Assignment 2: Supply and Demand (Reference: Mankiw and Taylor, Chapters 4, 5, 6) Multiple Choice 1. Suppose that a large dairy farmer is able to raise the market price of milk by restricting milk supply to the market. In this case, a. the milk market is perfectly competitive. b. buyers will decrease their demand for milk. c. buyers will increase their demand for milk. d. the milk market is imperfectly competitive. 2. Refer to the figure below. This diagram shows the market for roller skates. Which of the following would cause a move from point A to point B? a. an increase in the price of bicycles b. a decrease in the price of bicycles c. a decrease in consumer incomes d. a popular new movie that convinces teens that skateboards are really cool 3. Suppose that the price elasticity of supply of home cleaners is 1.5. If the price of home cleaners rises 5 per cent, the quantity supplied of home cleaners would a. decline 7.5 per cent. b. rise 7.5 per cent. c. rise 1.5 per cent. d. rise 0.3 per cent. 4.The diagram below shows the supply of oranges per week provided by Farmer Jones. When the price increases from 1.00 per pound to 2.00 per pound, the quantity supplied increases to
a. 50. b. 100. c. 150. d. 500. 5. The cross-price elasticity of demand for substitute goods must be a. greater than one. b. less than one. c. zero. d. greater than zero. 6. Refer to the figure below. In this diagram, the price elasticity of supply between points A and B is a. 1.5 b. 0.33 c. 0.66 d. 3.33
7. When comparing price elasticities of demand for petrol in the long run and the short run, what can we say about the long-run elasticities? a. Within every price range, the price elasticity of demand for petrol is more elastic in the long run. b. Consumers are less sensitive to changes in the price of petrol in the long run. c. Within every price range, the price elasticity of demand is less elastic in the long run. d. The price elasticity of demand for petrol tends to be unit elastic in the long run. 8. In a market where the government imposes a price control, the extent of the excess demand or excess supply created will be determined by the a. imposed price and the slope of the demand curve. b. imposed price and the slope of the supply curve. c. difference between quantity demanded and quantity supplied at the imposed price. d. difference between the imposed price and the equilibrium price. 9. The government is thinking about increasing the tax on petrol to raise additional revenue rather than to promote conservation. The tax will result in the greatest amount of tax revenue if the price elasticity of demand for petrol equals a. 1.8 b. 1.4 c. 1.0 d. 0.5 10 Refer to the Figure below. Consider the impact of a tax on sellers, shown in this diagram of the market for whisky. In this case, the total tax revenue collected by the government is a. 3 b. 1500 c. 13,500 d. 40,500
11 Taxes levied directly on consumers a. always hurt consumers rather than producers. b. always hurt producers rather than consumers. c. generate more revenue than taxes levied on producers. d. have the same effect as taxes directly levied on producers. 12 When the minimum wage is set above the equilibrium market wage, a. there will be an excess demand for labour at the minimum wage. b. it will have no effect on the quantity of labour employed. c. the unemployment rate will rise. d. the quality of the labour force will rise. 13 Suppose that the government introduces a price ceiling in the fish market, and that suppliers begin to accept under-the-table payments or bribes from buyers who are anxious to ensure they get the fish they want. The a. excess supply of fish will be eliminated. b. purpose of that price ceiling would be defeated. c. price ceiling must have been too low. d. price of fish set by the price ceiling would rise. 14 A 5 per cent tax is levied on products A and B, both of which have the same price elasticity of demand. Unit sales of A are nearly the same after the tax, while unit sales of B fall dramatically. Which of the following can we conclude? a. Producers of A bear a greater share (relative to consumers) of their market's tax burden than the producers of B. b. Product B has a smaller price elasticity of supply than product A. c. Tax revenue is greater from product A. d. Tax revenue is greater from product B.
15. An inferior good is one for which demand: a. rises as income rises. b. falls as income rises. c. is unrelated to income. d. is low because of the low quality of the good. e. is high because the good must be replaced often. Short Answer 1. There is a market with 8 buyers and 8 sellers. Each buyer can buy at most 1 unit, each seller can produce at most 1 unit. Buyer Willingness to Pay Seller Cost 1 95 1 25 2 85 2 25 3 85 3 25 4 70 4 30 5 50 5 30 6 45 6 45 7 30 7 50 8 25 8 70 a) What is the quantity demanded when price is 50? What is the quantity supplied when price is 50? There is an excess of units when price is 50. b) Compute the equilibrium price and quantity.
2. You are given the following data on price/quantity movements for selected commodities: Case I Case II Case III P Q P Q P Q 8 10 6 20 4 30 6 20 4 30 2 40 Price is measured in US dollars. In each case: (a) Calculate the percentage change in quantity and percentage change in price, assume that the lower price is the initial price. (b) Assume that demand is linear. Calculate the price elasticity of demand at the lower price and the corresponding quantity. State whether demand at that price is elastic, inelastic, or unit elastic. (c) Calculate the change in total revenue. (d) State the general rule that relates price elasticity of demand to changes in total revenue. Do your findings support that rule? 3. Graph the demand curve Q = 3 1 / 2 P and mark the elastic, unit elastic, and inelastic regions.