# Homework 2 Market Equilibrium and Shocks

Save this PDF as:

Size: px
Start display at page:

## Transcription

2 shifts out (and up). Ceteris paribus, this means the new equilibrium price of crude will be higher. Since crude oil is an input in the production of gasoline, we should see a shift in (and up) in the supply of gasoline. This leads to a higher price and lower quantity exchanged of gasoline. COMMENT 1 Have we described the story with causality in the right direction? Maybe not. World income increases should have its first-order influence on final products and services. In other words, there is good reason to think that an increase in world income will lead to an outward shift in the demand for things like car travel, jet travel, larger homes, and freight transport and therefore gasoline, jet fuel, heating oil and deisel. The increased demand for these refined products should in turn increase their price which in turn shifts out the demand for the input, crude oil. So a slightly more sophisticated look at the increased demand for refined products might ask whether, for example, the outward shift in the demand for gasoline was greater or less than the average outward shift in the demand for other refined products (deisel, jet fuel, etc.). What do I mean by this? How would you measure it? and why do we care? Suppose the really big jump in demand was in freight transport and therefore diesel fuel and there was only a small direct outward shift in the demand for personal transport (and therefore gasoline). This would indeed put upward pressure on the price of crude oil, which normally (in ceteris paribus world) would mean a shift up in the supply curve of gasoline. However ceteris is not paribus. Besides the upward pressure on gasoline s supply curve because of the increase in the price of oil, there may also be some counter veiling downward pressure on that supply curve to the extent that deisel and gasoline are complements in production in the short run. 1 Moreover there is the simultaneously outward shift in the demand for gas. 2 So what do we have? Suppose we knew the upward pressure on the supply cureve for gas was greater than the downward pressure (because the complement in production effect is small), then we would certainly be able to say that the new price of gas is going to be higher. But the quantity movement is less certain. The supply shift pushes quanitity lower while the demand shift pushes quantity higher. Now overall the quantity of crude oil should be increasing, so we expect overall to have more refine products, but not necessarily in a uniform manner. All the prices (for LPG, gas, deisel, jet fuel, heating oil) will probably be higher, but in some of these markets the supply shift due to the increased price of crude will overpower the demand shift and quantities may be lower. COMMENT 2 Global versus local. Crude oil trades in a truly integrated world market. It is very difficult for the price of crude oil to be radically different in Texas than it is in Indonesia (adjusted for grade of course). This is because demanders of crude oil have the freedom to order it up from whom ever is offering the best deal. That freedom derives from low to non-existent trade barriers and ability of modern tankers and pipelines to carry the stuff over long distances at low 1 Without knowing how easily and in what time frame a oil refineries can shift the proportion of crude they make into various refined products, we cannot say precisely whether two refine products are substitutes or complements in production. However, I think it is safe to say that the longer the length of run the more substitutes in production there will be. 2 Both because of the primary income motivate increase in demand for personal transport and also because diesel and gasoline are substitutes in consumption 2

3 cost. 3 That said, this is less true for refined products. Refineries tend to be located closer to where the final products are consumed. tends to get shipped around in smaller batches over shorter distances. Therefore gasoline markets have a little local flavor to them. It is possible to sustain higher prices of gasoline in one country or region than another - at least in the short term. So one way to read this problem is to assume that non-u.s. demand for crude oil shifted out. Then from the point of view of U.S. refiners and U.S. consumers, the story really is as simple as the first answer. Price of Oil ( U.S. \$ / barrel ) Crude Oil Market Market Oil (M Barrels / Day) Figure 1. The left diagram illustrates the effect of raising world income in the crude oil market. In particular, it shows that this demand shift would lead to an increase in price for crude oil The diagram on the right show how we expect the increase in the price of crude oil to affect the gasoline market. It would shift supply up and to the left, increasing price and decreasing quantity. (b) The price of steel increases which raises the cost of producing automobiles.answer A good diagram for the automobile market would show the supply curve shifting in (and up). This means that the price of automobiles should increase and their quantity decrease. Ceteris paribus, an increase in the price of a complement to gasoline (automobiles) should cause the demand curve for gasoline to shift in (and down). Therefore we expect to see a lower price of gasoline and lower quantity traded. See Figure 2. Market for Automobiles Market for Price of Cars ( U.S. \$ / car ) Automobiles (Cars / Day) Figure 2. An increase in the price of steel might be expected to put downward pressure on the price for gasoline (via the market for autos). (c) Congress increases highway spending by \$100 billion. ANSWER It is useful to consider the demand for driving as the intermediary between roads and gasoline. Whether or not the shock described in the problem shifts the demand for gasoline in or out will depend on how the shock affects the quantity and quality of miles driven. In the short run, 3 Note, this is why economists cringe whenever politicians say we have to reduce our dependence on oil from the middle east. It doesn t matter where the oil comes from. Our demand contributes to the price and middle-eastern suppliers will enjoy that price whether we buy it from them or the norwegians. 3

