Ch. 3 – Essay Practice questions

question

Chips and salsa are complements. If the price of salsa decreases, the demand for chips will increase.
answer

TRUE
question

If consumers believe the price of iPads will decrease in the future, this will cause the demand for iPads to decrease now.
answer

TRUE
question

A change in supply is represented by a shift of the supply curve.
answer

TRUE
question

An increase in the quantity of a product supplied is caused by an increase in the price of the product
answer

TRUE
question

Scarcity is defined as the situation that exists when the quantity demanded for a good is greater than the quantity supplied
answer

FALSE
question

Market equilibrium occurs where supply equals demand.
answer

FALSE
question

If the demand curve for a product shifts to the left and the supply curve for the product shifts to the left, the equilibrium quantity will decrease.
answer

TRUE
question

If the demand for a product increases and the supply of the same product increases, the equilibrium price will increase.
answer

FALSE
question

What is the law of supply? What does this law imply about the shape of the supply curve?
answer

The law of supply states that, holding everything else constant, an increase in price causes an increase in quantity supplied. The positive relationship between price and quantity supplied gives rise to an upward sloping supply curve
question

Explain how it would be possible for the equilibrium price and equilibrium quantity to both increase in the market for motorcycles if consumer preference for motorcycles increases and the number of motorcycle manufacturers decreases
answer

An increase in consumer preference will shift the demand curve to the right, which increases the equilibrium price and the equilibrium quantity. A decrease in the number of manufacturers will shift the supply curve to the left, which will increase the equilibrium price and decrease the equilibrium quantity. In both cases, the equilibrium price increases. For the equilibrium quantity to increase, the rightward shift in demand resulting from the increase in consumer preference must be more than the leftward shift in supply which results from the decrease in manufacturers.
question

Indicate whether each of the following situations would shift the supply curve to the left, to the right, or not at all. a. An increase in the price of an input b. An increase in productivity c. An increase in the price of a substitute in production d. A decrease in the expected future price of a product e. A decrease in the current price of the product
answer

a. Shift to the left b. Shift to the right c. Shift to the left d. Shift to the right e. No shift
question

What are the two effects that explain the Law of Demand? Briefly explain each effect.
answer

The two effects that explain the Law of Demand are the income effect and the substitution effect. The income effect is the change in quantity demanded of a good that results from a change in purchasing power due to a change in the good’s price. The substitution effect is the change in quantity demanded of a good that results from the effect of a change in the good’s price making the good more or less expensive relative to other goods that are substitutes.
question

In each of the following situations, list what will happen to the equilibrium price and the equilibrium quantity for a particular product, which is an inferior good. a. The population decreases and productivity increases b. The income increases and the price of inputs increase c. The number of firms in the market decreases and income decreases d. Consumer preference decreases and the price of a complement increases e. The price of a substitute in consumption increases and the price of a substitute in production increases
answer

a. Price decreases; Quantity may increase or decrease b. Quantity decreases; Price may increase or decrease c. Price increases; Quantity may increase or decrease d. Price decreases; Quantity decreases e. Price increases; Quantity may increase or decrease

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