Chapter 4

True/False (2 pts each)

Indicate whether the statement is true or false.

____ 1. Supply and demand together determine the price and quantity of a good sold in a market.

Multiple Choice (2 pts each)

Identify the choice that best completes the statement or answers the question.

____ 1. A group of buyers and sellers of a particular good or service is called a(n)
a. coalition.
b. economy.
c. market.
d. competition.

____ 2. An increase in the price of oranges would lead to

a. an increased supply of oranges.
b. a reduction in the prices of inputs used in orange production.
c. an increased demand for oranges.
d. a movement up and to the right along the supply curve for oranges.

Table 4-4
Price Firm A’s Firm B’s Firm C’s Firm D’s
Quantity Quantity Quantity Quantity
Supplied Supplied Supplied Supplied
$0 10 0 0 0
$2 8 3 4 5
$4 6 6 8 10
$6 4 9 12 15
$8 2 12 8 20
$10 0 15 4 25

____ 3. Refer to Table 4-4. If these are the only four sellers in the market, then when the price increases from $6
to $8, the market quantity supplied
a. increases by 0.5 units.
b. increases by 2 units.
c. decreases by 4 units.
d. increases by 42 units.
____ 4. If macaroni and cheese is an inferior good, then an increase in
a. the price will cause the demand curve for macaroni and cheese to shift to the left.
b. the price will cause the demand curve for macaroni and cheese to shift to the right.
c. a consumer’s income will cause the demand curve for macaroni and cheese to shift to the
left.
d. a consumer’s income will cause the demand curve for macaroni and cheese to shift to the
right.

____ 5. Which of the following is not a characteristic of a perfectly competitive market?

a. Sellers set the price of the product.
b. There are many sellers.
c. Buyers must accept the price the market determines.
d. All of the above are characteristics of a perfectly competitive market.

Table 4-6
An Increase in Supply A Decrease in Supply
An Increase in Demand A B
A Decrease in Demand C D

____ 6. Refer to Table 4-6. Which combination would produce a decrease in equilibrium quantity and an
indeterminate change in equilibrium price?
a. A
b. B
c. C
d. D

____ 7. If the number of sellers in a market increases, then the

a. demand in that market will increase.
b. supply in that market will increase.
c. supply in that market will decrease.
d. demand in that market will decrease.
 Figure 4-17
price
50

45

40

35

30
S
25

20

15

10

5 D

100 200 300 400 500 600 700 800 900 quantity

____ 8. Refer to Figure 4-17. If the price is $25, then there would be an excess
a. supply of 100 units, and price would fall.
b. supply of 300 units, and price would fall.
c. demand of 100 units, and price would fall.
d. demand of 300 units, and price would fall.

____ 9. If consumers view cappuccinos and lattés as substitutes, what would happen to the equilibrium price and
quantity of lattés if the price of cappuccinos falls?
a. Both the equilibrium price and quantity would increase.
b. Both the equilibrium price and quantity would decrease.
c. The equilibrium price would increase, and the equilibrium quantity would decrease.
d. The equilibrium price would decrease, and the equilibrium quantity would increase.

____ 10. If the demand for a product decreases, then we would expect equilibrium price
a. to increase and equilibrium quantity to decrease.
b. to decrease and equilibrium quantity to increase.
c. and equilibrium quantity to both increase.
d. and equilibrium quantity to both decrease.

____ 11. Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If the federal
government increases the minimum wage by $1.00 per hour, then it is likely that the
a. demand for bicycle assembly workers will increase.
b. supply of bicycles will shift to the right.
c. supply of bicycles will shift to the left.
d. firm must increase output to maintain profit levels.
____ 12. You lose your job and, as a result, you buy fewer iTunes music downloads. This shows that you consider
iTunes music downloads to be a(n)
a. luxury good.
b. inferior good.
c. normal good.
d. complementary good.

____ 13. Which of the following is not an example of a market?

a. A small town has only one seller of electricity.
b. In the United States, a sick person cannot legally purchase a kidney.
c. In Florida, there are many buyers and sellers of key lime pie.
d. The availability of Internet shopping has expanded the clothing choices for buyers who do
not live near large cities.

