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Chapter 4
Extensions of Demand and Supply Analysis
4.1 The Price System and Markets
1) An economic system in which relative prices change to reflect changes in supply and demand
for different commodities is known as a
A) socialist system. B) communist system.
C) queuing system. D) market system.
2) In a market system, which component conveys information about what is relatively scarce and
what is relatively abundant?
A) The number of producers B) The number of consumers
C) Prices D) The amount of government regulation
3) In a market system, what must take place for quantity demanded to continually be equated with
quantity supplied?
A) Price controls must be applied by governments.
B) Relative prices must be able to adjust to market clearing levels.
C) Tastes and preferences of consumers must adjust to eliminate surpluses or shortages.
D) Businesses must engage in involuntary, unprofitable exchanges to eliminate surpluses or
shortages.
4) Which of the following statements about markets is correct?
I. A market helps resources move to their highest valued uses by means of prices.
II. A market encompasses the exchange arrangements of both buyers and sellers.
A) I only B) II only C) Both I and II D) Neither I nor II
5) In a market system, the costs associated with exchanging goods are known as
A) voluntary costs. B) signaling costs.
C) wholesale costs. D) transaction costs.
6) In a market system, intermediaries in the exchange process are known as
A) producers. B) consumers. C) middlemen. D) free agents.
7) Which of these would NOT be considered a middleman?
A) A produce wholesaler B) An apple farmer
C) A shopbot company D) A fruit distributor
8) In a price system, changes in prices
A) make it difficult for the system to function well.
B) imply that people have made mistakes in the past.
C) signal to everyone in the system what goods are relatively more or less scarce.
D) signal to policy makers what goods should and should not be taxed more.
9) The way we know what commodities are relatively scarce or abundant is through
A) transaction costs. B) prices.
C) price ceilings. D) price floors.
10) The price system
A) is the voluntary exchange system used in the United States.
B) is old fashioned and is no longer used.
C) is used only in countries that are developing.
D) is used to set resource prices only.
11) The price system has
A) prices fixed by the government. B) prices fixed by the seller.
C) voluntary exchange. D) prices fixed by the producer.
12) In the price system,
A) prices are set by government action.
B) producers alone set the price.
C) the president sets all prices.
D) price is set by the interaction of supply and demand.
13) The price of milk increases. Which of the following is NOT part of the likely chain of events that
follows from this price change?
A) Some milk consumers reduce their consumption of milk.
B) Milk producers increase their production of milk.
C) The producers of feed for dairy cows increase production.
D) The manufacturers of milking machines lay off some workers.
14) The signaling aspect of the market system refer to
A) legal requirements for contracts and exchanges.
B) the price of the good to the consumer and producer.
C) the voluntary character of the exchange.
D) transaction costs of carrying out exchanges.
15) The signals in markets are determined
A)
b
y supply and demand.
B) for all goods by the government through the use of price controls.
C) in an unfair manner that ends up hurting the poor.
D)
b
y nonprice rationing devices.
16) The price system features
A) exchanges made in currency only.
B) voluntary exchange that makes both the consumer and producer better off.
C) exchanges made only on a barter basis.
D) an exchange in which consumer is made better off and the producer is made worse off.
17) Voluntary exchange
A) will eliminate scarcity.
B) is a nonprice rationing device.
C) is trading so that the consumer and producers are better off.
D) never involves transactions costs.
18) Which of the following is NOT an example of a transaction cost?
A) The enjoyment of owning the good.
B) The opportunity cost of time spent looking for stores that sold the good desired.
C) The cost of returning a defective product.
D) Time spent bargaining over the price of a good.
19) Specialists who try to lower transaction costs are
A) consumers. B) producers. C)
b
ureaucrats. D) middlemen.
20) Which of the following is NOT a device to reduce transaction costs?
A) Shopping centers
B) Auto dealers located close together
C) Government prohibitions on advertising
D) Banks that direct funds from savers to borrowers
21) Which of the following statements is NOT true about exchanges in the market system?
A) In voluntary exchange both parties are better off because of the exchange.
