2 1. Suppose prices for new homes have risen, yet sales of new homes have also risen. We can conclude that a. the demand for new homes has risen. b. the law of demand has been violated. c. new firms have entered the construction industry. d. construction firms must be facing higher costs. A. The demand for new homes has risen causing the price to increase and the quantity of new homes to increase as illustrated on the next page.
3 Q1Q1 Q2Q2 D1D1 S D2D2 P1P1 P2P2 An increase in demand for new homes
4 2. Which of the following statements if true of a market? a. An increase in demand, with no change in supply, will increase the equilibrium price and quantity. b. An increase in supply, with no change in demand, will decrease the equilibrium price and the equilibrium quantity. c. A decrease in supply, with no change in demand, will decrease the equilibrium price and increase the equilibrium quantity. d. all of the above are true. A. See previous graph.
5 3. Consider the market for chicken. An increase in the price of beef will a. decrease the demand for chicken, resulting in a lower price and a smaller amount of chicken purchased in the market. b. decrease the supply of chicken, resulting in a higher price a and a smaller amount of chicken purchased in the market. c. increase the demand for chicken, resulting in a higher price and a greater amount of chicken purchased in the market. d. increase the supply of chicken, resulting in a lower price and a greater amount of chicken purchased in the market. C. An increase in the price of beef will cause an increase in the demand for chicken because beef and chicken are substitutes.
6 4. An increase in consumer income increases the demand for oranges. As a result of the adjustment to a new equilibrium, there is a (an) a. leftward shift of the supply curve. b. downward movement along the supply curve. c. rightward shift of the supple curve. d. upward movement along the supply curve. D. As the demand curve shifts to the right along the upward sloping supply curve, there is a movement along the supply curve as illustrated on the next page.
7 $1200 $600 $300 481216 D1D1 The Effects of Shift in Demand on Market Equilibrium D2D2 $900 S P Q Shortage
8 5. An increase in the wage paid to grape pickers will cause the a. demand curve for grapes to shift to the right, resulting in higher prices for grapes. b. demand curve for grapes to shift to the left, resulting in lower prices for grapes. c. supply curve for grapes to shift to the left, resulting in lower prices for grapes. d. supply curve for grapes to shift to the left, resulting in higher prices for grapes. D. An increase in costs is one factor that will cause the supply curve to shift to the left as production becomes more expensive as illustrated on the next page.
9 $800 $200 2468 D Shortage $600 S1S1 S2S2 $400 The Effects of Shift in Supply on Market Equilibrium P Q
10 6. If the federal government wants to raise the price of cheese, it will a. take cheese from government storage and sell it. b. encourage farmers to research ways to produce more cheese. c. subsidize purchases of farm equipment. d. encourage farmers to produce less cheese. D. As the supply curve for cheese shifts to the left and moves along a downward sloping demand curve, equilibrium price will increase as illustrated on the next page.
11 $800 $200 2468 D Shortage $600 S1S1 S2S2 $400 The Effects of Shift in Supply on Market Equilibrium P Q
12 7. Which of the following is least likely to result from rent controls set below the equilibrium price for rental housing? a. Shortages and black markets will result. b. The existing rental housing will deteriorate. c. The supply of rental housing will increase rapidly. d. People will demand more apartments than are available. C. The supply curve will shift to the left, not to the right, as suppliers produce fewer rental units due to the lower price and lower profits.
13 8. Suppose the equilibrium price set by supply and demand is lower than the price ceiling set by the government. The result will be a. a shortage. b. that quantity demanded is equal to quantity supplied. c. a surplus. d. a black market. B. The purpose of price ceilings is to set a maximum price by law. If it is set higher than the equilibrium price, it will have no effect on the equilibrium price as illustrated on the next page.
14 $800 $600 $400 $200 2468 D S Price Ceiling Set Above Equilibrium Price Price ceiling P Q Surplus Price ceiling
15 9. A good that provides external benefits to society has a. too few resources devoted to its production. b. too many resources devoted to its production. c. the optimal resources devoted to its production. d. not provided profits to producers of the good. A. An external benefit is an unintentional byproduct of the market.
16 10. Pollution from cars is an example of a. a harmful opportunity cost. b. a negative externality. c. a production dislocation. d. none of the above. B. A negative externality imposes costs on third parties when drivers discharge pollution into the air, they erode the quality of life of others.
17 11. Which of the following is the best example of a public good? a. Pencils. b. Education. c. Defense. d. Trucks. C. None of the other answers fit the definition of a public good. A public good is something from which everyone benefits and no one can be excluded.
18 12. A public good may be defined as any good or service that a. allows users to collectively consume benefits. b. must be distributed to all citizens in equal shares. c. is never produced by government. d. is described by answers a and c above. A. Once a public good is provided, for instance a road, everyone collectively benefits from it.