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ECN1A
Problem Set 2
Dr. Charles Liao
Name___________________________________
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
1) For each of the following pairs of products state which are complements, which are substitutes, and which are
unrelated.
a. Blu-ray discs and video-on-demand
b. Fiat 500 and Mini Cooper S
c. Toothpaste and toothbrush
d. Popcorn and snowboards
e. Razors and razor blades
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
2) How does the increasing use of MP3 players affect the market for compact discs?
A) The demand curve for compact discs shifts to the left.
B) The supply curve for compact discs shifts to the right.
C) The demand curve for compact discs shifts to the right.
D) The supply curve for compact discs shifts to the left.
2)
3) Positive technological change in the production of LCD televisions caused the price of LCD
televisions to fall. Holding everything else constant, how would this affect the market for Blu-ray
players (a complement to LCD televisions)?
A) The supply of Blu-ray players would increase and the equilibrium price of Blu-ray players
would decrease.
B) The demand for Blu-ray players would decrease because consumers could afford to buy
fewer LCD televisions and Blu-ray players.
C) The demand for Blu-ray players would increase and the equilibrium price of Blu-ray players
would decrease.
D) The demand for Blu-ray players would increase and the equilibrium price of Blu-ray players
would increase.
3)
4) Assume that the demand curve for MP3 players shifts to the right and the supply curve for MP3
players shift to the left, but the supply curve shifts less than the demand curve. As a result
A) the equilibrium price of MP3 players may increase or decrease; the equilibrium quantity will
decrease.
B) the equilibrium price of MP3 players will increase; the equilibrium quantity will decrease.
C) both the equilibrium price and quantity of MP3 players will decrease.
D) both the equilibrium price and quantity of MP3 players will increase.
4)
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Figure 3-2
5) Refer to Figure 3-2. A decrease in the price of the product would be represented by a movement
from
A) A to B.
B) B to A.
C) S1 to S2 .
D) S2 to S1 .
5)
6) Which of the following would cause an increase in the supply of peanut butter?
A) an increase in the number of firms that produce peanut butter
B) an increase in the price of peanut butter
C) a decrease in the price of grape jelly (assuming that peanut butter and grape jelly are
complements)
D) an increase the price of a product that producers sell instead of peanut butter
6)
7) Prices of microbrewery beer (assume that this is a normal good) have risen steadily in recent years.
Over this same period, prices for fermenting vats used in beer making have also risen and
consumer incomes have fallen. Which of the following best explains the rising prices of
microbrewery beer?
A) The supply curve for microbrewery beer has shifted to the left more than the demand curve
has shifted to the left.
B) The demand curve and the supply curve for microbrewery beer have both shifted to the
right.
C) The demand curve for microbrewery beer has shifted to the left more than the supply curve
has shifted to the left.
D) The supply curve for microbrewery beer has shifted to the left while the demand curve for
microbrewery beer has shifted to the right.
7)
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Article Summary
More than a million Americans are estimated to have gone to other countries in 2014 for medical procedures. Documentary
filmmaker Morgan Spurlock was among those Americans who travelled abroad in 2014 to partake in what is being referred
to as "medical tourism". From his own experience and those of others who had also travelled for medical procedures,
Spurlock found that there can be distinct advantages to medical tourism for certain patients and procedures. Those
advantages include: The level of care offered in many hospitals, with the best hospitals reportedly meeting or exceeding
Western standards; Significantly lower costs, examples of which include a heart bypass operation in the United States that
typically runs $88,000 can cost as little as $31,500 in Costa Rica, and hip replacement surgery that averages $33,000
domestically is only $12,400 in Thailand; The ability to combine medical procedures with vacations to amazing locations
around the globe.
Source: Sean Redlitz, " Surf, sand ... and surgery? Inside the world of medical tourism," cnn.com, February 6, 2015
8) Refer to the Article Summary above. Assume that more foreign governments and hospitals begin
to offer and publicize their medical services to American medical tourists and, due to the growing
number of aging baby boomers, more Americans desire hip-replacement surgery. All else equal,
what will happen in the market for hip-replacement surgery as a result of these two factors?
A) Demand and supply will both increase.
B) Supply will increase, but these two factors will not shift the demand curve.
C) Demand will increase and supply will decrease.
D) Demand will increase, but these two factors will not shift the supply curve.
8)
9) If a firm has an incentive to increase supply now and decrease supply in the future, the firm
expects that the
A) price of inputs will be lower in the future than they are today.
B) price of its product will be lower in the future than it is today.
C) price of its product will be higher in the future than it is today.
D) demand for the product will be lower in the future than it is today.
9)
10) A decrease in the price of GPS systems will result in
A) a decrease in the demand for GPS systems.
B) a smaller quantity of GPS systems supplied.
C) a larger quantity of GPS systems supplied.
D) an increase in the supply of GPS systems.
10)
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
11) An inferior good is a good for which the quantity demanded decreases as the price increases,
holding everything else constant.
11)
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
12) Draw a demand curve and label it D1. On the graph, illustrate an increase in demand and a decrease in
demand, and label the curves D2 and D3, respectively. Starting on demand curve D1 , explain the shift that
would result from each of the following events:
a. an increase in income and the good is a normal good
b. an increase in income and the good is an inferior good
c. a decrease in the price of a substitute good
d. a decrease in the price of a complementary good
e. an increase in the taste for the good
f. a decrease in population
g. an increase in the expected future price of the good
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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
13) Which of the following would cause an increase in the equilibrium price and an increase in the
equilibrium quantity of watermelons?
