increase in quantity supplied d. a decrease in supply e. an increase in supply 24. Who was the first person to formally model supply and demand? a. Alfred Marshall b. David Ricardo c. Richard Rubin d. Adam Smith e. Lawrence Summers 25. Which of the following would increase the demand for TCU education? a. a decrease in TCU s tuition b. an increase in TCU s tuition c. a decrease in SMU s tuition d. an increase in SMU s tuition e. both b and d 26. In the Spring of 1999, oil prices fell and oil production in the U.S. decreased. Which of the following best characterizes this change on the part of sellers? a. a decrease in supply b. an increase in supply c. a decrease in quantity supplied d. an increase in quantity supplied 27. Egbert Egghead knows a lot about the computer industry. He states; In 1999, 4X (4 speed) Read/Write CD-ROM Devices (the things which can write to a CD-ROM) cost an average of million were sold. In 2, with continued technology advances in the manufacturing of computer periphials, 6. million were sold for an average price of 275. Therefore, the supply curve for these devices slopes down. Egbert s statement is: a. correct. However, this is an anomaly caused by an excessively competitive market. b. correct. Downward sloping supply curves are typical when one firm (ex. H) dominates the market. c. not physically possible. His facts, i.e. his price and quantity data, must be incorrect. d. incorrect. He is talking about points on two different supply curves. e. incorrect. Rapidly changing industries to not have to reach equilibrium. The laws off supply and demand do not function in these markets. 8
9 28. Below you are given a circular flow diagram. Fill in the blanks with the appropriate labels. c. Markets f. (Name of dollar flows) e. a. (Group or Agents) b. (Group or Agents) g. [Item(s) being bought & sold)] d. Markets (Name of Markets) 9 h. [Name(s) of dollar flows]
10 # s 29 32: Assume the market for Shelled Oyster Meat was initially in equilibrium. Then one thing happens. The price of oyster shells (used in road building, making lime, etc.) falls drastically. Assume both the demand for, and the supply of, oyster meat is neither perfectly vertical or perfectly horizontal. 29. What happens to the equilibrium price of shelled oyster meat? a. increase b. decrease c. uncertain 3. What happens to the equilibrium quantity of shelled oyster meat? a. increase b. decrease c. uncertain 31. What happens to the buyers side of the market for shelled oyster meat? a. no change b. only a decrease in quantity demanded c. only an increase in quantity demanded d. a decrease in demand e. an increase in demand 32. What happens to the sellers side of the market for shelled oyster meat? a. no change b. only a decrease in quantity supplied c. only an increase in quantity supplied d. a decrease in supply e. an increase in supply # s 33 36: Assume the market for cotton is initially in equilibrium. Then two things happen. 1) A new sub-species of boll wevil (a bug that eats the cotton plant) arises. esticides are not as effective on this sub-species as on previous ones. The exact size of the problem, however, is as of yet unknown. 2) Cotton clothing becomes less fashionable as consumers are won over by the look and feel of rayon. The exact size of this fashion shift, however, is as of yet unknown. 33. What does the first change (the boll wevil) do? a. decrease the demand for cotton b. increase the demand of cotton c. decrease the supply of cotton d. increase the supply of cotton 34. What does the second change (the fashion swing) do? a. decrease the demand for cotton b. increase the demand of cotton c. decrease the supply of cotton d. increase the supply of cotton 35. What will these two changes do to the equilibrium price of cotton? a. increase b. decrease c. uncertain 36. What will these two changes do to the equilibrium quantity of cotton? a. increase b. decrease c. uncertain 1