____ 14. Assume Diana buys computers in a competitive market. It follows that
a. Diana has a limited number of sellers to turn to when she buys a computer.
b. Diana will find herself negotiating with sellers whenever she buys a computer.
c. if Diana buys a large number of computers, the price of computers will rise noticeably.
d. None of the above is correct.

____ 15. The market demand curve

a. is found by vertically adding the individual demand curves.
b. slopes upward.
c. represents the sum of the prices that all the buyers are willing to pay for a given quantity
of the good.
d. represents the sum of the quantities demanded by all the buyers at each price of the good.

Table 4-1
Price Quantity Demanded Quantity Demanded Quantity Demanded
by Michelle by Laura by Hillary
$5 5 4 11
$4 6 6 13
$3 7 8 15
$2 8 10 17
$1 9 12 19
$0 10 14 21
____ 16. Refer to Table 4-1. Which of the following illustrates the market demand curve?
a. Price
5

1
Demand A

2 4 6 8 10 12 Quantity

b. Price
5

1
Demand B

4 8 12 16 20 24 28 Quantity

c. Price
5

1
Demand C

5 10 15 20 25 30 35 40 45 Quantity

d. Price
5

1
Demand D

5 10 15 20 25 30 Quantity

Table 4-2
Price William’s Fergie’s Taboo’s [Link]’s
Quantity Quantity Quantity Quantity
Demanded Demanded Demanded Demanded
$12 2 1 3 4
$10 4 4 4 5
 $8 6 7 5 6
$6 8 8 4 7
$4 10 9 3 8
$2 12 10 2 9

____ 17. Refer to Table 4-2. If these are the only four buyers in the market, then when the price decreases from
$6 to $4, the market quantity demanded
a. increases by 0.75 units.
b. increases by 3 units.
c. increases by 8 units.
d. decreases by 27 units.

Figure 4-6
price

D' D

quantity

____ 18. Refer to Figure 4-6. The movement from D’ to D could be caused by
a. a decrease in price.
b. a decrease in income, assuming the good is inferior.
c. buyers expecting the price of the good to fall in the near future.
d. an increase in the price of a complement.

____ 19. If a good is normal, then an increase in income will result in a(n)
a. increase in the demand for the good.
b. decrease in the demand for the good.
c. movement down and to the right along the demand curve for the good.
d. movement up and to the left along the demand curve for the good.

____ 20. Suppose that when income rises, the demand curve for doctor’s visits shifts to the right. In this case, we
know doctor’s visits are
 a. inferior goods.
b. normal goods.
c. perfectly competitive goods.
d. durable goods.

____ 21. A decrease in quantity supplied

a. results in a movement downward and to the left along a fixed supply curve.
b. results in a movement upward and to the right along a fixed supply curve.
c. shifts the supply curve to the left.
d. shifts the supply curve to the right.

Figure 4-8
Price
10

9
Supply
8

5 A
4

2 B
1

1 2 3 4 5 6 7 8 Quantity

____ 22. Refer to Figure 4-8. The movement from Point A to Point B represents a(n)
a. increase in the price.
b. decrease in the quantity supplied.
c. shift in the supply curve.
d. Both a) and b) are correct.

____ 23. The law of supply states that, other things equal, when the price of a good
a. falls, the supply of the good rises.
b. rises, the quantity supplied of the good rises.
c. rises, the supply of the good falls.
d. falls, the quantity supplied of the good rises.
 Figure 4-10
Price

Supply A Supply B Supply C

Quantity

____ 24. Refer to Figure 4-10. Which of the following would cause the supply curve to shift from Supply A to
Supply C in the market for winter coats?
a. an increase in the price of winter coats
b. a decrease in the number of firms selling winter coats
c. a decrease in the price of zippers and snaps
d. a decrease in the price of winter hats and gloves

____ 25. Equilibrium price must increase when demand

a. increases and supply does not change, when demand does not change and supply
decreases, and when demand decreases and supply increases simultaneously.
b. increases and supply does not change, when demand does not change and supply
decreases, and when demand increases and supply decreases simultaneously.
c. decreases and supply does not change, when demand does not change and supply
increases, and when demand decreases and supply increases simultaneously.
d. decreases and supply does not change, when demand does not change and supply
increases, and when demand increases and supply decreases simultaneously.

