ECON 2113: Microeconomics Problem Set 2 Instructor: Fei DING

Problem Set 2 (Ch3-4) Solution

Microeconomics, ECON 2113
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Part I: Multiple Choice Questions: choose the best answer

1) Which of the following influences people's buying plans and does not shift the demand curve?
A) the price of the good
B) the prices of related goods
C) income
D) preferences
Answer: A

2) You observe that an increase in the price of salsa decreases the demand for tortilla chips and
increases the demand for potato chips. You can conclude that
A) salsa and tortilla chips are substitutes.
B) salsa and potato chips are complements.
C) tortilla chips and potato chips are complements.
D) salsa and tortilla chips are complements.
Answer: D

3) A change in which of the following alters buying plans for cars but does NOT shift the demand
curve for cars?
A) a 5 percent increase in people's income
B) a 10 percent decrease in the price of car insurance
C) a 20 percent increase in the price of a car
D) an increased preference for walking rather than driving
Answer: C

4) Which of the following shifts the supply curve for gasoline rightward?
A) a situation in which the quantity demanded exceeds the quantity supplied
B) an increase in the price of gasoline
C) a decrease in the price of a resource used to produce gasoline, such as crude oil
D) an increase in the demand for gas-guzzling sport utility vehicles (i.e., large cars with very high
petrol consumption)
Answer: C

5) For a "change in the quantity supplied" but not "a change in supply" to occur, there must be a
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ECON 2113: Microeconomics Problem Set 2 Instructor: Fei DING

A) rightward shift of the supply curve.

B) rightward shift of the demand curve.
C) leftward shift of the demand curve.
D) Both answers B and C are correct.
Answer: D

6) The price of peanut was rising, which lead peanut butter sellers and peanut butter buyers to expect
the price of peanut butter would rise in the future. Consequently, in the current market for peanut
butter, there was ________ which resulted in a ________ in the price of peanut butter and ________ in
the quantity of peanut butter.
A) a decrease in supply of peanut butter and an increase in demand for peanut butter; rise; an increase,
decrease or possibly no change
B) a decrease in supply of peanut butter and a decrease in demand for peanut butter; rise, fall, or
possibly no change; a decrease
C) an increase in supply of peanut butter and a decrease in demand for peanut butter; fall; an increase,
decrease or possibly no change
D) a decrease in supply of peanut butter and an increase in demand for peanut butter; fall; an increase,
decrease or possibly no change
Answer: A

7) Flights to Paris are a normal good and people's incomes rise. At the same time, the price of jet fuel
rises. The equilibrium price of a flight to Paris ________ and the equilibrium quantity of flights to
Paris ________.
A) might rise, fall, or not change; increases
B) falls; decreases.
C) rises; increases
D) rises; might increase, decrease, or not change
Answer: D

8) The price of a tomato increases and people buy more lettuce. You infer that lettuce and tomatoes are
________.
A) complements
B) normal goods
C) substitutes
D) inferior goods
Answer: C

9) Which of the following is TRUE?

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ECON 2113: Microeconomics Problem Set 2 Instructor: Fei DING

A) For an inferior good, when income increases, the demand curve shifts leftward.
B) The demand curve for a good shifts leftward when the price of a substitute rises.
C) If consumers expect the price of a good will rise in the future, the demand curve shifts leftward.
D) An increase in population shifts the demand curve for most goods leftward.
Answer: A

10) A decrease in the price of eggs from $1.50 to $1.30 per dozen resulted in an increase in egg
purchases in two cities. In Philadelphia, daily egg purchases increased from 6000 to 8000 dozens; in
nearby Dover, Delaware, daily egg purchases increased from 300 to 400 dozens. The price elasticity of
demand is therefore
A) lower in the smaller city as would be expected.
B) greater in the smaller city as would be expected.
C) certainly affected by population differences in different markets.
D) the same in Philadelphia as in Dover.
Answer: D

11) If the demand curve is a downward sloping straight line, the price elasticity of demand always
A) increases as the demand curve shifts rightward.
B) increases as the demand curve shifts leftward.
C) increases with movements upward along the demand curve.
D) decreases with movements upward along the demand curve.
Answer: C

12) "Last October, due to an early frost, the price of a pumpkin increased by 10 percent compared to
the price in the previous Halloween season. As a result, the quantity demanded county-wide decreased
from 2 million to 1.5 million." Based on this statement, it is certain that the
A) demand curve for Halloween costumes shifted leftward.
B) price elasticity of demand for pumpkins decreased from its value in previous years.
C) demand curve for pumpkins shifted leftward.
D) total revenue from the sale of pumpkins decreased.
Answer: D

13) A Business Wire report shows that sales at Target stores increased in 2012 compared to the
previous year. (Source: Business Wire, August 30, 2012) Incomes grew slightly between 2011 and
2012. Using that fact and the sales data given above means that Target definitely is selling goods and
services that
A) are normal.
B) are inferior.
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ECON 2113: Microeconomics Problem Set 2 Instructor: Fei DING

C) have an income elasticity of zero.