5 both diesel and gasoline powered cars, so we should see the demand for gasoline shift in (and down). What about supply? As mentioned in part (a), it is hard to know to what extent gasoline and diesel are substitutes or complements in production. The longer the run the more they are substitutes in production, but in the very short run at least they may be complements in production. Under the assumption that they are substitutes in production, we should see the supply curve for gasoline to shift down (and out). Hence, under this assumption, both shifts contribute a lower price for gasoline, while the supply and demand shifts work in opposite directions w.r.t. quantity. See Figure 4. Diesel Market Market Price of Diesel S0 (subsitutes in production assumption) D1 Diesel Fuel (?) Figure 4. The effect of the downturn in heavy construction on the gasoline market (via the market for deisel) under the assumption that diesel and gasoline are substitutes in production and consumption. (e) Food and health care prices increase while wages remain stagnant. ANSWER. This sounds a lot like an income decrease. In fact, it is equivalent. When the prices of most things increase and wages / income do not increase it looks very similar to the kind of budget line shift cause by an decrease in income. It is accurate to call this a decrease in real income. So demand shifts in (and down). Quantity and price of gasoline both decrease. See Figure 5. 5

6 Income Decrease in the Market for Gas. Figure 5. The effect of the downturn in heavy construction on the gasoline market (via the market for deisel) under the assumption that diesel and gasoline are substitutes in production and consumption. (f) The U.S. signs a global warming treaty and agrees to reduce CO 2 emissions by imposing a tax on all fossil fuel extraction and importation. However, the full amount of the tax is rebated back to each citizen in equal shares. ANSWER The fossil fuel tax will increase the price of crude oil faced by refiners. Therefore we certainly will see a shift up (and left) in the Supply curve for Gas. The rebate will shift Demand out (and up). Both of these work to push price up. However the effect on quantity would appear to be ambiguous, since the supply shift pushes quantity down and the demand shift pushes quantity up. Can we say any more? It depends on several things. First a fossil fuel tax would also be applied to coal and natural gas, so one question is what percentage of the tax is being paid by the gasoline market? Do the participants in this market as a whole expect to receive more in rebates then they pay in tax? If so and the overall rebate to the gasoline market is significantly larger than what is paid in tax, then we migh expect to see an overall increase in gasoline consumption. 4 Suppose, however, that the gasoline market overall pays about the same in tax and they receive in rebates. Then we can expect the substitution effect to outstrip the income effect and see the quantity of gasoline to decrease. Note this may not hold on an individual household level. Households who consume significantly less gasoline than average will be getting rebate checks larger than their contribution to the tax. Some of these households may demand more gasoline. 4 This is probably a more realistic story for natural gas. Natural gas is a fossil fuel but one which would be subject to a relatively low tax rate per BTU under a carbon tax. Hence it is easy to imagine how under such a policy the overall volume of natural gas could increase. 6

