# Homework_1_Answer_Key[1] - Principles of Microeconomics...

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Principles of Microeconomics Prof. Sánchez-Peñalver Homework 1 Answer Key P a g e 1 | 8 Homework 1 – Answer Key Q UESTION 1 As more people buy computers, the demand for Internet service increases and the price of Internet service decreases. The fall in the price of Internet service decreases the supply of Internet service. Is this statement true or false? Explain. The statement is false for several reasons. First, if the demand for Internet services increases and nothing else changes, the price of Internet service will rise not fall. Second, if the price of Internet services falls, the supply of Internet services does not change. Rather, there is a decrease in the quantity supplied, that is, a movement along the supply curve rather than a shift of the supply curve. Q 2 The following events occur one at a time: (i) The price of crude oil rises. (ii) The price of a car rises. (iii) All speed limits on highways are abolished. (iv) Robots cut car production costs. Which of these events will increase or decrease (state which occurs) a. The demand for gasoline? (ii) and (iii) and (iv) change the demand for gasoline. The demand for gasoline will change if the price of a car rises, all speed limits on highways are abolished, or robot production cuts the cost of producing a car. If the price of a car rises, the quantity of cars bought decreases and the demand for gasoline decreases. If all speed limits on highways are abolished, people will drive faster and use more gasoline. The demand for gasoline increases. If robot production plants lower the cost of producing a car, the supply of cars will increase. With no change in the demand for cars, the price of a car will fall and more cars will be bought. The demand for gasoline increases. b. The supply of gasoline? (i) changes the supply of gasoline. The supply of gasoline will change if the price of crude oil (a factor of production used in the production of gasoline) changes. If the price of crude oil rises, the cost of producing gasoline rises and the supply of gasoline decreases.

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Principles of Microeconomics Prof. Sánchez-Peñalver Homework 1 Answer Key P a g e 2 | 8 c. The quantity of gasoline demanded? (i) changes the quantity of gasoline demanded. If the price of crude oil rises, the cost of producing gasoline rises and the supply of gasoline decreases. The demand for gasoline does not change. The price of gasoline rises and there is a movement up the demand curve for gasoline. The quantity of gasoline demanded decreases.
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