____ 26. When a surplus exists in a market, sellers

a. raise price, which increases quantity demanded and decreases quantity supplied, until the
surplus is eliminated.
b. raise price, which decreases quantity demanded and increases quantity supplied, until the
surplus is eliminated.
c. lower price, which increases quantity demanded and decreases quantity supplied, until the
 surplus is eliminated.
d. lower price, which decreases quantity demanded and increases quantity supplied, until the
surplus is eliminated.

____ 27. Suppose there is an earthquake that destroys several corn canneries. Which of the following would not be
a direct result of this event?
a. Sellers would not be able to produce and sell as much as before at each relevant price.
b. The supply would decrease.
c. Buyers would not be willing to buy as much as before at each relevant price.
d. The equilibrium price would rise.

____ 28. If consumers view cappuccinos and lattés as substitutes, what would happen to the equilibrium price and
quantity of lattés if the price of cappuccinos rises?
a. Both the equilibrium price and quantity would increase.
b. Both the equilibrium price and quantity would decrease.
c. The equilibrium price would increase, and the equilibrium quantity would decrease.
d. The equilibrium price would decrease, and the equilibrium quantity would increase.

Short Answer
1. Suppose we are analyzing the market for hot chocolate. Graphically illustrate the impact each of the
following would have on demand or supply. Also show how equilibrium price and equilibrium quantity
would change.
a. Winter starts, and the weather turns sharply colder.
b. The price of tea, a substitute for hot chocolate, falls.
c. The price of cocoa beans decreases.
d. The price of whipped cream falls.
e. A better method of harvesting cocoa beans is introduced.
f. The Surgeon General of the U.S. announces that hot chocolate cures acne.
g. Protesting farmers dump millions of gallons of milk, causing the price of milk to rise.
h. Consumer income falls because of a recession, and hot chocolate is considered a normal
good.
i. Producers expect the price of hot chocolate to increase next month.
j. Currently, the price of hot chocolate is $0.50 per cup above equilibrium.
 Chapter 4 Answer Section
TRUE/FALSE
1. ANS: T PTS: 1 DIF: 1 REF: 4-4
NAT: Analytic LOC: Supply and demand TOP: Equilibrium
MSC: Definitional

MULTIPLE CHOICE
1. ANS: C PTS: 1 DIF: 1 REF: 4-1
NAT: Analytic LOC: Supply and demand TOP: Markets
MSC: Definitional

2. ANS: D PTS: 1 DIF: 2 REF: 4-3

NAT: Analytic LOC: Supply and demand TOP: Quantity supplied
MSC: Applicative

3. ANS: B PTS: 1 DIF: 2 REF: 4-3

NAT: Analytic LOC: Supply and demand TOP: Market supply
MSC: Applicative

4. ANS: C PTS: 1 DIF: 2 REF: 4-2

NAT: Analytic LOC: Supply and demand TOP: Inferior goods
MSC: Applicative

5. ANS: A PTS: 1 DIF: 2 REF: 4-1

NAT: Analytic LOC: Perfect competition TOP: Perfect competition
MSC: Interpretive

6. ANS: D PTS: 1 DIF: 2 REF: 4-4

NAT: Analytic LOC: Supply and demand TOP: Equilibrium
MSC: Interpretive

7. ANS: B PTS: 1 DIF: 2 REF: 4-3

NAT: Analytic LOC: Supply and demand TOP: Number of sellers
MSC: Interpretive

8. ANS: B PTS: 1 DIF: 2 REF: 4-4

NAT: Analytic LOC: Supply and demand TOP: Surpluses
MSC: Applicative

9. ANS: B PTS: 1 DIF: 2 REF: 4-4

NAT: Analytic LOC: Supply and demand TOP: Equilibrium | Substitutes
MSC: Analytical
10. ANS: D PTS: 1 DIF: 2 REF: 4-4
NAT: Analytic LOC: Supply and demand TOP: Equilibrium
MSC: Interpretive