7 Price of Oil Oil Market Gas Market Crude Oil?? Figure 6. Carbon Tax effect on the gasoline market. (g) A company invents a new battery and builds an electric car capable of 400 miles on a single charge. ANSWER This would lower the demand for gasoline powered cars and therefore lower the demand for gasoline. We would price and quantity go down. Similar to picture in Figure 5. (h) A new national trend in zoning laws encourages redevelopment of dense neighborhoods near city centers. ANSWER. Some cities in recent years have begun to reverse the doughnut effect of suburban sprawl. Residential areas near the center of the city which were abondonned in the 60s 70s and 80s get re-populated. To the extent that these people now live closer to their work and shopping districts, demand for gasoline should shift down and in. I have seen this happen quite dramatically in Madison, WI as well as certain neighborhoods in Chicago and Baltimore. Though I do not know whether it was motivated by zoning laws or something else. Again, graphically this looks like the shift in Figure 5. 7

### Demand, Supply and Elasticity

Demand, Supply and Elasticity CHAPTER 2 OUTLINE 2.1 Demand and Supply Definitions, Determinants and Disturbances 2.2 The Market Mechanism 2.3 Changes in Market Equilibrium 2.4 Elasticities of Supply and

### Chapter 3 Market Demand, Supply, and Elasticity

Chapter 3 Market Demand, Supply, and Elasticity After reading chapter 3, MARKET DEMAND, SUPPLY, AND ELASTICITY, you should be able to: Discuss the Law of Demand and draw a Demand Curve. Distinguish between

### 4 THE MARKET FORCES OF SUPPLY AND DEMAND

4 THE MARKET FORCES OF SUPPLY AND DEMAND IN THIS CHAPTER YOU WILL Learn what a competitive market is Examine what determines the demand for a good in a competitive market Chapter Overview Examine what

Chapter 9 The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis Chapter Outline The FE Line: Equilibrium in the Labor Market The IS Curve: Equilibrium in the Goods Market The LM Curve:

### Chapter 3 Market Demand, Supply and Elasticity

Chapter 3 Market Demand, Supply and Elasticity Multiple Choice Questions Choose the one alternative that best completes the statement or answers the question. 1. Ceteris paribus means (a) other things

### Market Equilibrium and Applications

Market Equilibrium and Applications I. Market Equilibrium In the previous chapter, we discussed demand and supply, both for individual consumers and firms and for markets. In this chapter, we will combine

### Multiple Choice Questions for Self Study. (GZ der VWL / Introduction to Economics)

Multiple Choice Questions for Self Study (GZ der VWL / Introduction to Economics) ao. Prof. Dr. B. Yurtoglu) Economic Models 1) The purpose of making assumptions in economic model building is to (a) force

### LECTURE NOTES ON MACROECONOMIC PRINCIPLES

LECTURE NOTES ON MACROECONOMIC PRINCIPLES Peter Ireland Department of Economics Boston College peter.ireland@bc.edu http://www2.bc.edu/peter-ireland/ec132.html Copyright (c) 2013 by Peter Ireland. Redistribution

### Microeconomics Topic 3: Understand how various factors shift supply or demand and understand the consequences for equilibrium price and quantity.

Microeconomics Topic 3: Understand how various factors shift supply or demand and understand the consequences for equilibrium price and quantity. Reference: Gregory Mankiw s rinciples of Microeconomics,

### Elasticity. I. What is Elasticity?

Elasticity I. What is Elasticity? The purpose of this section is to develop some general rules about elasticity, which may them be applied to the four different specific types of elasticity discussed in

### Supply and Demand. A market is a group of buyers and sellers of a particular good or service.

Supply and Demand A market is a group of buyers and sellers of a particular good or service. The definition of the good is a matter of judgement: Should different locations entail different goods (and

### 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

### Econ 101: Principles of Microeconomics

Econ 101: Principles of Microeconomics Chapter 16 - Monopolistic Competition and Product Differentiation Fall 2010 Herriges (ISU) Ch. 16 Monopolistic Competition Fall 2010 1 / 18 Outline 1 What is Monopolistic

### Chapter 6 Competitive Markets

Chapter 6 Competitive Markets After reading Chapter 6, COMPETITIVE MARKETS, you should be able to: List and explain the characteristics of Perfect Competition and Monopolistic Competition Explain why a

### Demand, Supply, and Market Equilibrium

3 Demand, Supply, and Market Equilibrium The price of vanilla is bouncing. A kilogram (2.2 pounds) of vanilla beans sold for \$50 in 2000, but by 2003 the price had risen to \$500 per kilogram. The price

