Week+2+Questions+and+Recommended+Answers

` Week 2 Group Problems CUSP 200 Student: ___

1. Refer to the graph above. At a price of 90 cents per dozen: A. there is a shortage of 2,000 dozen eggs per week. B. there is a surplus of 2,000 dozen eggs per week. D. there is a shortage of 1,000 dozen eggs per week. Reason: Self-explanatory.
 * C. quantity demanded is just equal to quantity supplied. **

2. Which of the following is not held constant as you move along the demand curve? B. The price of other goods. C. The incomes of consumers. D. The preferences of consumers for the good. Reason: Self-explanatory.
 * A. The price of that good. **



3. Refer to the graph above. The relevant market is corn. The impact of a poor corn harvest on the market for corn would most likely be demonstrated by which graph above? A. Graph A B. Graph B  **C. Graph C** D. Graph D Reason: A poor harvest would result in a shift in the supply towards less supply. That shift is represented by Graph C. 4. Assume the graph above reflects demand in the automobile market. Which arrow best captures the impact of increased consumer income on the automobile market?

A. A B. B  C. C  **D. D** Reason: Increased consumer income will mean that on overall, the population would have more income to spend on buying cars. More cheap, more medium-prized, and more expensive cars would be bought, so there's an overall shift in demand, not an increase in quantity demanded. Shift in demand is represented by D.

5. Refer to the graph above. The arrow that would best illustrate the impact on consumers of reducing sales tax on a good paid by suppliers is:

A. A B. B  **C. C** D. D Reason: If suppliers are given a tax break on buying product X, then their costs for making product Y would be reduced, which would mean that the price of product Y would decrease. These graphs represent demand. In such a case, the quantity of goods demanded would increase... not the demand as a whole, since we're dealing with prices of sales products, which affect quantity of goods demanded.

6. If the price of movies on VHS rises while the price of movies on DVD remains the same, the law of demand predicts that consumers will:

**A. substitute movies on VHS for movies on DVD.** B. substitute movies on DVD for movies on VHS. C. buy only movies on VHS. D. buy only movies on DVD. Reason: VHS and DVD are substitutes for each other, so if the price for one (VHS) rises, and the price for the other (DVD) stays constant, more people who used to buy VHS would now buy DVD.

7. When the going rate is $2.00 per hour, Ann wants to baby sit 6 hours each week and Pat wants to baby sit 4 hours each week. If the rate goes up to $4.00, Ann and Pat both double the number of hours they are willing to baby sit each week. Based on this information, a combined supply curve will pass through the points:

A. price = $2.00, quantity supplied = 20 and price = $4.00, quantity supplied = 10. **B. price = $2.00, quantity supplied = 10 and price = $4.00, quantity supplied = 20.** C. price = $2.00, quantity supplied = 6 and price = $4.00, quantity supplied = 4. D. price = $2.00, quantity supplied = 4 and price = $4.00, quantity supplied = 6. Reason: The combined supply of nanny hours at a price of $2 per hour is 10 hours. If the rate goes up to $4, the combined supply of nanny hours double to twenty.

8. Compared to last year, fewer oranges are being purchased and the selling price has decreased. This could have been caused by

A. an increase in demand. B. an increase in supply. **C. a decrease in demand.** D. a decrease in supply. Reason: A decrease in demand would result in both a drop in both decreased oranges sales and a decrease in the price per orange.

9. Refer to the graph above. The arrow that best shows an increase in supply is:

A. W B. X  **C. Y** D. Z Reason: Two options seem likely, W and Y. W however represents increase in the quantity supplied at price P, that is, how much stuff suppliers are willing to supply at a price (P) of a product (not an overall increase in supply). Y represents an all-around increase in supply, meaning suppliers would be producing more of a product at any cost, which is what an increase in supply is.

10. The more the current price exceeds the equilibrium price, the:

A. greater the resulting shortage will be. B. smaller the resulting shortage will be. **C. greater the resulting surplus will be.** D. smaller the resulting surplus will be. Reason: Think New York example from class. In other words, imagine a price floor above the equilibrium price of a product. The price being above the equilibrium would mean that more suppliers would be willing to supply that product and cash in on the profits. However, a higher price of the product would also mean less demand, so a surplus develops.

11. Refer to the graph above. An increase in foreign demand for U.S. assets would cause a shift from:

**A. S1 to S2.** B. S2 to S1. C. D1 to D2. D. D2 to D1. Reason: Such an increase is D1 to D2. However, such an increase in demand for U.S. assets would cause an increase in supply of U.S. assets (S1 to S2). There will be a shift of supply to the right.

