ANS:
A competitive market is where there are so many buyers and sellers that each one has only negligible impact on the market price and output. An imperfect market is where either the buyer or the seller has the ability to influence the market price. An example of an imperfect market is a monopoly.
DIF: Easy REF: Imperfect Markets TOP: I.
MSC: Understanding
NOT: Depending on when this question is given, students can answer the example of an imperfect market with answers such as an oligopoly, duopoly, monopsony, and so forth.
2. Assume that the market for cheeseburgers consists of only three individuals: Jerry, George, and Elaine. Here are their demand schedules:
From the information in demand schedules, answer the following questions:
a. If the price of a cheeseburger were $2, how many cheeseburgers would be sold?
b. If the price of a cheeseburger were $8, how many cheeseburgers would be sold?
c. Construct the market demand schedule for cheeseburgers.
ANS:
a. If the price is set at $2, the quantity demanded in the market would be 13.
b. If the price is set at $8, the quantity demanded in the market would be 7.
c. The market demand schedule is constructed by adding each individual’s quantity demanded at each price. Doing so gives us:
DIF: Medium REF: Market Demand TOP: II.A.
MSC: Applying
3. Without using a graph, explain the difference between a movement along a demand curve and a shift in the entire demand curve.
ANS:
A movement along the curve results when the price of the good you are examining changes. This will not cause a shift in the demand curve; it will just cause the quantity demanded to change because the price has changed. A shift in the entire demand curve occurs when something makes the quantity that is demanded at every price, change. This means that at every price, the market demands more or less of the good or service.
DIF: Medium REF: Shifts in the Demand Curve TOP: II.B.
MSC: Understanding
4. You are given the following demand schedule:
a. Graph the information from this demand schedule. Be sure to label everything.
b. Graph the following demand schedule:
c. What happened to the demand curve?
d. List five things that could make the demand curve reflect your answer in part c.
ANS:
c. The demand curve shifted to the right.
d. The five demand shifters that shift the demand curve to the right are: (1) an income change (increase for a normal good, decrease for an inferior good), (2) a change in the price of a related good (an increase in the price of a substitute, a decrease in the price of a complement), (3) an increase in the tastes and preferences of consumers, (4) an increase in the number of consumers, and (5) expecting the price of the product to increase in the future.
DIF: Medium REF: Shifts in the Demand Curve TOP: II.B.
MSC: Analyzing
5. During a national recession, we see the income in the economy decreasing and the majority of stock prices decline (stock prices reflect the value of a company and are directly related to its profits). A few stock prices actually increase during a recessionary time. Using the information regarding supply and demand, explain why some stock prices rise during a recession.
ANS:
During a recession, incomes largely go down. For most goods, as income decreases, the demand for that good decreases. A decrease in a good’s demand causes its price to decrease. However, inferior goods act in the opposite way. When income increases, the demand for inferior goods falls, and when income falls, the demand for inferior goods rises. Thus, we may see some stock prices rise during a recession because inferior goods tend to do well during a recession.
DIF: Medium REF: Shifts in the Demand Curve TOP: II.B.1.b.
MSC: Evaluating
6. Using a supply and demand model, show what happens to the equilibrium price and equilibrium quantity in the market for bagels if, holding all else constant, the price of cream cheese decreases.
ANS:
DIF: Medium REF: Shifts in the Demand Curve TOP: II.B.2.a.
MSC: Applying
NOT: Bagels and cream cheese are complements. When the price of cream cheese decreases, individuals demand more bagels at every price, causing the demand curve to shift to the right. This shift causes the equilibrium price of bagels to increase and the equilibrium quantity in the market to increase.
7. Using a supply and demand model, show what happens to the equilibrium price and equilibrium quantity in the market for bananas if, holding all else constant, a study comes out that says eating bananas causes cardiac problems.
ANS:
DIF: Medium REF: Shifts in the Demand Curve TOP: II.B.3.
MSC: Analyzing
8. Compare and contrast the following sets of words:
a. normal good versus inferior good
b. substitute good versus complementary good
c. a supply curve versus a supply schedule
d. the law of demand versus the law of supply
ANS:
a. A normal good is one that consumers demand more of as income rises, whereas an inferior good is one that consumers demand less of as income rises. An increase in income causes the demand curve for a normal good to shift to the right, whereas an increase in income causes the demand curve for an inferior good to shift to the left.
b. A substitute good is one that is used for the same purpose; for example, Coke may be
substituted for Pepsi. A complementary good is one that is used with another good, for
example, hot dogs and hot dog buns. When the price of a good rises, the demand curve for its
substitutes shifts to the right. When the price of a good rises, the demand curve for its complements shifts to the left.
c. A supply curve is a graph of the relationship between the prices of a good and the quantity supplied at those prices. The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied. Both show the relationship between the price and the quantity supplied; they just represent those data in a different ways.
d. The law of demand states that, all other things being equal, quantity demanded falls when prices rise, and quantity demanded rises when prices fall. The law of supply states that, all other things being equal, quantity supplied falls when prices fall, and quantity supplied rises when prices rise.
DIF: Easy REF: The Supply Curve TOP: II.A.
MSC: Understanding
9. You are given the following supply schedule:
a. Graph the information from the supply schedule. Be sure to label everything.
b. Now graph the following supply schedule:
c. What happened to the supply curve?
d. List five things that could make the supply curve reflect your answer in part c.
ANS:
c. The supply curve shifted to the left.
d. The five supply shifters that shift the curve to the left are: (1) an increase in input costs, (2) a negative change in technology that negatively affects the production process, (3) a tax on the good or service, (4) a declining number of firms in the industry, and (5) the firm’s expectation that the price will rise in the future.
DIF: Medium REF: Shifts in the Supply Curve TOP: III.B.
MSC: Analyzing
10. After the invention of the cotton gin in 1793, shirt production became more efficient. If everything else remained constant and this production efficiency was the only change that affected the supply and demand for shirts, what would you expect to happen to the equilibrium price and equilibrium quantity? Use a supply and demand graph to supplement your explanation.
ANS:
An improvement in the production process allows producers to supply more of a good at every price. This shifts the supply curve to the right. The shift in supply causes the equilibrium price to decrease and the equilibrium quantity to increase.
DIF: Easy REF: Supply, Demand, and Equilibrium TOP: III.B.2.
MSC: Evaluating
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