Econ 102
Fall 2004
Practice Questions 3

Readings:
Chapter 3: Supply and Demand

Concepts:
Market	Substitute	
Demand	Complement	
Supply	Price Ceiling	
Normal Good	Price floors	
Inferior Good	Consumer and Producer Surplus	

I.	Binary Choices:

1)	The equilibrium price in a market is decided by suppliers who produce the good. 
a.	True.
b.	False.

2)	An increase in excise taxes levied on the buyers of computers and an increase in subsidies to HiTech industries will result in a lower equilibrium price in the computer market.
a.	 True.
b.	False.

3)	An increase in income always results in an increase in the demand for a good.
a.	True.
b.	False.

4)	Income can be larger than wealth.
a.	True.
b.	False.

5)	Mr. Ford says: “You can choose the car you want, provided that it is a Model-T and it is black”. The price of saddles (and the stock market value of ConfortBottom, leader in the industry) goes down.
a.	True.
b.	False.

6)	As a result of a demand shock in a market, there will always be a simultaneous increase in both the equilibrium price of a good and the quantity that is demanded.
a.	True
b.	False

II.	Multiple Choices:

7)	A normal good is a good that:
a.	is usually consumed by people.
b.	is not weird.
c.	is consumed in a normal quantity by a household with an average income.
d.	 is consumed in larger quantities when income increases.

8)	 Which of the following doesn't affect the demand curve for ski-boots?
a.	The amount of snow in Colorado this year.
b.	 An increase in oil prices (that makes everyone but oil producers poorer).
c.	A change in fashion.
d.	A change in the price of skis.
e.	An improvement in the distribution facilities that lower the retailing price of ski-boots.
f.	A shortage in the supply of mountain cottages.
g.	A stock market crash.

9)	An inferior good is a good :
a.	that is demanded in a smaller quantity at each level of income.
b.	that is supplied in a smaller quantity as price increases.
c.	that is disliked by people.
d.	 that is demanded in a smaller quantity as income increases.
e.	where the increase in demand is smaller and smaller as income goes up.

10)	A technological breakthrough in the production of synthetic material is achieved and a terrible hurricane kills all the poor Scottish sheep. As a result of these two changes, in the market for wool sweaters:
a.	the equilibrium quantity decreases but the price change is uncertain.
b.	both the equilibrium quantity and price decrease.
c.	both the equilibrium quantity and price are uncertain.
d.	the equilibrium quantity goes down while the price goes up.
Hint: synthetic material is used to make “synthetic sweaters”, for example fleeces, and wool is is used to make wool sweaters. What is the relationship between fleeces and wool sweaters?

11)	An effective price ceiling will:
a.	benefit the producer, the consumer and the government.
b.	usually benefit the consumer and always damage the producer.
c.	affect the market only when the equilibrium price is lower.
d.	benefit the consumer and not affect the producer.

Problems

12)	Represent on a graph what happens in the market for wool sweaters, after the tremendous changes described in question 10).

13)	Compute the aggregate demand schedule for washing machines for an economy populated by B. Favre, T. Blair, P. Picasso, W. Shakespeare, A. Einstain, D. Trump and last but not the least M. Mouse. Then, using the slope-intercept form, find the aggregate demand curve. 
Price	Favre	Blair	Picasso	Shakespeare	Einstain	Trump	Mouse	
1	4	2	1	1	1	9	0	
2	3	2	0	1	1	9	0	
3	2	2	0	0	1	9	0	
5	1	1	0	0	0	8	0	
10	0	0	0	0	0	0	0	
M. Mouse always wears the same clothes.

14)	Vinnyland is a  country where pizza, is produced, consumed and loved. The aggregate demand for pizza is described by Qd = 40 – Pd, while the aggregate supply by Qs = 2Ps-20.
a.	Compute the equilibrium price of a pizza and the number of pizzas that are produced and consumed in Vinnyland.
b.	Find the consumer surplus and the producer surplus.

Due to technological progress in the production of ovens to cook pizza the supply curve becames  Qs = 2Ps-5 (do you find this change in the function reasonable?):
c.	What happens to the equilibrium value of price and quantity?
d.	How is the consumer surplus and the producer surplus affected? Do you find that reasonable?

Suppose the technological progress did not occur (i.e., use the original supply curve).  Now suppose Vinnyland opens its market for pizzas to international trade. The price of a pizza in the international market is 14.
e.	Will Vinnyland import or export pizza? Is this reasonable given the result you found in question 14.a)? Note the relationship between autarky price (the price without trade), the international price and whether the country becomes a net importer or exporter.
f.	Find the consumer surplus and the producer surplus in Vinnyland with an open market and trade. Does everybody benefit from international trade?

Now suppose Vinnyland puts a tariff on pizzas that results in the price of each imported pizza increasing by  $2.  Assume the technological progress in parts (c) and (d) did not occur; that is, use the original supply curve for the rest of this problem (parts (e) through (l)).
g.	What is the level of imports now?
h.	How much does the government collect in revenues from the imposition of this tariff?
i.	What is the consumer surplus with the tariff? Is the consumer surplus higher or lower than before the imposition of the tariff (compare the open market result with the result when there is an open market and a tariff)?
j.	What is the producer surplus with the tariff? Is the producer surplus higher or lower than before the imposition of the tariff (compare the open market result with the result when there is an open market and a tariff)?
k.	What is the deadweight loss with the imposition of the tariff? Represent it graphically.
Suppose instead of a tariff, the government of Vinnyland imposes a quota of 12 pizzas on the quantity of pizza that can be imported.
             l.  Compare this quota to the tariff.