A) an increase in demand and an increase in supply
B) an increase in supply
C) a decrease in demand and an increase in supply
D) an increase in supply and an increase in demand greater than the increase in supply
13)
14) If the absolute value of the price elasticity of demand for aspirin equals 0.8 then
A) the demand for aspirin is inelastic.
B) aspirin is a normal good.
C) aspirin has few substitutes.
D) the demand for aspirin is elastic.
14)
15) Economists have estimated that the cross-price elasticity of demand between beer and spirits is
-0.50, the income elasticity for spirits is 1.21 and the income elasticity for wine is 5.03. These
elasticities mean that beer and spirits are ________, and spirits and wine are ________.
A) normal goods; luxuries
B) substitutes; luxuries
C) complements; luxuries
D) complements; substitutes
15)
16) If at a price of $24, Octavia sells 36 home-grown orchids and at $30 she sells 24 home-grown
orchids, the demand for her orchids is
A) perfectly elastic.
B) elastic.
C) unit elastic.
D) inelastic.
16)
17) Holding everything else constant, the absolute value of the price elasticity of demand for Saucony
tennis shoes is ________ the price elasticity of demand for tennis shoes.
A) twice as great as
B) equal to
C) greater than
D) less than
17)
18) Studies show that the income elasticity of demand for wine is 5.03 and the income elasticity of
demand for spirits is 1.21. This indicates that
A) wine and spirits are highly price elastic.
B) wine is a luxury good and spirits are necessities.
C) wine and spirits are luxury goods.
D) wine is a luxury good and spirits are inferior goods.
18)
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
19) The demand for most farm products is relatively inelastic. A drought that reduces the supply of
farm products will also cause farm revenues to fall.
19)
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
20) In order to prove that Motrin and Ibuprofen are substitutes, one should measure the ________ and
get a ________.
A) price elasticity of demand; number greater than 1 (in absolute value)
B) cross-price elasticity; negative number
C) cross-price elasticity; positive number
D) price elasticity of demand; number less than 1 (in absolute value)
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20)
Figure 6-2
21) Refer to Figure 6-2. The absolute value of the price elasticity of demand at points a and b is 1. What
is the value of Pb?
21)
22) Suppose when Nablom's Bakery raised the price of its breads by 10 percent, the quantity
demanded fell by 15 percent. What was the effect on sales revenue?
A) Sales revenue remained unchanged.
B) Sales revenue decreased.
C) Sales revenue increased.
D) It cannot be determined without information on prices.
22)
23) Consider the following pairs of items:
a. shampoo and conditioner
b. iPhones and earbuds
c. a laptop computer and a desktop computer
d. beef and pork
e. air-travel and weed killer
23)
A) $50
B) $40
C) $30
D) $20
Which of the pairs listed will have cross-price elasticity of zero?
A) a and b only
B) c only since most people cannot do without computers
C) e only
D) none of the pairs listed
24) Most people buy salt infrequently and in small quantities. Even a doubling of the price of salt is
likely to result in a small decline in the quantity of salt demanded. Therefore,
A) the price elasticity of demand for salt is greater than 1 (in absolute value).
B) salt is a normal good.
C) the demand for salt will be perfectly inelastic.
D) the demand for salt is relatively inelastic.
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24)
Figure 6-4
25) Refer to Figure 6-4. The inelastic segment of the demand curve
A) lies above the midpoint of the curve.
B) is coincident with the horizontal axis.
C) is coincident with the vertical axis.
D) lies below the midpoint of the curve.
25)
Figure 6-9
26) Refer to Figure 6-9. The data in the diagram indicates that DVDs are
A) luxury goods.
B) inelastic goods.
C) necessities.
D) both luxury goods and inelastic goods.
E) both necessities and inelastic goods.
26)
27) Suppose a hurricane decreased the supply of oranges so that the price of oranges rose from $120 a
ton to $180 a ton and quantity sold decreased from 800 tons to 240 tons. What is the absolute value
of the price elasticity of demand?
A) 0.11
B) 0.37
C) 2.69
D) 9.33
27)
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28) If at a price of $24, Octavia sells 36 home-grown orchids and at $30 she sells 24 home-grown
orchids, the demand for her orchids is
A) inelastic.
B) unit elastic.
C) perfectly elastic.
D) elastic.
28)
29) Suppose when Nablom's Bakery raised the price of its breads by 10 percent, the quantity
demanded fell by 15 percent. What was the effect on sales revenue?
A) Sales revenue decreased.
B) Sales revenue increased.
C) Sales revenue remained unchanged.
D) It cannot be determined without information on prices.
29)
30) From 1950 to 2015 the number of people who lived on farms fell from 23 million to fewer than 3
million? Which of the following factors have contributed to this trend?
A) government policies that have increased the cost of living and working on farms
B) rapid growth in farm production and low income and price elasticities for food products
C) increases in the cost of farming and a desire for young adults to move to urban areas
D) slow growth in agricultural productivity and low income elasticities for food products
30)
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Answer Key
Testname: PS2
1) a. Substitutes
b. Substitutes
c. Complements
d. Unrelated
e. Complements
2) A
3) D
4) D
5) B
6) A
7) A
8) A
9) B
10) B
11) FALSE
12)
a, d, e, and g would increase demand, causing a shift from D1 to D2
b, c, and f would decrease demand, causing a shift from D1 to D3
13) D
14) A
15) C
16) B
17) C
18) C
19) FALSE
20) C
21) B
22) B
23) C
24) D
25) D
26) A
D
27) C
28) D
29) A
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Answer Key
Testname: PS2
30) B
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