### Taxes and Subsidies PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD

Taxes and Subsidies PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD Introduction We have already established that taxes are one of the reasons that supply decreases. Subsidies, which could be called

### Chapter 3 Key for homework questions

Chapter 3 Key for homework questions 3. (Key Question) What effect will each of the following have on the demand for small automobiles such as the Mini Cooper and Smart car? a. Small automobiles become

### DEMAND AND SUPPLY. Chapter. Markets and Prices. Demand. C) the price of a hot dog minus the price of a hamburger.

Chapter 3 DEMAND AND SUPPLY Markets and Prices Topic: Price and Opportunity Cost 1) A relative price is A) the slope of the demand curve B) the difference between one price and another C) the slope of

### d d Calculating Price Elasticity of Demand: The Midpoint or Arc Method

Microeconomics Topic 5: Discuss factors that determine demand and supply elasticity. Explain how demand and supply elasticity affect tax policy and the consequences of business decisions. Reference: Gregory

### Elasticity and Its Uses

CHAPTER 4 Elasticity and Its Uses CHAPTER OVERVIEW One of the most practical uses of economic analysis is to predict the effects of changes in underlying conditions or policies on the prices and production

### 17. Suppose demand is given by Q d = 400 15P + I, where Q d is quantity demanded, P is. I = 100, equilibrium quantity is A) 15 B) 20 C) 25 D) 30

Ch. 2 1. A relationship that shows the quantity of goods that consumers are willing to buy at different prices is the A) elasticity B) market demand curve C) market supply curve D) market equilibrium 2.

### as a function of E D and E S can be looked as follows:

TOPIC IV: MARKETS IN ACTION - Applications of S&D and E D &E S A. Using E D and E S to increase our understanding of the impact of a change in S or D. B. Price ceilings and price floors C. Trade quotas

### Chapter 13. Aggregate Demand and Aggregate Supply Analysis

Chapter 13. Aggregate Demand and Aggregate Supply Analysis Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics In the short run, real GDP and

### ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 23 Chapter 8 WRITE [4] Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot

### CHAPTER 4 WORKING WITH SUPPLY AND DEMAND

CHAPTER 4 WORKING WITH SUPPLY AND DEMAND ANSWERS TO ONLINE REVIEW QUESTIONS 1. The rate of change along a demand curve measures how much one variable changes for every one-unit change in another variable.

### Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay. Lecture - 10 Theory of Demand (Contd )

Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay Lecture - 10 Theory of Demand (Contd ) In continuation to our last session on theory of demand

### Chapter 4 Supply and Demand Macroeconomics In Context (Goodwin, et al.)

Chapter 4 Supply and Demand Macroeconomics In Context (Goodwin, et al.) Chapter Overview In this chapter, you ll find the basics of supply and demand analysis. As you work through this chapter, you will

### Midterm Exam #2. ECON 101, Section 2 summer 2004 Ying Gao. 1. Print your name and student ID number at the top of this cover sheet.

NAME: STUDENT ID: Midterm Exam #2 ECON 101, Section 2 summer 2004 Ying Gao Instructions Please read carefully! 1. Print your name and student ID number at the top of this cover sheet. 2. Check that your

### Short-Run Production and Costs

Short-Run Production and Costs The purpose of this section is to discuss the underlying work of firms in the short-run the production of goods and services. Why is understanding production important to

### Demand, Supply, and Market Equilibrium

Chapter Summary 4 Demand, Supply, and Market Equilibrium In this chapter, we ve seen how demand and supply determine prices. We also learned how to predict the effects of changes in demand or supply on

### Supply, Demand, Equilibrium, and Elasticity

The Meaning of Supply Supply describes the available goods and services in an economy. In a freemarket economy like the United States, firms tend to be the economic agents producing goods and services

### ECON 101 MIDTERM 1 REVIEW SESSION (WINTER 2015) BY BENJI HUANG

ECON 101 MIDTERM 1 REVIEW SESSION (WINTER 2015) BY BENJI HUANG TABLE OF CONTENT I. CHAPTER 1: WHAT IS ECONOMICS II. CHAPTER 2: THE ECONOMIC PROBLEM III. CHAPTER 3: DEMAND AND SUPPLY IV. CHAPTER 4: ELASTICITY

### Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly

Chapter 6 The Two Extremes: Perfect Competition and Pure Monopoly Learning Objectives List the four characteristics of a perfectly competitive market. Describe how a perfect competitor makes the decision

### Demanded per year a. Graph this demand curve in Figure 1. Label the axes. Figure 1

Practice Homework Supply & Demand Economics 101 The Economic Way of Thinking 1. MULTI-PART QUESTION: Suppose the demand curve for MSU sweatshirts is given by: Price Quantity Demanded per year 10 4000 20

### Douglas, Spring 2008 February 21, 2008 PLEDGE: I have neither given nor received unauthorized help on this exam.

, Spring 2008 February 21, 2008 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Midterm 1 1. What will happen to the equilibrium price of hamburgers

### SUPPLY AND DEMAND : HOW MARKETS WORK

SUPPLY AND DEMAND : HOW MARKETS WORK Chapter 4 : The Market Forces of and and demand are the two words that economists use most often. and demand are the forces that make market economies work. Modern

### Sample Questions for ECN 302 Midterm 1

Sample Questions for ECN 302 Midterm 1 The correct answers are highlighted in yellow and the explanations for selected questions are provided in bold italics. Question (1): Which of the following will

### (P 2 P 1 )/[(P 1 + P 2 )/2]. It shows how flexible sellers are to a change in price.

September 15, 2008 Elasticity of supply The price elasticity of supply measures how quantity offered of a good responds to a change in the good s price. It is defined the same as price elasticity of demand,

### Economics 352: Intermediate Microeconomics

Economics 35: Intermediate Microeconomics Notes and Sample Questions Chapter Twelve: The Partial Equilibrium Competitive Model and Applied Competitive Analysis This chapter will investigate perfect competition

### Competitive Market Equilibrium

Chapter 14 Competitive Market Equilibrium We have spent the bulk of our time up to now developing relationships between economic variables and the behavior of agents such as consumers, workers and producers.

### Answers to the Problems Chapter 4

Answers to the Problems Chapter 4 1. a. The price elasticity of demand is 1.25. The price elasticity of demand equals the percentage change in the quantity demanded divided by the percentage change in

### Econ 100B: Macroeconomic Analysis Fall Problem Set #3 ANSWERS (Due September 15-16, 2008)

Econ 100B: Macroeconomic Analysis Fall 2008 Problem Set #3 ANSWERS (Due September 15-16, 2008) A. On one side of a single sheet of paper: 1. Clearly and accurately draw and label a diagram of the Production

### PAGE 1. Econ 2113 - Test 2 Fall 2003 Dr. Rupp. Multiple Choice. 1. The price elasticity of demand measures

PAGE 1 Econ 2113 - Test 2 Fall 2003 Dr. Rupp Multiple Choice 1. The price elasticity of demand measures a. how responsive buyers are to a change in income. b. how responsive sellers are to a change in

### Review Notes The Demand for Labor Elasticities

Review Notes The Demand for Labor Elasticities Wage elasticity of the demand for labor = η w What is the impact of the minimum wage on labor markets? Recall that if the market is competitive then the wage

### Econ 201 Exam 1 F2002 Professor Phil Miller Name: Student Number:

Econ 201 Exam 1 F2002 Professor Phil Miller Name: Student Number: Multiple Choice (3 points each) Directions: Identify the letter of the choice that best completes the statement or answers the question.

