MECO51116/MPME51112 Chapter 5 tut

1. In the market for IPADs, assuming everything else remains unchanged, the equilibrium price
of IPADs will decrease if:
A. there is a shortage of IPADs.
B. the price of iPhones, a complement, decreases.
C. the supply of IPADs decreases.
D. the price of Samsung Galaxy tablets, a substitute in consumption, increases.
E. there is a technological improvement in the manufacturing of IPADs.

2. There is an increase in the number of adverts highlighting the dangers of consuming sugar.
Which of the following is likely to occur in the market for sugarless sweets, as a result of
this?
A. An increase in both price and equilibrium quantity traded.
B. A decrease in price and an increase in equilibrium quantity traded.
C. A decrease in both price and equilibrium quantity traded.
D. An increase in price and a fall in equilibrium quantity traded.
E. None of the above is likely to result.

3. In the market for first-year economics textbooks, assuming everything else remains
unchanged, the equilibrium price of textbooks will increase if:
A. there is a surplus of textbooks.
B. the price of university education, a complement, increases.
C. the supply of textbooks increases.
D. the cost of the publication of textbooks increases.
E. there is a drop in the cost of paper necessary to produce textbooks.

4. If the price and the quantity of beer decrease, it is likely that:

A. demand for beer has increased.
B. demand for beer has decreased.
C. supply of beer has decreased.
D. supply of beer has increased.
E. supply and demand for beer have both increased.

5. Which of the following will definitely cause an increase in the equilibrium price?
A. An increase in both demand and supply.
B. A decrease in both demand and supply.
C. An increase in demand combined with a decrease in supply.
D. A decrease in demand combined with an increase in supply.
E. Any of the above, depending on the circumstances.

6. In the market for diamonds, assuming everything else remains unchanged, the equilibrium
price of diamonds will decrease if
A. there is a shortage of diamonds.
B. the price of gold, a complement, decreases.
C. the supply of diamonds decreases.
D. the price of cubic zirconia’s, a substitute, increases.
 E. there is a technological improvement in mining equipment.

7. If the price and the quantity of curtains exchanged falls, it is likely that
A. demand for curtains has increased.
B. demand for curtains has decreased.
C. supply of curtains has decreased.
D. supply of curtains has increased.
E. supply and demand for curtains have both increased.

8. If the price of powdered milk, a substitute for fresh milk, falls then
A. the supply curve of fresh milk will shift to the right.
B. the demand curve for fresh milk will shift to the right,
C. the equilibrium quantity and price of fresh milk will not change.
D. the quantity of fresh milk demanded will increase.
E. the demand curve for fresh milk will shift to the left.

9. The equilibrium price of wine will increase if, ceteris paribus,

A. consumers are more aware of the risks of alcohol abuse.
B. there is a surplus of wine.
C. the supply of wine decreases.
D. wine is a normal good and income decreases.
E. all wine adverts are banned.

10. Which one of the following statements is incorrect?

An increase in the supply of plastic bags:
A. may be illustrated by a rightward shift of the supply curve.
B. may be caused by an increase in labour productivity.
C. could be the result of lower wages in the plastic industry.
D. could be the result of a decrease in the cost of producing plastic bags.
E. may be illustrated by an upward movement along the supply curve.

11. Use a diagram to illustrate what will happen to the equilibrium price and quantity of a
product if the demand for the product increases. Also mention three factors that can cause
an increase in demand.

The answer is illustrated in the figure on the

right.

Any factor other than a change in the price of

the product can cause a change in demand. An
increase in demand could be the result of an
increase in the price of a substitute product, a
decrease in the price of a complementary
 product, an increase in consumers’ income, a greater consumer preference for the good
and an expected increase in the price of the product.

12. Do the same as in question 1 for (a) an increase in supply, (b) a decrease in demand and (c)
a decrease in supply.

11. Use a diagram to illustrate what will happen to the equilibrium price and quantity of a product
if the demand for the product increases. Also mention three factors that can cause an increase in
demand.

Any factor other than a change in the price of the product can cause a change in demand.
An increase in demand could be the result of an increase in the price of a substitute
product, a decrease in the price of a complementary product, an increase in consumers’
income, a greater consumer preference for the good and an expected increase in the price
of the product

12.Do the same as in question 1 for (a) an increase in supply, (b) a decrease in demand and
(c) a decrease in supply.
The possible reasons for (a) an increase in supply includes any factor except a change in
the price of the product. Three possible reasons are:
 a fall in the price of an alternative product or a rise in the price of a joint product
 a reduction in the price of any of the factors of production or other inputs (ie a
decrease in the cost of production) an improvement in the productivity of the
factors of production (eg as a result of technological progress) – this also lowers
the cost of production.

The possible reasons for (b) a decrease in demand include any factor except a change in
the price of the product. Five possible reasons are:
 a fall in the price of a substitute product
 an increase in the price of a complementary product
 a fall in consumers’ income
 a reduced preference for the product
 an expected fall in the price of the product.

Possible reasons for (c) a decrease in supply include any factor except a change in the price
of the product. Three possible reasons are:
  an increase in the price of an alternative product or a fall in the price of a joint
product
 an increase in the price of any of the factors of production or other inputs (ie an
increase in the cost of production)
 a deterioration in the productivity of the factors of production (which also raises
the cost of production).

13. Explain, with the aid of diagrams, how each of the following will affect the market for
coffee:
a) The price of tea declines sharply.

Coffee and tea are substitutes. When the price of tea declines sharply, there will be an
increase in the quantity of tea demanded. In the market for coffee, the demand for coffee
will fall, illustrated by a leftward shift of the demand curve. This will give rise to a lower
price and a lower quantity sold than before (ceteris paribus).

b) Researchers find that drinking a cup of coffee a day reduces the probability of having a heart
attack.

There will be an increased preference for coffee, illustrated by a rightward shift of the
demand curve. The equilibrium price and the equilibrium quantity will both increase
(ceteris paribus).

c) A severe frost destroys much of the Brazilian coffee crop.

There will be a decrease in the supply of coffee, illustrated by a leftward shift of the supply
curve. The equilibrium price will increase and the equilibrium quantity will fall (ceteris
paribus).

1. Use a diagram to explain how a so-called black market can develop when the government
intervenes in the price mechanism by fixing prices.

In the diagram below, the equilibrium price is P0. Government fixes a price Pm, below the
equilibrium price. At Pm the quantity demanded is Q2 and the quantity supplied Q1. Only Q1
units of the product are available. For quantity Q1 consumers are willing to pay a price P1.
This is derived from the demand curve.

Anyone who can obtain the product

at price Pm will be able to resell the
product to consumers willing to pay
price P1 to obtain the product. This
means a profit per unit of the 80
difference between P1 and Pm can be
obtained in the so-called black
market. See also pp 91-92 of the
textbook.

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2. Use demand and supply curves to illustrate and explain why a rare item such as a painting
by Rembrandt, Rubens, Van Gogh, Picasso or Munch is sold at such a high price.

There is by definition a limited supply

of a rare item. Graphically the supply
can be illustrated as a vertical line.
Those who want to obtain the item
compete among each other by bidding
up the price. This can be viewed as
increases in the demand for the
product. Since the quantity supplied
cannot increase, any increase in
demand will impact exclusively on the
price of the item.