11. ANS: C PTS: 1 DIF: 2 REF: 4-3

NAT: Analytic LOC: Supply and demand TOP: Input prices
MSC: Applicative

12. ANS: C PTS: 1 DIF: 2 REF: 4-2

NAT: Analytic LOC: Supply and demand TOP: Normal goods
MSC: Applicative

13. ANS: B PTS: 1 DIF: 1 REF: 4-1

NAT: Analytic LOC: Supply and demand TOP: Markets
MSC: Applicative

14. ANS: D PTS: 1 DIF: 2 REF: 4-1

NAT: Analytic LOC: Supply and demand TOP: Competitive markets
MSC: Applicative

15. ANS: D PTS: 1 DIF: 2 REF: 4-2

NAT: Analytic LOC: Supply and demand TOP: Market demand
MSC: Interpretive

16. ANS: C PTS: 1 DIF: 1 REF: 4-2

NAT: Analytic LOC: Supply and demand TOP: Market demand
MSC: Definitional

17. ANS: B PTS: 1 DIF: 2 REF: 4-2

NAT: Analytic LOC: Supply and demand TOP: Market demand
MSC: Applicative

18. ANS: B PTS: 1 DIF: 2 REF: 4-2

NAT: Analytic LOC: Supply and demand TOP: Inferior goods
MSC: Interpretive

19. ANS: A PTS: 1 DIF: 2 REF: 4-2

NAT: Analytic LOC: Supply and demand TOP: Normal goods
MSC: Interpretive

20. ANS: B PTS: 1 DIF: 2 REF: 4-2

NAT: Analytic LOC: Supply and demand TOP: Normal goods
MSC: Applicative
21. ANS: A PTS: 1 DIF: 2 REF: 4-3
NAT: Analytic LOC: Supply and demand TOP: Quantity supplied
MSC: Interpretive

22. ANS: B PTS: 1 DIF: 1 REF: 4-3

NAT: Analytic LOC: Supply and demand TOP: Quantity supplied
MSC: Definitional

23. ANS: B PTS: 1 DIF: 1 REF: 4-3

NAT: Analytic LOC: Supply and demand TOP: Law of supply
MSC: Definitional

24. ANS: C PTS: 1 DIF: 2 REF: 4-3

NAT: Analytic LOC: Supply and demand TOP: Supply curve
MSC: Applicative

25. ANS: B PTS: 1 DIF: 3 REF: 4-4

NAT: Analytic LOC: Supply and demand TOP: Equilibrium
MSC: Analytical

26. ANS: C PTS: 1 DIF: 2 REF: 4-4

NAT: Analytic LOC: Supply and demand TOP: Surpluses
MSC: Interpretive

27. ANS: C PTS: 1 DIF: 2 REF: 4-4

NAT: Analytic LOC: Supply and demand TOP: Equilibrium | Supply
MSC: Applicative

28. ANS: A PTS: 1 DIF: 2 REF: 4-4

NAT: Analytic LOC: Supply and demand TOP: Equilibrium | Substitutes
MSC: Analytical
SHORT ANSWER
1. ANS:

(a) (b)
price price

S S

Pe' Pe

Pe Pe'

D D' D' D

Qe Qe' quantity Qe' Qe quantity

(c) (d)
price price

S S' S

Pe'

Pe Pe

Pe'

D D D'

Qe Qe' quantity Qe Qe' quantity

(e) (f)
price price

S S' S

Pe'

Pe Pe

Pe'

D D D'

Qe Qe' quantity Qe Qe' quantity

 (g) (h)
price price

S' S S

Pe

Pe' Pe'

Pe

D D' D

Qe' Qe quantity Qe' Qe quantity

(i) (j)
price price

S' S S

Pe+ Surplus
Pe' $0.50

Pe Pe

D D

Qe' Qe quantity Qd Qe Qs quantity

In (j), a price above equilibrium will affect both quantity demanded and quantity supplied and will cause a
surplus in the market. It will not cause either demand or supply to shift.

PTS: 1 DIF: 2 REF: 4-4 NAT: Analytic

LOC: Supply and demand TOP: Demand | Supply
MSC: Applicative