B) Exchanges occur only in situations of barter where the market price is irrelevant.
C) Prices indicate what is relatively abundant and what is relatively scarce.
D) Transaction costs in exchanges include the cost of enforcing a contract as well as the costs
of information.
22) Market clearing prices in a market system act as
A) a signaling device. B) a direct measure of resource costs.
C) a way for producers to advertise. D) a legally determined rationing device.
23) The rationing function of prices means that
A) government is responsible for setting the prices of basic foods.
B) all goods and services are produced by large firms.
C)
b
usinesses determine what goods consumers should purchase.
D)
b
uyers and sellers synchronize their decisions through the price system.
24) Buyers and sellers receive signals from markets
A)
b
y listening to the TV news programs.
B) through the price system.
C) from the gossip columns in the newspapers.
D) from their friends and acquaintances.
25) The market system is also called the price system because
A) rising prices are the signal to producers to offer more of a particular good.
B) people pay money in markets.
C) everything has a price tag.
D) inflation is a significant problem.
26) Which of the following is a main characteristic of exchanges in the market system?
A) Decisions to trade are based on individuals self interest.
B) Exchanges are highly regulated by the government.
C) Sellers hire economists to determine the market clearing price.
D) Exchanges are part of the legislative imperative.
27) In a market system, how are the price signals established?
A) Consumer advocacy groups establish fair prices for items, and most firms follow these
pricing guidelines because they don t want to anger their consumers.
B) Industry associations establish an acceptable price range for each commodity sold within
the industry, and member firms are obligated to abide by association guidelines.
C) The forces underlying supply and demand interact to determine a market clearing price.
D) Federal legislation establishes maximum prices for most goods, and state governments
regulate the prices of any remaining items.
28) Intermediaries, known as middlemen, specialize in
A) reducing transaction costs.
B) negotiating high prices for sellers.
C) negotiating low prices for buyers.
D) encouraging consumers to buy goods on credit, rather than with cash.
29) Which of the following is NOT a voluntary exchange?
A) Tom s car is stolen from in front of his house.
B) Marie buys groceries.
C) Scott pays $10,000 for tuition and fees this semester.
D) Emily buys a $1,000 plane ticket to fly from New York to Dallas on short notice.
30) The publication Consumer Reports reduces transaction costs on many purchases by
A) providing coupons.
B) providing reliable information on product quality.
C) advertising sales at discount stores.
D) paying its employees low wages.
31) Markets tend to
A) exist primarily in towns or cities. B) increase transaction costs.
C) reduce transaction costs. D) make exchange more difficult.
32) Transaction costs are
A) production costs. B) taxes on production.
C) regulations on production. D) costs associated with exchange.
33) When a market clearing price is determined,
A) the exchange between buyers and sellers is voluntary.
B) the exchange between buyers and sellers is directed by outside factors such as the
government.
C) the exchange between buyers and sellers benefits only the buyers.
D) the exchange between buyers and sellers benefits only the sellers.
34) Your local grocery store reduces transaction costs to the consumer
A)
b
y reducing the consumer s need to travel from food producer to food producer (or
manufacturer to manufacturer) to purchase the food staples that the consumer desires.
B)
b
y providing a system that directs funds from lenders to borrowers.
C)
b
y providing a system of justice to enforce contracts.
D) All of the above are correct.
35) Another term for intermediaries who specialize in reducing transaction costs is
A) service providers. B) consultants.
C) middlemen. D) revenue agents.
36) All of the following reduce the transaction costs for consumers EXCEPT
A) eBay.
B) a shopping mall.
C) the Supreme Court decisions regarding the Second Amendment.
D) a grocery store.
37) What are transaction costs? What are some ways in which society reduces transaction costs?
38) What are the terms of exchange and how are these terms related to the price?
Chapter 4 Extensions of Demand and Supply Analysis 311
4.2 Changes in Demand and Supply
1) Assume that the initial demand and supply curves in the above figure are D Aand SA,
respectively. The initial equilibrium price and quantity are
A) P1and E. B) P3and F. C) P1and G. D) P2and F.
