When The Price Of Smart Phones Increases:

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(Credit: Elekes Andor/ Wikimedia Commons/ CC BY-SA 4.0)

1. Consider the cell phone market. Technological improvements have reduced the costs to produce cell phones. Successful advertising campaigns launched by cell phone companies have made more people want to buy cell phones. The equilibrium price of cell phones will ___________.

A) increase

B) decrease

C) stay the same

D) be ambiguous

Correct Answer: D

Explanation:

  • A reduction in production costs will cause a rightward shift of the supply curve.
  • Successful advertising campaigns will cause the demand for cell phones to shift to the right.
  • With supply and demand increasing, the impact on the equilibrium price will be ambiguous as it will depend on which curve shifts further to the right.

2. Assume that, at current prices, the cross-price elasticity of the demand for Goods A and B is -0.6. When the price of A increases, with other factors remaining the same,______________.

A) the demand curve for B will shift to the right

B) the demand curve for B will shift to the left

C) the demand curve for B will remain the same

D) the supply curve for B will shift to the right

Correct Answer: B

Hint:

  • Since the cross-price elasticity of the demand for Goods A and B is negative, the two goods are implied to be complements.
  • When the price of A increases, the demand for B will decrease.

3.

The demand for labour is: Qd = 120 – 4P

The supply of labour is: Qs = 30 + 2P

Now, suppose the government imposes a minimum wage of $20 per hour. This policy represents a _______________.

A) non-binding price floor

B) binding price ceiling

C) non-binding price ceiling

D) binding price floor

Correct Answer: D

Explanation:

Set Qd = Qs. When the market clears, P = $15.

The minimum wage is set at $20, which is higher than the equilibrium wage.

This policy is considered a binding price floor.

4.

The demand for phones is: Qd = 80 – 2p

The supply of phones is: Qs = 6p + 40

In the above scenario, the quantity of phones sold at market equilibrium is _____ and

the price elasticity of the supply at market equilibrium is ______.

A) 5, -1/7

B) 70, 3/7

C) 55, 1/7

D) 40, -3/7

Correct Answer: B

Explanation:

Set Qd = Qs. 80 – 2p = 6p + 40, then solve for p

At equilibrium, p = 5. Q = 70

Es = (ΔQs/Δp)*(p/Qs) = 6*(5/70) = 3/7

5. The demand and supply in the market for birthday cakes are given by Qd = 90 – 4P and Qs = 10 + P, respectively, where P is price measured in dollars. What is the equilibrium price for birthday cakes?

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A) $16

B) $26

C) $36

D) $66

Correct Answer: A

Steps:

Set Qd = Qs

90 – 4P = 10 + P

90 – 10 = P + 4P

80 = 5P

Solve for P. P = $16

6. Over the past few decades, technological improvements in agriculture have led to significantly higher efficiencies in the production of soybean. At the same time, numerous health scientists have advocated for the increased consumption of soy milk.

(1) How will these changes affect the demand and supply of soy milk?

(2) True or False: Assume the demand curve shifts further to the right than the supply curve. We will observe an unambiguous decrease in the price of soy milk and an unambiguous increase in the quantity of soy milk.

Answer:

(1) Both the demand and supply curves will shift to the right.

(2) False. In this scenario, both the equilibrium price and the quantity of soy milk will increase unambiguously.

7. Which of the following scenarios would NOT cause a shift in the demand curve for iPhones?

A) The price for Android phones decreases

B) The price for Android phones increases

C) The price to manufacture iPhones increases

D) A new research study reveals that smartphones may have negative effects on your future health

Correct Answer: C

Explanation:

All of these scenarios cause the demand curve to shift, except for option C. When the price for Android phones decreases, the demand curve for iPhones will shift to the left since they are substitutes. So, if the price for Android phones increases, the demand curve for iPhones will shift to the right. And if a study proves that all smartphones have negative effects on people’s health, fewer people would want an iPhone, causing the demand curve to shift to the left. Nevertheless, if the price to manufacture iPhones increases, the supply curve, rather than the demand curve would shift. Manufacturers would supply fewer phones since it is more costly to do so.

8. The cross-price elasticity of demand for buns and burger patties is -0.8. If the price of buns decreases, what will happen to the demand curve and the equilibrium price for burger patties?

A) Demand curve shifts to the left and equilibrium price decreases

B) Demand curve remains unchanged and equilibrium price increases

C) Demand curve shifts to the right and equilibrium price remains unchanged

D) Both the demand curve and equilibrium price do not change

E) Demand curve shifts to the right and the equilibrium price increases

Correct Answer: E

Solution:

The cross-price elasticity of demand is negative, which means that the two goods are complements. When the price of one good decreases, the demand curve for the other good shifts to the right. When the demand curve shifts to the right, the equilibrium price increases.

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9. A 10% decrease in the price of Good X causes the quantity demanded for X to increase from 100 units to 120 units. How much will the quantity demanded for X fall if the current price increases by 5%?

