ECON 202 Lecture Notes - Lecture 5: Demand Curve, Ipad, Opportunity Cost

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2 Feb 2017

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Where prices come from: the interaction of demand and supply. Demand for smartphones: how many smartphones do consumers want to buy, affected by price of the smartphones, other factors (including prices fo other goods) Supply for smartphones: how many smartphones are producers willing to sell, affected by price of smartphones, other factors (including prices of other goods) Highest possi(cid:271)le p(cid:396)i(cid:272)e you"(cid:396)e willi(cid:374)g to pay at p(cid:396)i(cid:272)e p. Demand system: the existence of many varieties of consumers with different reservation prices/valuations for a product or service, can be depicted in a demand system. Demand schedule: table that shows the relationship between the price of a product and the quantity of the product demanded. Quantity demanded: the amount of a good or service that a consumer is willing and able to purchase at a given price. Each unit represents one person willing to buy a product.

Related Questions

Answer the following 24 questions.

1. The elasticity that measures how sensitive the buyers of a good are to a change in the price of another good is called:

a. price-elasticity of demand

b. income-elasticity of demand

c. cross-price-elasticity of demand

d. price-elasticity of supply

2. If the price of walnuts rises, many people would switch from consuming walnuts to consuming pecans. But if the price of salt rises, people would have difficulty purchasing something to use in its place. These examples illustrate the importance of

a. the availability of close substitutes in determining the price elasticity of demand.

b. a necessity versus a luxury in determining the price elasticity of demand.

c. the definition of a market in determining the price elasticity of demand.

d. the time horizon in determining the price elasticity of demand.

3. Suppose that Juan Carlos is filling out a survey that he received in the mail. The survey asks him what he would do if the price of his favorite toothpaste increased. Juan Carlos reports that he would switch to a different brand. The survey asks what he would do if the price of all kinds of toothpaste increased. Juan Carlos reports that he must use toothpaste, so he would have to adjust his spending elsewhere. These examples illustrate the importance of

a. changes in total revenue in determining the price elasticity of demand.

b. a necessity versus a luxury in determining the price elasticity of demand.

c. the definition (broad vs narrow) of a market in determining the price elasticity of demand.

d. the time horizon in determining the price elasticity of demand.

4. Suppose that gasoline prices increase dramatically this month. Lola commutes 100 miles to work each weekday. Over the next few months, Lola drives less on the weekends to try to save money. Within the year, she sells her home and purchases one only 10 miles from her place of employment. These examples illustrate the importance of

a. the availability of substitutes in determining the price elasticity of demand.

b. a necessity versus a luxury in determining the price elasticity of demand.

c. the definition of a market in determining the price elasticity of demand.

d. the time horizon in determining the price elasticity of demand.

5. When a smartphone manufacturer introduces a phone with new features (like a more powerful camera, more storage, a screen with better definition, or being waterproof) and advertises them, it is

a. trying to decrease buyers' price-elasticity of demand by differentiating the goods relative to the competition so that consumers perceive it as having no close substitutes in the market.

b. trying to decrease buyers' price-elasticity of demand by differentiating the goods relative to the competition so that consumers perceive it as having more substitutes in the market.

c. trying to increase buyers' price-elasticity of demand by differentiating the goods relative to the competition so that consumers perceive it as having more substitutes in the market.

d. trying to increase buyers' price-elasticity of demand by differentiating the goods relative to the competition so that consumers perceive it as having no close substitutes in the market.

6. Consider the following two alternative scenarios.

1) In scenario 1, the price of all smartphones increases by 10%.

2) In scenario 2, the price of Samsung smartphones increases by 10% while the price of all other smartphones stays the same as before.

Which of the following is true?

a. The quantity demanded of Samsung phones in scenario 2 falls by more, in percentage terms, than the quantity demanded of all phones in scenario 1.

b. The quantity demanded of Samsung phones in scenario 2 falls by less, in percentage terms, than the quantity demanded of all phones in scenario 1.

7. As more electric car models appear in the market, the price elasticity of demand for the models already in the market should

a. Stay the same. In other words, buyers' sensitivity to changes in the price of the existing cars does not change.

b. Increase. In other words, buyers' sensitivity to changes in the price of the existing cars increases.

c. Decrease. In other words, buyers' sensitivity to changes in the price of the product of the car decreases.

8. Demand for a good is likely to be flatter if

a. the good has many substitutes

b. the good is narrowly defined

c. we are considering the long run rather than the short run

d. the good is a luxury.

e. All of the above.

