Nov52004.ans - Answers Test #2 ECMA04H November 5, 2004...

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Answers – Test #2 ECMA04H – November 5, 2004 Version #1 – (on front page: “Profs. Michael Krashinsky and Gordon Cleveland”) 1. The price of pears rises. Pears are a substitute in consumption for apples. Therefore, the demand for apples shifts to the right. As a result, P* and Q* both rise. The correct answer is (A). 2. Consumer incomes rise. Apples are a normal good, so the demand for apples shifts to the right. At the same time, a technological innovation occurs which lowers the cost of producing apples. Therefore, the supply curve for apples shifts to the right as well. Q* must rise, but the effect on P* is uncertain (depends on the relative size of the shifts in demand and in supply). The correct answer is (K). 3. The price of pears rises. Pears are a substitute in consumption for apples. Therefore, the demand for apples shifts to the right. At the same time, the price of cheese rises. Cheese is a complement in consumption to apples. Therefore, the demand for apples shifts to the left. Since we do not know the magnitude of these two shifts, we do not know what happens to P* and Q*. However, if the shift to the right is larger, P* and Q* will rise; if the shift to the left is larger, P* and Q* will fall. The correct answer is (N). 4. A newspaper story increases the demand for apples – the demand shifts to the right. At the same time, wages in the apple industry rise; this will shift the supply curve of apples to the left. As a result, P* will rise, but we cannot tell what happens to Q* (without knowing the relative magnitude of the two shifts). The correct answer is (G). 5. An increase in price in the textiles industry will increase the total expenditures on textiles. This must mean that demand is inelastic (i.e., % change in Q is less than % change in P). The correct answer is (C). 6.
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This note was uploaded on 06/11/2011 for the course ECMA 04 taught by Professor Cleverland during the Spring '09 term at University of Toronto- Toronto.

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Nov52004.ans - Answers Test #2 ECMA04H November 5, 2004...

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