### BASIC MARKET ELEMENTS. Supply Demand Price Competition

BASIC MARKET ELEMENTS Supply Demand Price Competition Supply Supply is the quantity of goods that firms are willing to produce and sale with respect to the market price when all other conditions (like

### Considering a US Carbon Tax

Considering a US Carbon Tax Frequently Asked Questions Have questions about a carbon tax? Researchers in RFF s Center for Climate and Electricity Policy have the answers. Marie Bertrand/Corbis For the

### Externality Essentials P E Q E

Micro Externality Essentials If it ain t broke, don t fix it consider our standard supply and demand diagram below note the size of the shaded economic surplus generated if we allow the market to O reach

### At the end of Chapter 18, you should be able to answer the following:

1 How to Study for Chapter 18 Pure Monopoly Chapter 18 considers the opposite of perfect competition --- pure monopoly. 1. Begin by looking over the Objectives listed below. This will tell you the main

### Chapter 27: Taxation. 27.1: Introduction. 27.2: The Two Prices with a Tax. 27.2: The Pre-Tax Position

Chapter 27: Taxation 27.1: Introduction We consider the effect of taxation on some good on the market for that good. We ask the questions: who pays the tax? what effect does it have on the equilibrium

### Price Theory Lecture 2: Supply & Demand

Price Theory Lecture 2: Supply & emand I. The Basic Notion of Supply & emand Supply-and-demand is a model for understanding the determination of the price of quantity of a good sold on the market. The

### Chapter 5 Applications of Supply and Demand

1. Elasticity of Demand (E d ) Chapter 5 Applications of Supply and Demand Measures the responsiveness of Q d to a change in price. How much does Q d change (%) when P changes (%)? We can use a formula

### MICROECONOMIC PRINCIPLES SPRING 2001 MIDTERM ONE -- Answers. February 16, 2001. Table One Labor Hours Needed to Make 1 Pounds Produced in 20 Hours

MICROECONOMIC PRINCIPLES SPRING 1 MIDTERM ONE -- Answers February 1, 1 Multiple Choice. ( points each) Circle the correct response and write one or two sentences to explain your choice. Use graphs as appropriate.

### Microeconomics Instructor Miller Practice Problems Labor Market

Microeconomics Instructor Miller Practice Problems Labor Market 1. What is a factor market? A) It is a market where financial instruments are traded. B) It is a market where stocks and bonds are traded.

### Microeconomics Instructor Miller Practice Problems Monopolistic Competition

Microeconomics Instructor Miller Practice Problems Monopolistic Competition 1. A monopolistically competitive market is described as one in which there are A) a few firms producing an identical product.

### Externalities: Problems and Solutions. 131 Undergraduate Public Economics Emmanuel Saez UC Berkeley

Externalities: Problems and Solutions 131 Undergraduate Public Economics Emmanuel Saez UC Berkeley 1 OUTLINE Chapter 5 5.1 Externality Theory 5.2 Private-Sector Solutions to Negative Externalities 5.3

### MARKETS WITHOUT POWER Microeconomics in Context (Goodwin, et al.), 3 rd Edition

Chapter 16 MARKETS WITHOUT POWER Microeconomics in Context (Goodwin, et al.), 3 rd Edition Chapter Summary This chapter presents the traditional, idealized model of perfect competition. In it, you will

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Exam Four - Sample Questions Chapters 12-14 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) What is the difference between perfect competition

### An increase in the number of students attending college. shifts to the left. An increase in the wage rate of refinery workers.

1. Which of the following would shift the demand curve for new textbooks to the right? a. A fall in the price of paper used in publishing texts. b. A fall in the price of equivalent used text books. c.

### Consumer and Producer Surplus. Consumer and Producer Surplus. Consumer Surplus. Consumer Surplus. Consumer Surplus Individual consumer surplus

Consumer and Consumer and February 6, 2007 Reading: Chapter 6 Introduction Consumer surplus Producer surplus Efficiency and the gains from trade s 2 Introduction Connections to: Opportunity costs to consumers

### Pre-Test Chapter 18 ed17

Pre-Test Chapter 18 ed17 Multiple Choice Questions 1. (Consider This) Elastic demand is analogous to a and inelastic demand to a. A. normal wrench; socket wrench B. Ace bandage; firm rubber tie-down C.