2) Refer to the above figure. Suppose the demand curve shifts from DAto DB, while the supply
curve remains at SA. Which of the following statements is FALSE?
A) There has been an increase in demand.
B) Supply has increased.
C) More consumers in the market might have caused the demand curve to shift.
D) The new equilibrium price is P2
,
and the new equilibrium quantity is F.
3) Refer to the above figure. Suppose that the supply curve shifts from SAto SBwhile the demand
curve shifts from DAto DB. Which of the following is true about the results of the shifts in the
supply and demand curves?
A) The equilibrium price increases while the equilibrium quantity remains unchanged.
B) Both the equilibrium price and equilibrium quantity increase.
C) The equilibrium price remains unchanged while the equilibrium quantity increases.
D) Both the equilibrium price and equilibrium quantity remain unchanged.
4) Refer to the above figure. Suppose that the supply curve shifts from SAto SBwhile the demand
curve remains at DA. Which of the following is true?
A) Only quantity supplied has increased.
B) Only quantity demanded has decreased.
C) Supply has increased.
D) Supply has decreased.
5) Other things being equal, suppose that the demand for wheat in constant quality units increases.
The increase in demand will cause
A) a surplus of wheat.
B) a higher equilibrium price and higher equilibrium quantity of wheat.
C) fall in the market clearing price of corn, a substitute for wheat.
D) a higher equilibrium quantity, but a lower equilibrium price of wheat.
6) Suppose that consumer income decreases and that hamburger is an inferior good. Which of the
following will occur in the market for hamburger?
A) Market clearing price will rise, and equilibrium quantity will rise.
B) Market clearing price will fall, and equilibrium quantity will fall.
C) Market clearing price will rise, and equilibrium quantity will fall.
D) Market clearing price will fall, and equilibrium quantity will rise.
7) Suppose that there is an improvement in technology in the market for iPods. Which of the
following is true?
A) Supply will increase and the market clearing price will fall.
B) Supply will increase and the market clearing price will rise.
C) Demand will increase and the market clearing price will rise.
D) Demand will increase and the market clearing price will fall.
8) Suppose that demand for soybeans increases, and simultaneously, the supply of soybeans
increases. Which of the following would you conclude definitely will occur in the market for
soybeans?
A) The market clearing price will rise. B) The market clearing price will fall.
C) The equilibrium quantity will rise. D) The equilibrium quantity will fall.
9) Suppose there is a simultaneous increase in the demand for diamonds and increase in the
supply of diamonds. Which of the following will occur as a result of these simultaneous events?
A) Both the market clearing price and equilibrium quantity will rise.
B) The market clearing price will fall, but the equilibrium quantity will rise.
C) The market clearing price may rise, fall, or stay the same, but the equilibrium quantity will
fall.
D) The market clearing price will fall, but the equilibrium quantity may rise, fall, or stay the
same.
10) Suppose you are told that the equilibrium price of gasoline has increased, while the equilibrium
quantity of gasoline has fallen. You are also told that either the demand changed or supply
changed, but not both. Which of the following must have occurred?
A) Demand increased. B) Demand decreased.
C) Supply increased. D) Supply decreased.
11) Which of the following will cause, other things being equal, a movement along the supply curve
for HD televisions?
A) An improvement in technology.
B) An increase resource costs.
C) A reduction in the price of HD televisions.
D) An expectation that the price of HD televisions will be lower in the future.
12) Suppose we observe the following two simultaneous events in the market for cigarettes. First,
there is a decrease in the demand for cigarettes due to changes in consumer tastes. And second,
there is a reduction in supply due to tobacco farmers selling their land to real estate developers.
We know with certainty that these two simultaneous events will cause which of the following?
A) no change in the equilibrium quantity and a reduction in the equilibrium price
B) an increase in the equilibrium quantity and in the equilibrium price
C) a decrease in the equilibrium quantity and an indeterminate change in the equilibrium
price
D) a decrease in the equilibrium quantity and an increase in the equilibrium price
13) Suppose Matt Damon and Cameron Diaz wear matching platinum jewelry in their new movie.