D) have an income elasticity of 1.
Answer: A

14) In 2012, Canadian farmers did not suffer from drought conditions that affected the United States,
but they did enjoy the higher corn prices. Canadian farmers reacted to the higher price by planting
more corn. Suppose that the price of corn increased by 30 percent and the Canadian farmers increased
the quantity of corn they supply by 20 percent. The supply of corn is
A) perfectly inelastic.
B) unit elastic.
C) elastic.
D) inelastic.
Answer: D

15) The price elasticity of demand for gasoline is 0.40. If the price of gasoline rises by 20 percent, there
will be
A) a decrease of more than 20 percent in the quantity of gasoline demanded.
B) an increase in the total revenue received from the sale of gasoline.
C) a loss of total revenue for gasoline producers, because at a higher price the quantity of gasoline
demanded decreases.
D) no change in the quantity of gasoline sold because people need gasoline.
Answer: B

16) Netflix is the largest online DVD rental service offering flat rate online streaming to customers in
the United States. Currently, there are approximately 8 million subscribers. Suppose Netflix decreases
its flat rate rental by 10 percent and an additional 1 million people subscribe. This information means
that Netflix's demand is
A) elastic.
B) inelastic.
C) unit elastic.
D) perfectly elastic.
Answer: A

17) Suppose when the price of an iPad decreases by 20 percent, the number of songs downloaded on
iTunes increases by 30 percent. Based on this information iTunes are
A) a normal good.
B) an inferior good.
C) substitutes for iPads.
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ECON 2113: Microeconomics Problem Set 2 Instructor: Fei DING

D) complements to iPads.
Answer: D

18) If the price of gasoline fell from $2.95 to $2.85 per gallon, your expenditure on gasoline would
increase if your price elasticity of demand for gasoline equals
A) 1.1.
B) 1.0.
C) 0.9.
D) Total revenue would increase at all of the above elasticities.
Answer: A

19) Business people often speak about price elasticity without actually using the term. Which
statement describes a good with an elastic demand?
A) "A price cut won't help me. It won't increase my sales, and I'll just get less money for each unit."
B) "I don't think a price cut will help my bottom line any. Sure, I'll sell a bit more, but I'll more than
lose because the price will be lower."
C) "My customers are real shoppers. After I cut my prices just a few cents below those my competitors
charge, customers have been flocking to my store and sales are booming."
D) "The economic expansion has done wonders for my sales. With more people back at work, my sales
are taking off!"
Answer: C

20) Deb's income has just risen from $950 per week to $1,050 per week. As a result, she decides to
increase the number of movies she attends each month by 5 percent. Her demand for movies is
A) represented by a vertical line.
B) represented by a horizontal line.
C) income elastic.
D) income inelastic.
Answer: D

Part II: Short- and long-answer questions

1. The demand and supply schedules for potato chips are in the table.

Quantit Quantity
Price y supplied

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ECON 2113: Microeconomics Problem Set 2 Instructor: Fei DING

demande
d
(cents per (millions of bags a
bag) week)
50 160 130
60 150 140
70 140 150
80 130 160
90 120 170
100 110 180

a. Draw a graph of the potato chip market and

mark in the equilibrium price and quantity.

Figure 3.5 draws the supply and demand

curves for this market. The equilibrium
price is 65¢ a bag, and the equilibrium
quantity is 145 million bags a week.

b. If the price is 60¢ a bag, is there a shortage or a

surplus, and how does the price adjust?

At 60¢ a bag, there is a shortage of potato chips and the price rises.
At 60¢ a bag, the quantity demanded is 150 million bags a week and the
quantity supplied is 140 million bags a week. The difference is a
shortage of 10 million bags a week. The price rises until market
equilibrium is restored—65¢ a bag and 145 million bags a week.

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ECON 2113: Microeconomics Problem Set 2 Instructor: Fei DING

2. In Problem 1, a new dip increases the quantity of potato chips that people want to buy by 30 million bags
per week at each price.

a. Does the demand for chips change? Does the supply of chips change? Describe the change.

As the new dip comes onto the market, the demand for potato chips
increases. Supply does not change. The demand curves shifts rightward.

b. How do the equilibrium price and equilibrium quantity of chips change?