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Chapter 11 Perfect Competition - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Perfect competition is an industry with A) a

### Chapter 8. Competitive Firms and Markets

Chapter 8. Competitive Firms and Markets We have learned the production function and cost function, the question now is: how much to produce such that firm can maximize his profit? To solve this question,

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The law of demand states that, other things remaining the same, the lower the price of a good,

### chapter >> Making Decisions Section 2: Making How Much Decisions: The Role of Marginal Analysis

chapter 7 >> Making Decisions Section : Making How Much Decisions: The Role of Marginal Analysis As the story of the two wars at the beginning of this chapter demonstrated, there are two types of decisions:

### Micro Externalities WCC P E Q Q

Micro Externalities WCC If it ain t broke, don t fix it consider our standard supply and demand diagram below note the size of the shaded economic surplus generated if we allow the market to reach its

### CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY Learning goals of this chapter: What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How

### Supply and Demand, and Market Failure. Economics looks at the world from a perspective of choices we make given our limited resources.

and Demand, and Market Failure Economics looks at the world from a perspective of choices we make given our limited resources. Economics - the study of how society manages its scarce resources Or the study

### I d ( r; MPK f, τ) Y < C d +I d +G

1. Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the

### Student Name: Date: Teacher Name: Heather Creamer. Score:

Economics EOC Quiz Answer Key Microeconomic Concepts - (SSEMI1) Flow Of Goods, (SSEMI2) Law Of Demand, (SSEMI3) Economic Behavior, (SSEMI4) Organization And Role Of Business Student Name: Teacher Name:

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Chapter 3 - Demand and Supply - Sample Questions Answers are at the end fo this file MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A relative

### CALIFORNIA POLICY BRIEFING MEMO MOTOR VEHICLE FUEL DIVERSIFICATION

IMPACT OF CALIFORNIA TRANSPORTATION POLICIES ON LONG TERM FUEL DIVERSIFICATION, FUEL PRODUCER MARKET POWER, AND MOTOR VEHICLE FUEL (GASOLINE AND DIESEL) PRICES James Fine, PhD, Senior Economist, Environmental

### Elasticity and applications. Elasticity. Price elasticity of demand. Two demand curves 06.03.2012

Elasticity Elasticity and applications Law of demand: The demand curve is downward-sloping. As price rises quantity demanded falls, [as price falls quantity demanded rises]. Two markets: public transportation

### How to Study for Chapter 3 The Law of Demand Chapter 3 introduces the law of demand and the principle of elasticity.

1 How to Study for Chapter 3 The Law of Demand Chapter 3 introduces the law of demand and the principle of elasticity. 1. Begin by looking over the Objectives listed below. This will tell you the main

### Market Definition, Elasticities and Surpluses

Sloan School of Management 15.010/15.011 Massachusetts Institute of Technology rofessors Berndt, Chapman, Doyle, and Stoker RECITATION NOTES #1 Market Definition, Elasticities and Surpluses Friday - September

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Chapter 6 - Markets in Action - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The short-run impact of the San Francisco earthquake

### a) Policies to achieve efficient resource allocation and correct market failure Indirect Taxes CIE A-level Economics

a) Policies to achieve efficient resource allocation and correct market failure Indirect Taxes Indirect taxes are imposed by the government and they increase production costs for producers. Therefore,

### Practice Questions Week 3 Day 1

Practice Questions Week 3 Day 1 Figure 4-1 Quantity Demanded \$ 2 18 3 \$ 4 14 4 \$ 6 10 5 \$ 8 6 6 \$10 2 8 Price Per Pair Quantity Supplied 1. Figure 4-1 shows the supply and demand for socks. If a price

### INTRODUCTORY MICROECONOMICS Instructor: Filip Vesely 12

INTRODUCTORY MICROECONOMICS Instructor: Filip Vesely 12 MIDTERM EXAM will be on March 29 Everything you earn and many things you buy are taxed. Who really pays these taxes? Tax Incidence is the division

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that

### Summary Chapter 12 Monopoly

Summary Chapter 12 Monopoly Defining Monopoly - A monopoly is a market structure in which a single seller of a product with no close substitutes serves the entire market - One practical measure for deciding

### Pre Test Chapter 3. 8.. DVD players and DVDs are: A. complementary goods. B. substitute goods. C. independent goods. D. inferior goods.

