HW2_anskeys - HW2 (Chapter 3 and Chapter 6 - Price Ceiling,...

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HW2 (Chapter 3 and Chapter 6 - Price Ceiling, Price Floor and Tax Incidence) – Answer Keys Part I. Multiple Choice Questions – Choose the best answer. (40%) 1. D. 2. C. 3. B. 4. D. 5. D. 6. D. 7. B. 8. B. 9. B. 10. D. Part II. Short Answer Questions (60%) 1. a. The demand for gasoline? Explain your answer. Ans : The rise in the price of gasoline does not change the demand for gasoline. The demand for gasoline changes only when some other relevant factor other than the price of the good changes. b. The quantity of gasoline demanded? Explain your answer. Ans : The rise in the price of gasoline decreases the quantity of gasoline demanded. A rise in the price of a good or service decreases the quantity of that good or service demanded. 2. Ans : 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. 3. a. Draw a graph of the gum market, label the axes and the curves, and mark in the equilibrium price and quantity. Ans : Figure 3.1 , on the next page, shows the demand and supply curves. The equilibrium price is 50 cents a pack, and the equilibrium quantity is 120 million packs a week. The price of a pack adjusts until the quantity demanded equals the quantity supplied. At 50 cents a pack, the quantity demanded is 120 million packs a week and the quantity supplied is 120 million packs a week.
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b. Suppose that the price of gum is 70¢ a pack. Describe the situation in the gum market and explain how the price adjusts. Ans : At 70 cents a pack, there is a surplus of gum and the price falls. At 70 cents a pack, the quantity demanded is 80 million packs a week and the quantity supplied is 160 million packs a week. There is a surplus of 80 million packs a week. The price falls until market equilibrium is restored at a price of 50 cents a pack.
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This note was uploaded on 02/13/2012 for the course ECO 201 taught by Professor Dunlevy during the Fall '08 term at Miami University.

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HW2_anskeys - HW2 (Chapter 3 and Chapter 6 - Price Ceiling,...

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