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Practice_Problems_04 - Notes 04 Answers to Practice...

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Unformatted text preview: Notes 04: Answers to Practice Problems 1. E) A decrease in demand or an increase in supply could cause the equilibrium price to decrease. 2. E) In income rises, demand for inferior goods decreases. Thus price and quantity of Schlitz will decrease. 3. C) The supply of footballs decreases so the price of footballs rises. Thus demand for baseballs increases, causing price and quantity to increase. 4. True) Imagine health care is available at an equilibrium price and quantity. Making health care free will cause an increase in quantity demanded. The rise in consumer surplus will be more than offset by the fall in producer surplus. 5. False) The market is in equilibrium with the scalpers. People who buy from the scalpers are willing to buy at high prices. Outlawing scalpers moves the market out of equilibrium, producing a deadweight loss. 6. True) Under these circumstance, both price and quantity increase because the supply curve is horizontal. 7. B) Increasing the price of oranges causes an upward movement along the demand curve, or equivalently an increase in the quantity of oranges demanded. 8. C) The height of the supply curve shows the marginal cost of production. 9. D) Gains from trade equals total value minus total expenditure. 10. B) An increase in demand and decrease in supply leads to an increase in equilibrium price. 11. B) Demand will increase, leading to an increase in quantity and price. This causes an increase in total revenue. 12. C) If the supply of tennis balls decreases then the price of tennis balls will increase. This causes an increase in demand for pencils. 13. D) A bad harvest will decrease the supply of apples and increase their price. An increase in the price of an input causes supply to decrease. This will cause a movement down along the demand curve, or equivalently a decrease in the quantity demanded. 14. B) An increase in technology leads to an increase in supply. 15. D) Both supply and demand decrease, causing an uncertain change in price and a decrease in quantity. 16. A) Incomes rise causing an increase in demand. Wages rise causing a decrease in supply. Combined these changes produce an increase in price and an uncertain change in quantity. 17. D) The negative sign indicates the goods are complements so a rise in price of one causes a decline in demand for the other. 18. Equilibrium price and quantity are $6.00 and 9, respectively, since this is the point at which marginal value equals marginal cost. The chart indicates the contribution to producer and consumer surplus from each unit up to 9: Unit 1 2 3 4 5 6 7 8 9 Total MC $ 2.00 $ 2.50 $ 3.00 $ 3.50 $ 4.00 $ 4.50 $ 5.00 $ 5.50 $ 6.00 PS $ 4.00 $ 3.50 $ 3.00 $ 2.50 $ 2.00 $ 1.50 $ 1.00 $ 0.50 $ ‐ $ 18.00 MV $ 20.00 $ 18.00 $ 16.00 $ 14.00 $ 12.00 $ 10.00 $ 8.00 $ 7.00 $ 6.00 CS $ 14.00 $ 12.00 $ 10.00 $ 8.00 $ 6.00 $ 4.00 $ 2.00 $ 1.00 $ ‐ $ 57.00 Thus the consumer surplus is $57.00, the producer surplus is $18.00, and the gains from trade are $75.00. ...
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