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).
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 Spring '09
 Cleverland
 Supply And Demand, Correct Answer

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