Demand increases by 30 million

bags a week. The demand curve
shifts rightward as shown in
Figure 3.6 by the shift from D to D1.
The quantity demanded at each
price increases by 30 million
bags. The quantity demanded at 65¢
is now 175 million bags a week of
potato chips. The price rises to 80¢
a bag, at which the quantity
supplied equals the quantity
demanded (160 million bags a
week). The new equilibrium price is 80¢ per bag and the new equilibrium
quantity is 160 million bags.

3. In Problem 1, if a virus destroys potato crops and the quantity of potato chips produced decreases by 40
million bags a week at each price, how does the supply of chips change?

The supply of potato chips decreases, and the supply curve shifts
leftward by 40 million bags. The price rises to 85¢ a bag and the quantity
decreases to 125 million bags a week.

4. If the virus in Problem 3 hits just as the new dip in Problem 2 comes onto the market, how do the
equilibrium price and equilibrium quantity of chips change?

The result by itself of the new dip entering the market is a price of
80¢ a bag and a quantity of 160 million bags. But now with the virus
affecting the market, at this price there is a shortage of potato chips.
The price of potato chips rises until the shortage is eliminated. The

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ECON 2113: Microeconomics Problem Set 2 Instructor: Fei DING

new equilibrium price is 100¢ a bag, and the new equilibrium quantity
is 140 million bags a week.

Price Quantity
(euros per gym demanded
subscription) (hundreds of
gym
subscriptions
Use the following table to work Problems 5 to 7. per year)
180 35
The demand schedule for gym subscriptions is in the table. 230 30
280 25
5. a. What happens to total revenue if the price rises from (i)
330 20
€230 to €280 per gym subscription and from (ii) €280 to
380 15
€330 per gym subscription?

When the price of a gym subscription is €230, 30 thousand gym

subscriptions are sold and total revenue equals €6.9 million. When the
price of a gym subscription rises to €280, 25 thousand gym subscriptions
are sold and total revenue is €7 million. The total revenue increases
as the price rises. When the price of a gym subscription rises from €280
to €330, 20 thousand subscriptions are sold and total revenue is €6.6
million. The total revenue decreases as the price rises.

b. At what price is total revenue at a maximum?

b. Total revenue is maximized at €280 per gym subscription. When the

price of a gym subscription is €230, total revenue equals €6.9 million,
when the price is €280 per gym subscription, total revenue equals €7
million, and when the price €330 per gym subscription, total revenue
equals €6.6 million. Total revenue increases from €6.9 million to €7
million as price rises. It decreases from €7 million to €6.6 million
as price falls. Total revenue is maximized when the price is €280 per
gym subscription.

6. At €230, is the demand for gym subscriptions elastic, inelastic, or unit elastic? Use the total revenue test
to answer this question.

The demand for gym subscriptions is inelastic. The total revenue test
states that if the price falls and total revenue decreases, the demand

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ECON 2113: Microeconomics Problem Set 2 Instructor: Fei DING

is inelastic, all other influences on the quantity sold remain the same.
For €230 per gym subscription, cut the price from €280 to €180 per gym
subscription. When the price of a gym subscription falls from €280 to
€180, the total revenue decreases from €7 million to €6.3 million. Since
the price cut brings a decrease in total revenue at €230 a gym
subscription, demand is inelastic.

7. At €330 a gym subscription, is the demand for gym subscriptions elastic or inelastic? Use the total
revenue test to answer this question.

The demand for gym subscriptions is elastic. A price cut in the elastic range
brings an increase in total revenue. When the price rises from €280 to €380
per gym subscription, total revenue decreases from €7million to €5.7 million.
So at €330 per subscription, demand is elastic.

8. Memorial Day Gas Cheapest in a Decade

Gasoline prices are at their lowest in a decade. The average price in Orangeburg is $2.05 a gallon, 35¢
lower than last year. In a recent AAA survey, 55 percent of Americans said they are more likely to take a
road trip this year due to lower gas prices. About 1.5 million Carolinians are expected to drive to their
Memorial Day destinations, up 2.1 percent over last year.

Source: The Times and Democrat, May 27, 2016

a. What are the elasticities of demand implicitly referred to in the news clip.

The elasticity of demand that the article references is the price

elasticity of demand. The article mentions how drivers respond to the
fall in the price of gasoline by increasing the quantity of their road
trips.

b. Calculate the price elasticity of demand for road trips using the data in the news clip.

The price elasticity of demand for road trips equals the percentage
change in the quantity demanded, 2.1 percent, divided by the percentage
change in the price of gasoline. The average price fell 35¢ from $2.40
to $2.05, which makes the average price $2.23. So the percentage change
in the price is (0.35/2.23) × 100 or 15.7 percent. Consequently the
price elasticity of demand for road trips equals (2.1 percent/15.7
percent) or 0.13.