After the movie is released, suppose that consumers increase their demand for the jewelry and
at the same time manufacturers increase the supply of the jewelry. As a result,
A) the equilibrium quantity will increase, and there is an indeterminate change in the
equilibrium price.
B) the equilibrium quantity and price are both indeterminate.
C) the equilibrium quantity will decrease, and the equilibrium price will increase.
D) the equilibrium price and quantity will both decrease.
14) As demand for computer games increases, other things being equal, we can expect
A) a decrease in both the relative price and quantity of computer games.
B) a decrease in the supply of computer games.
C) more computer games to be produced.
D) an excess number of computer games in the market.
15) If both the demand for and the supply of computers are increasing, which of the following
statements is true?
A) The consumer should buy a computer now since the price will be higher in the future.
B) The consumer should wait and buy a computer later since the price will be lower in the
future.
C) The price of a computer will be the same in the future as it is now.
D) It is impossible to know, given only this information, whether the prices of computers will
go up or down in the future.
16) If demand increases while supply decreases, then the equilibrium price
A) always increases.
B) always decreases.
C) may increase, decrease, or stay the same.
D) never changes.
17) If demand increases while supply simultaneously decreases, then the equilibrium quantity
A) always increases. B) always decreases.
C) can never change. D) none of the above
18) If other factors remain unchanged, technological progress in producing good X definitely will
lead to
A) an increase in the market clearing price of good X and a decrease in the equilibrium
quantity of good X.
B) an increase in both the market clearing price and the equilibrium quantity of good X.
C) a decrease in the market clearing price of good X and an increase in the equilibrium
quantity of good X.
D) a decrease in both the market clearing price and the equilibrium quantity of good X.
19) With respect to the market clearing price and the equilibrium quantity of good X, increases in
the demand for and the supply of good X will definitely
A) increase the market clearing price of good X but have an uncertain impact on the
equilibrium quantity of X.
B) reduce the market clearing price and the equilibrium quantity of good X.
C) increase the market clearing price and the equilibrium quantity of good X.
D) increase the equilibrium quantity of good X but have an uncertain impact on the market
clearing price of X.
20) With respect to the market clearing price and the equilibrium quantity for good X, an increase in
the demand for and a decrease in supply of the good definitely will
A) increase the market clearing price and the equilibrium quantity of good X.
B) decrease the market clearing price and the equilibrium quantity of good X.
C) increase the market clearing price of good X but lower the equilibrium quantity of X.
D) increase the market clearing price of good X but have an uncertain impact on the
equilibrium quantity of X.
21) If equilibrium price falls and the equilibrium quantity of the good purchased decreases, what
has happened to either the supply curve or to the demand curve?
A) Supply increased. B) Demand decreased.
C) Demand increased. D) Supply decreased.
22) A change in an equilibrium price can result from
I. A change in demand
II. A change in supply
A) I only B) II only C) Both I and II D) Neither I nor II
23) An increase in supply, other things being equal, will cause which of the following to occur?
A) quantity supplied to decrease.
B) quantity demanded to increase.
C) a rightward shift in the demand curve as the price falls.
D) a leftward shift in the demand curves as the price increases.
24) Suppose the price of cheese rises. In the market for pizza, one would expect that
A) the supply of pizza would increase, and the price would fall.
B) the demand for pizza would increase, and the price would increase.
C) the demand for pizza would decrease, and price would fall.
D) the supply of pizza would decrease, and price would rise.
25) The prices of certain goods, such as ice and lumber, often increase after a disaster such as a
hurricane. The economic explanation for this observation is that
A) people panic in disaster situations.
B) disasters bring out the worst in people.
C) the disaster temporarily reduces the supply of the goods and increases the demand for the
goods.
D) the disaster temporarily reduces the supply of the goods and reduces the demand for the
goods.
26) People often complain about price gouging after a disaster such as a hurricane. Suppose the
government successfully prevented price increases due to the disaster. We would expect
A) reconstruction to take longer because the quantity supplied of new materials would
increase more slowly.
