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Lecture

DemandSupply.doc

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Department
Management
Course
MGMT 4F90
Professor
Professor Cottrel
Semester
Fall

Description
Problem Set #2: Demand, Supply, and Market Equilibrium Key Concepts Demand: - quantity demanded of goods & services at each market price for all prices ceteris paribus. Supply: - quantity supplied of goods and services at each market price for all prices ceteris paribus Note: Do not confuse quantity demanded (supplied) at a particular price with Demand (Supply) which encompasses the quantities demanded (supplied) for all prices. Normal Good: Demand positivelyrelated to Income changes Inferior Good: Demand negatively related to Income changes Complement: Used with another commodity (or factor) Substitute: Used in place of another commodity (or factor) Equilibrium: state of rest (no tendency to change) Problems 1. Use demand and supply diagrams to illustrate the effect on equilibrium price and quantity in the market for the normal good automobilies of each of the following events (considered separately), ceteris paribus: a) an increase in average household income b) a large increase in the price of public transit. c) a large increase in the price of gasoline. d) a decrease in the price of sheet metal. e) an increase in the wage rate of auto workers. f) an increase in the price of metal shavings, a complement in production 2. More gasoline and more tomatoes are sold in the summer than in the winter, even though gasoline prices tend to be at their highest and tomato prices at their lowest in the summer. Can you make sense of these facts with supply-and-demand diagrams? Multiple Choice 1. The Law of Demand says that a) Demand is inverselyrelated to price b)Demand is positivelyrelated to price c) Quantity demanded rises when price falls and falls when price rises d) Quantity demanded falls when price falls and rises when price rises e)only a/ and c/ are correct 2. If the demand for sugar decreases when the price of honey falls, then sugar a)is a normal good b) is an inferior good c) is a substitute for honey in consumption d) is a complement of honey in consumption e) is a complement of honey in production 3. If potatoes are an inferior good, then an increase in the price of potatoes willcause a/ an increase in the demand for potatoes b/ a decrease in the quantity demanded of potatoes c/ a decrease in the demand for potatoes d/ an increase in the quantity demanded of potatoes e/ a decrease in money income 4. An increase in the price of Y, a complement of X in consumption, will a/ increase the demand for Y b/ decrease the demand for Y c/ increase the demand for X d/ decrease the demand for X e/ increase the quantity demanded of X - 1 - Problem Set #2: Demand, Supply, and Market Equilibrium 5. If tapes and tape decks are complementary goods in consumption, then a decrease in the price of tape decks willcause which of the following changes in the market equilibriumfor tapes? a) a fall in both price and quantity b) a fallin price and rise in quantity c) a rise in price and fallin quantity d) a rise in both price and quantity e) no change in either price or quantity 6. Beef and hides are complements in production. An increase in demand for hides, ceteris paribus, would cause a a/ decrease in the price of hides and decrease in demand for beef b/ decrease in the price of hides and increase in demand for beef c/ increase in the price of hides and decrease in supply of beef d/ increase in the price of hides and increase in supply of beef e) no change in the price of beef 7. An increase in household income and a technological change that improves production will cause which of the following equilibrium changes in the market for a normal good? a/ price and quantity would both be higher b/ price and quantity would both be lower c/ price might be higher or lower but the quantity would be higher d/ price would be lower but the quantity would be higher e) price and quantity could be lower or higher 8. Suppose all farmers grow both wheat and oats for sale. If the price of oats increases, we would predict that farmers would react in such a way that, ceteris paribus, a/ the supply of wheat would increase causing the price of wheat to fall b/ the supply of wheat would decrease causing the price of wheat to rise c/ the price of wheat would not be affected d/ the price of wheat might rise or fallbut the supply of wheat would definitelyfall. e) the price of wheat would fall 9. If the quantity demanded of commodity X decreases when the price of X decreases, then X is a/ a substitute good b/ a complementary good c/ a normal good d) a Giffen good e/ an inferior good with an downward sloping demand curve 10. Which of the following would increase quantity demanded for an inferior good ceteris paribus? a) an decrease in the price
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