# answerstopracticequestions3fall2004 - Solutions to Practice...

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Solutions to Practice Questions #3 Multiple Choices 1.False: the price is not decided (for example through bargaining) by suppliers and people who demand. Instead, it is the outcome of market dynamics: market participants take prices as given , and then make a decision about the quantity they want to produce and consume. The price level which results is one in which aggregate supply actually equals aggregate demand. 2.True: an increase in subsidies to HiTech industries induces a rightward shift in the supply curve – at a given price, suppliers find it profitable to produce a larger quantity. More subtle is the effect of a rise in taxes on purchases. In general the demand curve for computers can be written as Qd=a-bp, where p is the market price. Taxes are an extra amount of money the consumer pays when purchasing a computer, i.e. taxes increase the price faced by consumers. Thus, after the imposition of taxes the demand curve is Qd=a-b*(p+t), where t stands for the tax the consumer pays when purchasing a computer and p is the before-tax market price. Thus, the demand curve can be rewritten as Qd=(a-bt)-bp. The intercept is now (a-bt), i.e. lower. Graphically, the damand curve shifts leftward. 3.False: the contrary happens if the good is inferior. 4.True: if you lose \$10,000 betting on the Budgers'football game and your income per month is \$1,000, your wealth is -\$9,000 (assuming you don't own anything else, like for example houses, bonds, companies. ..). 5.This is true since the model-T car is an effective substitute for horses and carriages, thus decreasing the demand for everything related to this industry (indeed the industry was practically destroyed). The demand curve for items in the horse and carriage industry, e.g. saddles, shifts leftward. 6.False: it depends on the "sign" of the demand shock, i.e. on the direction of the demand curve shift. Multiple Choices 7.d. 8.e: this is a technological improvement that affects the supply curve of ski-boots. Snow, mountain cottages and, obviously, skis are complement goods, a stock market crash and an increase in oil prices decreases consumer wealth and, finally, a change in fashion is a change in preferences.

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