12. Refer to the graph above that depicts a third-party payer market for prescription drugs. What is the cost of this program to the third-party if a $2 co-pay is established? A. $270 B. $240 **C. $180** D. $120 Reason: This is a graph of a scheme by which a third party pays for services for another party (like taxpayers paying for medicare). Basically, the price of a service is put at $2. The demand of the service/product at $2 is 45 units. However, the supply cost at 45 units is $6 per unit. Under this plan, what the guy/gitl paying the $2 is paying total is $2 x 45= $90. However, the supply of 45 units costs a total of $6 x 45 = $270. The third party pays the difference, or $180

13. Taxi medallions were issued in New York City to: A. help commuters afford transportation. **B. increase the wages of taxi drivers.** C. help new immigrants find jobs. D. raise revenue for the city. Reason: Check page 114, bottom. People were stupid back then.

14. About 10,000 tickets for the 2005 Men's Final Four college basketball games at the St. Louis Edward Jones Dome were sold in a lottery system for about $120 apiece. A year before the game, scalpers were already offering to sell tickets for between $200 and $2,000, depending on seat location, even though the practice is illegal. The evidence suggests that the equilibrium price of a ticket is: A. $120. B. between $120 and $130. **C. between $200 and $2,000.** D. more than $2,000. Reason: Tickets for the 2005 Men's Final Four college basketball games were sold for $120 apiece, when high demand shows that the real price was what the scalpers sold the tickets for later, from $200-$2000. That's the equilibrium, where supply = demand.

15. If the government imposes an excise tax on gasoline equal to $0.25 per gallon and the demand curve for gasoline is downward-sloping, the supply of gasoline will: A. shift upward and the price will increase by $0.25 per gallon. **B. shift upward and the price will increase by less than $0.25 per gallon.** C. shift downward and the price will decrease by $0.25 per gallon. D. shift downward and the price will decrease by less than $0.25 per gallon. Reason: Putting a gas tax of $0.25 would lead to two things. 1- Something other than an immediate decrease in supply and 2- An immediate decrease in demand. The consequence is a lower demand than supply. The result would be that gas prices would fall towards the equilibrium, which would lie somewhere between no increase and increase of $0.25 in price of gas. (Edit: Answer was B, as seen by Reason: Marked A by mistake.) 16. Refer to the graph above that depicts a third-party payer market for prescription drugs. What happens to total expenditures in this market if a $2 co-pay is established compared to a free-market equilibrium? A. Expenditures rise to $240 **B. Expenditures rise to $270** C. Expenditures fall by $120 D. Expenditures remain at $120 Reason: A free-market equilibrium would be at a price of P=$4. At that price, supply would equal demand, at 30 units of demand. Total cost would be $120. However, due to the $2 co-pay established, the total cost would be $270, as seen in question 12.

17. Consider a market for fish whose market demand and market supply for fish are specified as Qd = 300 - 2.5 P and Qs = - 20 + 1.5 P respectively. The government decides to impose a price ceiling of $50 per ton. What would be the resulting market distortion? **A. Shortage of 120 tons of fish.** B. Shortage of 175 tons of fish. C. Surplus of 120 tons of fish. D. Shortage of 175 tons of fish. Reason: Assuming trading at the ceiling price of $50 per ton, then Qd = 300 -2.5(50) = 300 - 125 = 175 tons demanded. Assuming trading at the ceiling price of $50 per ton, then Qs = -20 +1.5(50) = -20 +75 = 55 tons supplied. At equilibrium, whatever it may be, quantity demanded = quntity supplied. With the $50 ton price ceiling, there would be a shortage of 120 tons of fish.

18. Refer to the graph above. If buyers must pay $5, quantity demanded will equal: A. 2.5 B. 50 **C. 75** D. 100 Reason: Self-explanatory.

19. When an effective price ceiling is removed, we would expect the price of the good to: **A. increase and the quantity demanded to decrease.** B. increase and the quantity demanded to increase. C. decrease and the quantity demanded to decrease. D. decrease and the quantity demanded to increase. Reason: Effective price ceilings create a market price that lies below the market equilibrium. At that level, the price would be less than at the equilibrium, and demand would be more than at the equilibrium. Removing the price ceiling would gravitate the price and demand towards the equilibrium, so price would increase, and demand would decrease.

20. The Rent Control Authority of Chicago has found that total market demand for single occupancy apartments is Qd = 400,000 - 250 P. The Authority also noted that supply is given by Qs = 200,000 + 250P. Price of an apartment is measured in hundreds of dollars and quantity is measured in thousands of apartments. Suppose the Authority decides to impose a rent control of $300 per single-occupant apartment, how many people will be unable to find an apartment at that price? A. 325,000. B. 300,000. **C. 50,000.** D. 275,000.

Reason: Qd=400 000- 250(300) = 400 000 - 75 000 = 325 000 apartments would be demanded when price is at $300. Qs= 200 000 +250(300) = 200 000 + 75 000 = 275 000 apartments would be supplied when price is at $300. The difference, the unsatisfied demand, would be 50 000 apertments.