11 # s 37 4: Assume the market for oil and gasoline is initially in equilibrium. Then two things happen. 1) Hydrogen fueled cars become more available and cheaper. The exact size of the change, however, is as of yet unknown. 2) New oil fields, accessible with today s technology, are discovered in the Canadian and Alaskan Arctic. Unfortunately, the size of this development is not yet known. 37 What does the first change (hydrogen fueled cars) do? a. decrease the demand for oil and gasoline b. increase the demand of oil and gasoline c. decrease the supply of oil and gasoline d. increase the supply of oil and gasoline 38. What does the second change (new oil field discoveries) do? a. decrease the demand for oil and gasoline b. increase the demand of oil and gasoline c. decrease the supply of oil and gasoline d. increase the supply of oil and gasoline 39. What will these two changes do to the equilibrium price of oil and gasoline? a. increase b. decrease c. uncertain 4. What will these two changes do to the equilibrium quantity of oil and gasoline? a. increase b. decrease c. uncertain 11
12 Answers to Other roblems 1. Assume the market for frog legs (the other Market for Frog Legs white meat) is initially in equilibrium. S Now, assume the New England Journal of E Medicine releases a report stating; eating frog E E legs is associated with lower rates of cancer & heart disease, & improved memory. c. In red pen, shift the appropriate curve or curves. d. Indicate & label the new equilibrium price ( E ) and quantity ( E ). e. What happened to equilibrium price? increase f. What happened to equilibrium quantity? increase E E g. Which determinant of demand, if any, changed? tastes (buyers preferences) h. Which determinant of supply, if any, changed? none i. Which changed, demand ( D) or only quantity demanded (only D )? D j. Which changed, supply ( S) or only quantity supplied (only S )? only S D 2. Assume the market for air travel on the east Mkt for East Coast Air Travel coast is initially in equilibrium. S S E Now, assume the price of aviation fuel rises significantly. c. In red, shift the appropriate curve or curves. d. Indicate & label the new equilibrium price ( E ) and quantity ( E ). e. What happened to equilibrium price? increase E E E E f. What happened to equilibrium quantity? decrease g. Which determinant of demand, if any, changed? none h. Which determinant of supply, if any, changed? cost of a resource i. Which changed, demand ( D) or only quantity demanded (only D )? only D j. Which changed, supply ( S) or only quantity supplied (only S )? S 12
13 3. Assume the market for air travel on the east Market for East Coast Air Travel coast is initially in equilibrium. S curve (S ) and demand curve ( ). E E Now, assume the price of riding Amtrak, another way to travel on the east coast, falls. E D d. Indicate & label the new E and E. e. What happened to equilibrium price? decrease E E f. What happened to equilibrium quantity? decrease g. Which changed, demand ( D) or only quantity demanded (only D )? D h. Which changed, supply ( S) or only quantity supplied (only S )? only S Market for Catfish 4. Assume the market for Catfish is initially in S equilibrium. S b. E Indicate & label the initial equilibrium E E Now, assume that because of low profits, many Catfish farmers leave the industry. d. Indicate & label the new E and E. e. What happened to equilibrium price? increase E E f. What happened to equilibrium quantity? decrease g. Which changed, demand ( D) or only quantity demanded (only D )? only D h. Which changed, supply ( S) or only quantity supplied (only S )? S 5. Assume the market for Coffee is initially in equilibrium. E E Now, assume that a freeze destroys much of the South American coffee crop. d. Indicate & label the new E and E. e. What happened to equilibrium price? increase f. What happened to equilibrium quantity? decrease Market for Coffee E S E E S 13