Correct Answer: The quantity demanded for X will decrease by 10%.

Solution:

Percentage change in Qd = (120 – 100) / 100 = 20%

When price decreases by 10%

Ed = %change in quantity demanded / %change in price

Ed = (+20%) / (-10%) = -2

Ed = -2

If the current price increases by 5%

Ed = %change in quantity demanded / %change in price

-2 = %change in quantity demanded / (+5%)

Hence, %change in quantity demanded = -10%

10. Suppose two customers exist in the market for scissors and their individual demand curves are:

Jessica’s demand for scissors: QD = 12 – P

Audrey’s demand for scissors: P = 18 – QD

The market supply curve is:

QS = 4P – 30

Given the above, what is the market equilibrium price of scissors?

A) $9

B) $9.5

C) $10

D) $10.5

Correct Answer: C

Explanation:

Summing up individual demand, the market demand curve is:

QD = 12 – P +18 – P

QD = 30 – 2P

At equilibrium, QD = QS

30 – 2P = 4P – 30

60 = 6p

10 = p

Therefore, the equilibrium price is $10

11. In downtown Hamilton, a hotel exists with more than 500 identical rooms. It can accommodate 1,000 people at the same time. Last year, each hotel room price was $150 per night, and on average, 350 rooms were rented out per day. This year, the hotel saw a drop in revenue when the manager made a price change. Now, each room is rented out at $99 per night. As a result, 378 rooms are being rented each day. Calculate the price elasticity of demand.

Answer:

Ed = % ∆ in Qd / % ∆ in P

[(378 – 350) / 350] / [(99 – 150) / 150] = -0.08 / 0.34 or -0.2353

12. Assume the demand for face masks is Qd = 240 – P and the supply of face masks is Qs = 7P. At P = $25, which of the following statements is true?

A) There is a surplus of 40 masks

B) There is a shortage of 40 masks

C) There is a shortage of 5 masks

D) There is a surplus of 5 masks

Correct Answer: B

Explanation:

At P = 25, Qd = 240 – 25 = 215

Qs = 7*25 = 175

Qd – Qs = 40

There is a shortage of 40 masks

13. The market for keto bread clears when P = $10 and Q = 500. Assume the government enforces a price control, mandating that the bread must be sold at a maximum of $5 per loaf. This type of price control is _________, and it will cause a ______ in the market.

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A) Price floor, shortage

B) Price floor, surplus

C) Price ceiling, shortage

D) Price ceiling, surplus

Correct Answer: C

Explanation:

When P is lower than the equilibrium level, Qd > Qs, and a shortage will emerge.

14. Which of the following will cause a shift to the left in the supply curve of apple juice?

A) An increase in the price of apples

B) A decrease in the price of apple juice

C) An increase in the price of orange juice

D) An improvement in the production technology of apple juice

Correct Answer: A

Explanation/Steps:

The production costs of apple juice increase when the price of apples increases, which causes the supply curve of apple juice to shift to the left.

15. Suppose that at equilibrium, the price elasticity of demand for wheat is -1.5 and the price elasticity of supply is 0.5. If the government imposes a price ceiling that is 12% below the equilibrium price, this price constraint will lead to:

A) A shortage equal to 24% of the equilibrium quantity

B) A surplus equal to 24% of the equilibrium quantity

C) A shortage equal to 2.4% of the equilibrium quantity

D) A surplus equal to 2.4% of the equilibrium quantity

Correct Answer: A

Explanation/Steps:

When the price of wheat decreases by 12%, the quantity of wheat demanded will increase by -1.5*(-12%) = 18%, and the quantity of wheat supplied will decrease by 0.5*12% = 6%.

Qd – Qs = (18% + 6%) Qe; i.e., 24% of the equilibrium quantity.

16. True or False: When the price of Product A increases by 1%, the quantity of A demanded will decrease by 5%. Therefore, we can infer that the demand for product A is elastic at the current price.

Correct Answer: True

Explanation/Steps:

Ed = (-5%) / (+1%) = -5

17. When the demand curve shifts to the right and the supply curve shifts to the left, what will happen to the equilibrium price and quantity?

Correct Answer:

With supply decreasing and demand increasing, the equilibrium price will increase. The impact on the equilibrium quantity will be ambiguous.

18. Assume the price elasticity of the supply for steak is 0.4. If the price of steak increases by 7%, what is the expected change in the quantity of steak supplied in the market?

A) -2.8%

B) +2.8%

C) -28.0%

D) +28.0%

Correct Answer: B

Explanation/Steps:

Es = (%Δ in Qs) / (%Δ in P)

%Δ in Qs = 0.4 * 7% = 2.8%

19. Milk and bread are complements. An increase in the price of milk will cause ______________.

A) the demand for milk to shift to the right

B) the demand for bread to shift to the left

C) the quantity of milk demanded to increase

D) the quantity of bread demanded to increase

Correct Answer: B

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