9. If the price elasticity of the demand for ice-cream is equal to 1.5, then

a. a 1% increase in price will lead to a 1.5% increase in quantity demanded.

b. a 1% increase in price will lead to a 150% fall in quantity demanded.

c. a 1% increase in price will lead to a 15% fall in quantity demanded.

d. a 1% increase in price will lead to a 1.5% fall in quantity demanded.

10. If the price elasticity of demand for oil is 0.7, then

a. Demand is elastic, buyers are relatively sensitive to price, and the demand curve is relatively flat.

b. Demand is elastic, buyers are relatively insensitive to price, and the demand curve is relatively flat.

c. Demand is inelastic, buyers are relatively insensitive to price, and the demand curve is relatively steep.

d. Demand is inelastic, buyers are relatively sensitive to price, and the demand curve is relatively flat.

11. Note: this question is not about calculating elasticity, but about showing that you know how to calculate a % change using the midpoint method in any circumstance.

A biology class at Q State University initially had 205 students. After the first test, enrollment dropped to 195 students. Using the midpoint method, the % change in the number of students is equal to

a. 10%

b. approximately 5.12%

c. approximately 4.88%

d. 5%

12. When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7, the quantity demanded is 80 units per month. Using the midpoint method, the price elasticity of demand is approximately

a. 0.22.

b. 0.67.

c. 1.33.

d. 1.50.

13. If the price elasticity of demand for hamburgers is 0.4, then a 20% increase in the price of hamburgers will lead to

a. an 8% fall in quantity demanded.

b. a 20% fall in quantity demanded.

c. a 0.4% fall in quantity demanded.

d. a 4% fall in quantity demanded.

14. If the price elasticity of demand for cruises is 1.4, a 1% decrease in the price of cruises will lead to a

a. A 1.4% increase in quantity demanded.

b. A 1% increase in quantity demanded.

c. A 1.4% decrease in quantity demanded.

d. A 1% decrease in quantity demanded.

15. A city wants to raise revenues to build a new municipal swimming pool next year. The mayor suggests that the city raise the price of admission to the existing municipal pools this year to raise revenues. The city manager suggests that the city lower the price of admission to raise revenues. Who is correct?

a. the mayor

b. the city manager

c. The answer depends on the price elasticity of demand.

d. The answer depends on the costs of construction of the new municipal swimming pool.

16. When demand is elastic, an increase in price will cause

a. an increase in total revenue.

b. a decrease in total revenue.

c. no change in total revenue.

d. not enough information.

17. Consider luxury weekend hotel packages in Las Vegas. When the price is $250, the quantity demanded is 2,000 packages per week. When the price is $280, the quantity demanded is 1,700 packages per week. Using the midpoint method, the price elasticity of demand is about

a. 1.43, and an increase in the price will cause hotels' total revenue to decrease.

b. 1.43, and an increase in the price will cause hotels' total revenue to increase.

c. 0.70, and an increase in the price will cause hotels' total revenue to decrease.

d. 0.70, and an increase in the price will cause hotels' total revenue to increase.

18. Suppose researchers at the University of Wisconsin discovered a new vitamin that increases the milk production of dairy cows. If the demand for milk is relatively inelastic, the discovery will

a. raise both price and total revenues.

b. lower both price and total revenues.

c. raise the price and lower total revenues.

d. lower price and raise total revenues.

19. When we calculate elasticities, whether the percent changes have a plus or a minus sign matters if we are calculating

a. Price elasticity of demand, because the signs give us information about whether the good is normal or inferior.

b. Income elasticity of demand, because the signs give us information about whether the good is normal or inferior.

c. Cross-price-elasticity of demand, because the signs give us information about whether the goods are substitutes or complements.

d. b and c are both correct.

20. Income elasticity of demand measures how

a. the quantity demanded changes as consumer income changes.

b. consumer purchasing power is affected by a change in the price of a good.

c. the price of a good is affected when there is a change in consumer income.

d. many units of a good a consumer can buy given a certain income level.

21. Last year, Carolyn bought 6 pairs of earrings when her income was $40,000. This year, her income is $52,000, and she purchased 7 pairs of earrings. Holding other factors constant, it follows that Carolyn's income elasticity of demand is about

a. 0.59, and Carolyn regards earrings as an inferior good.

b. 0.59, and Carolyn regards earrings as a normal good.

c. 1.7, and Carolyn regards earrings as an inferior good.

d. 1.7, and Carolyn regards earrings as a normal good.

22. Sandra purchases 5 pounds of coffee and 10 gallons of milk per month when the price of coffee is $10 per pound. She purchases 6 pounds of coffee and 12 gallons of milk per month when the price of coffee is $8 per pound. Sandra's cross-price elasticity of demand for milk with respect to the price of coffee

a. 0.82, and the goods are substitutes.

b. -0.82, and the goods are complements.

c. 1.22, and the goods are substitutes.

d. -1.22, and the goods are complements.