B) reconstruction to take less time because the demand for materials would increase faster.
C) reconstruction never to occur.
D) reconstruction to take less time because the government could rebuild more quickly when
people are not in the way.
27) In the labor market, adjustments to changes in supply and demand
A) usually occur instantly.
B) usually take time to occur.
C) do not apply, since the labor market does not respond to supply and demand forces.
D) do not apply, since wages in the labor market always go up.
28) Hospitals announce that there are not enough nurses available to keep them fully staffed.
Economically speaking, what does this announcement mean?
A) The market wage for trained nurses is currently above the equilibrium wage.
B) There is currently a surplus of nurses in this market.
C) The market wage for nurses will eventually rise to the market clearing wage.
D) The market will adjust very rapidly to correct this imbalance because anyone can be a
nurse without any training.
29) Holding supply constant, a reduction in demand leads to
A) lower prices and higher quantity supplied.
B) lower prices and lower quantity supplied.
C) higher prices and higher quantity supplied.
D) higher prices and lower quantity supplied.
30) Some oil refineries were damaged by Hurricane Katrina of 2005, leading to
A) a decrease in supply of gasoline.
B) a decrease in quantity supplied of gasoline.
C) a decrease in demand for gasoline.
D) a decrease in quantity demanded for gasoline.
31) In recent years, the price of smartphones has fallen, while the quantity exchanged of
smartphones has risen. We can conclude that this is most likely a result of
A) a decrease in supply while demand remained constant.
B) an increase in demand while supply remained constant.
C) an increase in demand that exceeded an increase in supply.
D) an increase in supply that exceeded an increase in demand.
32) Holding supply constant, an increase in demand leads to
A) lower prices and higher quantity supplied.
B) lower prices and lower quantity supplied.
C) higher prices and higher quantity supplied.
D) higher prices and lower quantity supplied.
33) The increase in the price of gasoline to a national average of over $3.50 during the summer of
2010 was most likely a result of
A) a decrease in demand due to reduced summer driving.
B) an increase in supply resulting from higher refinery output.
C) an increase in demand due to increase in summer driving along with a decrease in supply
resulting from reduced refinery output.
D) an increase in supply resulting from higher refinery output along with a decrease in
demand in summer driving.
34) Holding demand constant, a reduction in supply leads to
A) lower prices and higher quantity demanded.
B) lower prices and lower quantity demanded.
C) higher prices and higher quantity demanded.
D) higher prices and lower quantity demanded.
35) Holding demand constant, an increase in supply leads to
A) lower prices and higher quantity demanded.
B) lower prices and lower quantity demanded.
C) higher prices and higher quantity demanded.
D) higher prices and lower quantity demanded.
36) If price increases and the quantity purchased increases, we know that
A) supply increased. B) supply decreased.
C) demand increased. D) demand decreased.
37) The price of a good always changes when
A) either a shortage or a surplus occurs.
B) quantity demanded and quantity supplied are constant.
C) there is an increase in demand and an increase in supply.
D) there is a decrease in demand and a decrease in supply.
38) The price of labor in the agricultural industry has just increased. For agricultural products, this
will lead to
A) an increase in price and a decrease in quantity.
B) an increase in price and an increase in quantity.
C) a decrease in price and a decrease in quantity.
D) a decrease in price and an increase in quantity.
Price Quantity Demanded Quantity Supplied
Per TV Per Month Per Month
$800 2,000 12,000
750 3,000 11,000
700 4,000 10,000
650 5,000 9,000
600 6,000 8,000
550 7,000 7,000
500 8,000 6,000
450 9,000 5,000
400 10,000 4,000
39) Refer to the above table. Suppose there are technological advances in the production of
televisions. The new equilibrium price will be
A) $550. B) $750.
C) less than $550. D)
b
etween $550 and $750.
40) Refer to the above table. Suppose the demand for televisions drops because more people watch
TV shows on computers instead. The new equilibrium price will be
A) $550. B) $750. C) less than $550. D) $800.
