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CHAPTER 2 - REVIEW
I. Choose ONE correct answer
,
1. Assume that A’s supply is constant, A and B are substitute goods. The
decrease in B’s price will lead to:
a. a rightward shift in A’s demand curve
b. a rightward shift in B’s demand curve
c. a leftward shift in B’s demand curve
d. None
2. The Engel curve describes the relationship between:
a. Price and quantity demanded
b. Income and quantity demanded
c. Price and quantity supplied
d. Taste and quantity demanded
3. The increase in A’s inputs cost will cause:
a. Supply curve shifts to the left
b. Supply curve shifts to the right
c. Both supply and demand curves shift to the right
d. None
4. Given a downward-sloping demand curve and an upward-sloping
supply curve for a product, an increase in income will:
a. increase equilibrium price and quantity if the product is a
normal good
b. decrease equilibrium price and quantity if the product is a
normal good
c. have no effects on equilibrium price and quantity
d. reduce quantity demanded, but not shift the demand curve
5. Supply function excludes which of the following determinants?
a. Inputs price
b. Technology
c. Price of related goods and services
d. Expectation
6. The law of demand shows the inverse relationship between:
a. Expectation and quantity demanded
b. Price and income
c. Income and quantity demanded
d. Price and quantity demanded
7. The government sets up price floor in order to:
a. Protect producer/supplier
b. Protect consumer/ buyer
c. Promote free international trade
d. none
8. Supply curve for iPhone 16 shifts because of:
a. The change in buyer's taste in iPhone 16
b. The change in the price of Samsung Galaxy
c. The change in buyer's income
d. All a, b, c
e. None
9. The relationship between income and quantity demanded is:
a. Positive
b. Inverse
c. Both a and b
d. None
10. What happens to equilibrium price and quantity in coffee market if
the wage for coffee worker declines and price of tea declines as well:
a. Price decrease and impact on quantity is ambiguous
b. Price increase and impact on quantity is ambiguous
c. Quantity decrease and impact on price is ambiguous
d. Quantity increase and impact on price is ambiguous
II. Answer true or false with short explanation and use
diagram if necessary
1. Inferior good is the one with low quality
F.
Whether or not a good is considered inferior depends on the income of
the consumer, not the quality of the good itself.
2. A and B are complement goods. The increase in A’s price causes the
decline in B’s price.
T.
P(a) increase => Qd(a) decrease => Qd(b) decrease
=> Draw the S&D curve of b. Qd(b) decrease => Demand curve shifts
to the left => compare the new equi point => P(b) decrease.
3. Expectation of higher price in stock market would make quantity
traded higher
F.
People expect for higher price => Most would choose to speculate =>
Reduce quantity traded.
4. The market price is decided by the interaction between demand and
supply
T.
The changes in supply and demand curve decide the equilibrium
point, which affects the market price.
5. Surplus or shortage would make the actual quantity traded in the
market smaller than the original equilibrium quantity.
T.
Surplus => Too much products, too little demand => the number of
actual quantity traded is restricted by the buyers
Shortage => Too much demand, too little products => the number of
actual quantity traded is restricted by the suppliers
III. Exercises
1. Statistics about A in the market are as follows:
P ($/kg) 7 8 9 10 11 12
Q (kg) 11 13 15 17 19 21
Q (kg) 20 19 18 17 16 15
a. Build demand and supply functions.
S: y=1/2x+3/2
D: y=-x+27
b. Compute equilibrium price and quantity.
Eq=17, Ep=10
c. Compute the actual quantity in the market at the price of P1 = 8.5$ and
P2=11.5 $
P1 = 8.5 => Shortage => replace y= 8.5 to the supply func => 14
P2 = 11.5 => Surplus => replace y= 11.5 to the demand func => 15.5
d. The government imposes a tax of 1$/unit on producer. Compute new
equilibrium price and quantity.
=> New S: y = ½ x + 8
D: y = -x + 26
=> Eq = 12, Ep = 14
2. B’s demand and supply curves are as follows:
P = 3Q – 12
P = 18 – 2Q
(P: $/kg, Q: kg)
a. Compute equilibrium price and quantity
Eq = 6 , Ep = 6
b. The government sets up the price ceiling at 4$/kg and supplies the
shortage. Compute the actual price and quantity in the market.
Actual price: 4
Actual quantity: 7 (replace P=4 to the demand func)
c. Suppose that the government wants the price and quantity to be equal
to the result in question (b) but by subsidizing producer rather than
setting up price ceiling. Compute the subsidy level per kg. In this
case, who will get more benefit from the subsidy package, supplier or
consumer?
Examine the supply func P=3Q-12
We have a general point (Q, 3Q-12)
We call the subsidy level per kilogram x. After subsidizing producer,
the general point turns into:
(Q, 3Q-12-x)
According to b, Q=7 and P=4
=> 3Q-12-x= 4
=> x=5
In this particular case, buyers will get more benefits since the price is
lower.