14 6. Assume the market for coffee in Happy Valley, Mkt for Coffee in Happy Valley a college town, is initially in equilibrium. S E E Now, assume that the spring semester ends and E most of the st udents leave town. D d. Indicate & label the new E and E. e. What happened to equilibrium price? decrease f. What happened to equilibrium quantity? decrease E E g. Which determinant of demand, if any, changed? # of potential buyers h. Which determinant of supply, if any, changed? none 7. Assume the market for Luxury Cars (a normal or luxury good )is initially in equilibrium. E Now, assume that average incomes fall because E of a recession. d. Indicate & label the new E and E. e. What happened to equilibrium price? decrease f. What happened to equilibrium quantity? decrease 8. Assume the market for Read/Write CD-ROM devices is initially in equilibrium. Now, assume that the price of writeable CD- ROMs falls. (Note: Assume that writeable CD- ROMs & Read/Write CD-ROM devices are always made by different companies.) E E Mkt for Read/Write CD-ROM Devices S D E E E d. Indicate & label the new E and E. g. Which determinant of demand, if any, changed? price of a related good (compliment) h. Which determinant of supply, if any, changed? none Market for Luxury Cars E E E S D 14
15 9. Assume the market for (already built) housing in Market for Housing in Annapolis Annapolis is initially in equilibrium. S price ( E ) and quantity ( E ). Now, assume that the price of housing in Arnold, a E E nearby community, falls greatly. E D d. Indicate & label the new E and E. e. What happened to equilibrium price? decrease f. What happened to equilibrium quantity? decrease E E g. Which determinant of demand, if any, changed? price of a related good (substitute) or # of potential buyers h. Which determinant of supply, if any, changed? none 1. Assume the market anti-freeze is initially in Market for Anti-Freeze equilibrium. S S E E Then, 2 plants which produce most of the world s E ethylene glycol, a major ingredient in anti-freeze, burn down. d. Indicate & label the new E and E. E E e. Which changed, demand ( D) or only quantity demanded (only D )? only D f. Which changed, supply ( S) or only quantity supplied (only S )? S 11. Assume the market for used clothing (an inferior good) is initially in equilibrium. Market for Used Clothing S price ( E ) and quantity ( E ). E E Now, assume that average incomes rise because of E an economic boom. D c. In red, shift the appropriat e curve or curves. d. Indicate & label the new E and E. E E e. Which changed, demand ( D) or only quantity demanded (only D )? D f. Which changed, supply ( S) or only quantity supplied (only S )? only S 15
16 Market for Housing in Annapolis 12. Assume the market for housing in Annapolis is S initially in equilibrium. price E ( E ) a nd quantity ( E ). E D Now, assume Metro lines from Baltimore & D.C. are E extended to Annapolis making it cheaper to commute. d. Indicate & label the new E and E. E E e. What happened to equilibrium price? increase f. What happened to equilibrium quantity? increase g. Which determinant of demand, if any, changed? rice of a related good (compliment) or # of peotential buyers. h. Which determinant of supply, if any, changed? None Mkt for Coal in 18th Century England 13. Assume the market for coal in 18th Century England is initially in equilibrium. S S Then, new steam engines come into production E E and are used to pump water out of mines. These E greatly reduce the cost of mining coal. Label your new cu rve(s) D &/or S. d. Indicate & label the new E and E. E E e. What happened to equilibrium price? decrease f. What happened to equilibrium quantity? increase g. Which changed, demand ( D) or only quantity demanded (only D )? only D h. Which changed, supply ( S) or only quantity supplied (only S )? S 14. Assume the market for Catfish is in equilibrium. price ( E ) and quantity ( E ). Now, assume that because of high profits, many new catfish farmers enter the industry. d. Indicate & label the new E and E. E E Market for Catfish E E E S S 16
17 e. What happened to equilibrium price? decrease f. What happened to equilibrium quantity? Increase 15. Event Effect on E Effect on E D Higher E Higher E S Higher E Lower E Net Effect Higher E Uncertain 16. Event Effect on E Effect on E D Higher E Higher E S Lower E Higher E Net Effect Uncertain Higher E 17. Event Effect on E Effect on E D Lower E Lower E S Higher E Lower E Net Effect Uncertain Lower E 18. Event Effect on E Effect on E D Lower E Lower E S Lower E Higher E Net Effect Lower E Uncertain E 19. You are on your own here. 2. b 21. b 22. d 23. b 24. You are on your own here. 25. d 26. c 27. d 28. You are on your own here. 29. a 3. b 31. b 32. d 33. c 34. a 35. c 36. b 37. a 38. d 39. b 4. c 17
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