Chapter 4 Part 2—Markets in Action
TRUE/FALSE
1. Suppose that X and Y are substitutes. If the price of Y increases, equilibrium price and quantity for X
both rise.
2. If the cost of producing a good rises for sellers, equilibrium price rises because of a decrease in
demand.
3. Assuming supply is held constant, an increase in demand for a product will cause an increase in the
equilibrium price and the amount bought and sold.
4. Assume demand is held constant and supply increases. The result is a decrease in the equilibrium price
and an increase in the equilibrium quantity of the item bought and sold.
5. If the demand curve increases while the supply curve remains unchanged, the equilibrium price would
increase.
6. If the supply curve decreases while the demand curve remains unchanged, the equilibrium price would
increase.
7. Higher gasoline prices would likely raise the price of large, gas-guzzling automobiles.
8. In a market without government interference, the price is free to move the equilibrium.
9. Either an increase in demand with the supply curve held constant or a decrease in supply with the
demand curve held constant will raise a market’s equilibrium price.
10. An equilibrium price is unaffected by nonprice factors.
11. If the demand curve increases while the supply curve remains unchanged, the equilibrium price would
decrease.
12. If the supply curve decreases while the demand curve remains unchanged, the equilibrium price would
decrease.
13. A price ceiling is set at $10, and the equilibrium market price is $8. Consumers will actually pay $8.
14. A price ceiling set below the equilibrium price creates a shortage.
15. Using supply and demand analysis, customers will stand in line for gasoline when a price ceiling is in
force, even if the price ceiling is at a level higher than the equilibrium price.
16. Assume a ceiling price is set above the equilibrium price. The final result is the equilibrium price.
17. A black market may arise when government imposes a price ceiling.
18. Assume a ceiling price is set above the equilibrium price. The eventual result is a shortage.
19. Assume no price floor exists and a market has a given equilibrium. Then a price floor is established,
which is above the market equilibrium. A shortage would result.
20. Assume a price floor is set above the equilibrium price. The result is a shortage.
21. A price floor is a price set below equilibrium by government and it creates a shortage.
22. Assume a price floor is set above the equilibrium price. The result is a surplus.
23. Price floors typically improve market efficiency.
24. Examples of market failure include lack of competition, externalities, public goods, and income
inequality.
25. If a good gives rise to substantial external benefits to society that are associated with its production
and/or consumption, then the good likely has too many resources devoted to its production.
26. Negative externalities result in unfair, excessively high prices.
27. If a good gives rise to substantial external benefits to society that are associated with its production
and/or consumption then the good likely has too few resources devoted to its production.
28. An economic justification for government providing public goods and services is that many people can
benefit regardless of whether they pay or not.
29. It’s easy for a private firm to provide a public good because of free riders.
30. An economic justification for government providing public goods and services is that many people can
benefit regardless of whether they pay or not.
31. A public good is any good or service that users collectively consume and there is no way to bar free
riders.
32. It’s difficult for a private firm to provide a public good because of free riders.
33. Public goods are overproduced in the marketplace.
34. For a public good, only one user can consume the good.
ESSAY
1. Discuss the impact of demand and supply changes on market equilibrium price and quantity. Express
this graphically.
2. What are market failures? Discuss examples of market failures. What can government do to improve
the results of market failures?