1. Graphically, the market demand curve is: A. steeper than any individual demand curve that is part of it. B. greater than the sum of the individual demand curves. C. the horizontal sum of individual

### Practice Questions Week 8 Day 1

Practice Questions Week 8 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The characteristics of a market that influence the behavior of market participants

### Practice Questions Week 2 Day 1 Multiple Choice

Practice Questions Week 2 Day 1 Multiple Choice 1. When individuals come together to buy and sell goods and services, they form a(n) a. economy b. market c. production possibilities frontier d. supply

### Perfect Competition. Perfect competition a pure market

We now move on to study the economics of different market structures. The spectrum of competition ranges from perfectly competitive markets where there are many sellers who are price takers to a pure monopoly

### EC2105, Professor Laury EXAM 2, FORM A (3/13/02)

EC2105, Professor Laury EXAM 2, FORM A (3/13/02) Print Your Name: ID Number: Multiple Choice (32 questions, 2.5 points each; 80 points total). Clearly indicate (by circling) the ONE BEST response to each

### chapter Perfect Competition and the >> Supply Curve Section 3: The Industry Supply Curve

chapter 9 The industry supply curve shows the relationship between the price of a good and the total output of the industry as a whole. Perfect Competition and the >> Supply Curve Section 3: The Industry

### The Demand Curve. Supply and Demand. Shifts in Demand. The Law of Demand. Lecture 3 outline (note, this is Chapter 4 in the text).

upply and emand Lecture 3 outline (note, this is Chapter 4 in the text). The demand d curve The supply curve Factors causing shifts of the demand curve and shifts of the supply curve. Market equilibrium

### Supplement Unit 1. Demand, Supply, and Adjustments to Dynamic Change

1 Supplement Unit 1. Demand, Supply, and Adjustments to Dynamic Change Introduction This supplemental highlights how markets work and their impact on the allocation of resources. This feature will investigate

### 5. Suppose demand is perfectly elastic, and the supply of the good in question

ECON 1620 Basic Economics Principles 2010 2011 2 nd Semester Mid term test (1) : 40 multiple choice questions Time allowed : 60 minutes 1. When demand is inelastic the price elasticity of demand is (A)

### ECON 600 Lecture 5: Market Structure - Monopoly. Monopoly: a firm that is the only seller of a good or service with no close substitutes.

I. The Definition of Monopoly ECON 600 Lecture 5: Market Structure - Monopoly Monopoly: a firm that is the only seller of a good or service with no close substitutes. This definition is abstract, just

### Problem Set 2 - Answers. Gains from Trade and the Ricardian Model

Page 1 of 11 Gains from Trade and the Ricardian Model 1. Use community indifference curves as your indicator of national welfare in order to evaluate the following claim: An improvement in the terms of

### Quantity of trips supplied (millions)

Taxes chapter: 7 1. The United tates imposes an excise tax on the sale of domestic airline tickets. Let s assume that in 2010 the total excise tax was \$6.10 per airline ticket (consisting of the \$3.60

### Introduction to microeconomics

RELEVANT TO ACCA QUALIFICATION PAPER F1 / FOUNDATIONS IN ACCOUNTANCY PAPER FAB Introduction to microeconomics The new Paper F1/FAB, Accountant in Business carried over many subjects from its Paper F1 predecessor,

### Assignment 3. 1. Which of the following statements is true of any market?

Assignment 3 1. Which of the following statements is true of any market? a) There must be a supply of the item but not necessarily a demand for the item. b) Demand and supply are always equal for an item.

### I. Introduction to Aggregate Demand/Aggregate Supply Model

University of California-Davis Economics 1B-Intro to Macro Handout 8 TA: Jason Lee Email: jawlee@ucdavis.edu I. Introduction to Aggregate Demand/Aggregate Supply Model In this chapter we develop a model

### Chapter 8 Application: The Costs of Taxation

Chapter 8 Application: The Costs of Taxation Review Questions What three factors must be taken into account in order to fully understand the effect of taxes on economic well-being? ANSWER: In order to

### MFP SET. Lecture 3 Surplus: Consumer & producer Elasticity & its applications MFP SET 2000 1

MFP SET Lecture 3 Surplus: Consumer & producer Elasticity & its applications MFP SET 1 Consumer surplus! Willingness to pay: the maximum amount that a consumer will pay for a good! Consumer surplus: the