23. Supply of good is likely to be steeper (that is, more inelastic)

a. if sellers can cheaply make more units of the good on short notice.

b. in the long run.

c. in the short run.

d. if sellers have a large degree of flexibility to expand factory size.

24. When the price of a barrel of oil is $35, an oil fracking company is willing to produce 500 gallons per minute. If the price increased to $45, the company would be willing to produce 2500 gallons per minute. Using the midpoint method, calculate the company's price elasticity of supply.

a. approximately 1.33

b. 0.25

c. approximately 5.33

d. approximately 0.188

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Considering the demand side of a market for a good, it is reasonable to expect that:
i. demand curves for a given good are identical between consumers
ii. demand curves for a given good differ between consumers
iii. an individual has identical demand curves for different goods
iv. an individual has different demand curves for different goods

iii

i and iii

ii and iv

Suppose the market demand curve for a good is represented by the linear equation Q = 60 - 0.75P. If the market price were to increase from P = $20 to P = $40, then holding all other factors constant:

the quantity demanded would decrease by 10 units and total expenditures on the good would decrease by $400

the quantity demanded would decrease by 15 units and total expenditures on the good would increase by $300

the quantity demanded would decrease by 30 units and total expenditures on the good would increase by $1200

the quantity demanded would increase by 20 units and total expenditures on the good would decrease by $800

the quantity demanded would increase by 10 units and total expenditures on the good would increase by $100

the quantity demanded would increase by 25 units and total expenditures on the good would increase by $1000

A perfectly competitive firms supply curve for a good identifies the:
i. minimum quantity supplied at each price, holding all other factors constant
ii. firms minimum willingness to accept for each incremental unit of the good (e.g., the first unit, second unit, etc.), holding all other factors constant
iii. maximum quantity supplied at each price, holding all other factors constant
iv. firms maximum willingness to accept for each incremental unit of the good (e.g., the first unit, second unit, etc.), holding all other factors constant

Considering the supply side of a market for a good, if a firms supply curve were vertical, then:

the law of supply holds, and quantity supplied is completely insensitive to changes in price

the law of supply holds, and quantity supplied is highly sensitive to changes in price

the law of supply fails to hold, and quantity supplied is completely insensitive to changes in price

the law of supply fails to hold, and quantity supplied is highly sensitive to changes in price

none of the above

The determinants of supply are:
i. factors other than price that will affect the quantity of a good or service a firm is willing and able to purchase
ii. factors that affect a producers maximum willingness-to-accept to produce various quantities of a good
iii. factors that affect a producers minimum willingness-to-accept to produce various quantities of a good

iii

i and ii

i and iii

The market supply curve for a good is derived by:
i. horizontally summing the supply curves of the individual firms in the market
ii. vertically summing the supply curves of the individual firms in the market
iii. summing the quantity supplied by each firm at a given price and then repeating this over the range of prices

iii

i and ii

i and iii

If the level of technology used in the production of a good improves, and assuming the quality of the good does not change, then:
i. more output may be obtained with a given amount of inputs compared to before the technological improvement
ii. a given amount of output may be obtained with fewer inputs compared to before the technological improvement
iii. the firm will increase its use of other inputs, such as the number of workers it employs
iv. market demand for the good will increase

Considering the market for gasoline, which of the following would result in an increase in market supply?
i. a decrease in the price of gasoline
ii. an improvement in oil extraction and refining technologies
iii. an increase in the wage rates paid to gasoline refinery workers
iv. a decrease in the price of crude oil, a key input used to produce gasoline
v. the imposition of a federal gasoline tax aimed a decreasing the emission of greenhouse gases

Suppose a market has two identical sellers. If each sellers supply function is given by P = 20 + Q, then the market supply function is:

From the market framework discussed in class and the readings, it may be concluded that in order for a good to be exchanged between a seller and a buyer, it must be that:

buyer maximum willingness-to-pay is greater than seller minimum willingness-to-accept

buyer maximum willingness-to-pay is greater than or equal to seller minimum willingness-to-accept

buyer minimum willingness-to-pay is greater than or equal to seller maximum willingness-to-accept

buyer minimum willingness-to-pay is greater than seller maximum willingness-to-accept

If the market demand function is given by P = 80 - 0.3Q and the market supply is given by P = 20 + 0.1Q, then the equilibrium price and quantity are:

Of concern are the affects of sustained summer droughts on the domestic supply of wheat. Noting that wheat is a primary ingredient in the production of bread and that potatoes are a substitute for bread, if the supply of wheat declines then it is reasonable to expect:

the price of wheat to fall, the supply of bread to increase, and the demand for potatoes to increase

the price of wheat to fall, the supply of bread to increase, and the demand for potatoes to decrease

the price of wheat to rise, the supply of bread to decrease, and the demand for potatoes to decrease

the price of wheat to rise, the supply of bread to decrease, and the demand for potatoes to increase

the price of wheat to rise, the supply of bread to increase, and the demand for potatoes to increase

the price of wheat to rise, the supply of bread to increase, and the demand for potatoes to decrease

Suppose a perfectly competitive market is initially in equilibrium. If market demand and supply decrease simultaneously, then equilibrium:

price will rise, but the equilibrium quantity may either rise, fall, or remain unchanged

quantity will rise, but the equilibrium price may either rise, fall, or remain unchanged

price will fall, but the equilibrium quantity may either rise, fall, or remain unchanged

quantity will fall, but the equilibrium price may either rise, fall, or remain unchanged

Considering the demand side of a market for a good, the consumer surplus derived by an individual:
i. is the difference between the maximum amount the consumer is willing to pay on each unit and the minimum prices that producers are willing to accept
ii. is the difference between the minimum amount the consumer is willing to pay on each unit and the price he/she
actually pays
iii. is the difference between the maximum amount the consumer is willing to pay on each unit and the price he/she actually pays
iv. will decrease if price increases

Suppose the market demand for a good is described by the equation P = 120 - 2Q. If a change in market supply results in price decreasing from P0 = $80 to P1 = $70, then the resulting change in consumer surplus is:

1 Other things remaining the same, a left shift in the supply curve will lead to:

A. a decrease in the equilibrium price and the equilibrium quantity.

B. an increase in the equilibrium price and the equilibrium quantity.

C. an increase in the equilibrium price and a decrease in the equilibrium quantity.

D. a decrease in the equilibrium price and an increase in the equilibrium quantity.

2 Two goods are said to be complements when a fall in the price of one good:

A. leads to a fall in price of the other good.

B. leads to a left shift in the demand for the other good.

C. leads to a right shift in the demand for the other good.

D. doesn't affect the demand for the other good.

3 In a competitive free market:

A. all exchanges take place involuntarily.

B. there is no provision for the protection of property rights.

C. there is only one seller and many buyers.

D. the government does not impose price controls.

4 Which of the following correctly explains the role of economic agents in a free market?

A. Economic agents allocate goods to those buyers who value the goods the most.

B. Economic agents allocate goods to those buyers who need the goods the most.

C. Economic agents set production quotas for sellers in the market.

D. Economic agents set prices according to the production cost of each good.

5 Which of the following was an effect of the price ceiling placed on gasoline in the U.S. in the 1970s?

A. Gas stations ran out of gas as the quantity of gas demanded exceeded the quantity supplied.

B. Car owners started buying luxury cars that were less fuel-efficient as the price of gas was very low.

C. Those who valued gas the most were able to buy gas under the price ceiling.

D. The inventory of unsold gas increased and gas stations incurred losses.

6 Willingness to accept is:

A. the highest price that a producer is willing to receive to sell an extra unit of a good.

B. always higher than the marginal cost of production.

C. always lower than the marginal cost of production.

D. the lowest price that a producer is willing to receive to sell an extra unit of a good.

7 Assume that the economy is in a recession and consumers are expecting a fall in their income levels. This will cause a(n):

A. right shift in the market demand for all goods.

B. left shift in the market demand for all goods.

C. an increase in the total quantity demanded of all goods.

D. decrease in the total quantity demanded of all goods.

8 Which of the following factors is expected to cause the demand curve for coffee to shift to the right?

A. A higher personal tax on the income of all consumers

B. An increase in the supply of coffee due to better weather

C. A higher tax on the sale of tea, a substitute for coffee

D. A fall in the manufacturing cost of coffee

9 If the demand and supply curves for a commodity shift to the right and the shift in demand is greater than the shift in supply, then in comparison to the initial equilibrium, the new equilibrium will be characterized by:

A. the same price and quantity.

B. a lower price and quantity.

C. a higher price and a lower quantity.

D. a higher price and quantity.

10 Which of the following statements correctly describes a perfectly competitive market?

A. Haggling and bargaining are commonly observed in a perfectly competitive market.

B. Buyers in a perfectly competitive market pay different prices according to their individual demand.

C. In a perfectly competitive market, individual sellers and buyers can influence the market price.

D. All participants in a perfectly competitive market are price-takers.

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ECON 202 Lecture Notes - Lecture 5: Demand Curve, Ipad, Opportunity Cost

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