Microeconomics 1 -1- Lectures and exercise sessions are complementary goods!

Important terms and definitions

1. Connect the definitions in the left column with the terms in the right column.
A. a market that has many buyers and many sellers, so no single buyer or seller can influence the price a. supply
B. the number of levas that must be given up in exchange for a good. b. price
C. the ratio of one price to another c. a competitive market
D. the amount that consumers plan to buy during a given time period at a particular price. d. relative price
E. the entire relationship between the price of a good and the quantity demanded of that good. e. quantity demanded
F. illustrates the relationship between the quantity demanded of a good and its price when all other f. surplus
influences on consumers’ planned purchases remain the same.
G. a good that can be used in place of another good g. substitute good
H. a good that is used in conjunction with another good h. deficit
I. the amount that producers plan to sell during a given time period at a particular price i. quantity supplied
J. the relationship between the price of a good and the quantity supplied of it. j. the supply curve
K. illustrates the relationship between the quantity supplied of a good and its price when all other k. complement good
influences on producers’ planned sales remain the same.
L. situation at which the price balances buying and selling plans. l. demand curve
M. situation in which the supply is higher than the demand. m. demand
N. situation in which the demand is higher than the supply. n. market equilibrium

Demand and the demand curve

2. The law of ________ implies that as prices fall, ________.

A demand; demand increases B demand; demand falls
C demand; quantity demanded increases D supply; supply increases
3. According to the law of demand, quantity demanded increases as ________, ceteris paribus
A prices rise B prices fall
C demand increases D demand decreases
4. If the demand for green tea increases as income increases, green tea is a(n):
A complementary good B substitute good.
C normal good. D inferior good.
5. When the increase in the price of one good causes the demand for another good to decrease, the goods are:
A normal. B inferior.
C substitutes. D complements.
6. Demand for one item goes down when the price of another item goes down. These items must be:
A substitutes. B complements.
C normal goods. D inferior goods.
7. If the demand for macaroni with cheese decreases as income increases, macaroni with cheese is a(n):
A complementary good B normal good.
C inferior good. D substitute good.
8. Suppose the demand for lawnmowers goes down when the price of gasoline goes up. We can
say that these two goods are:
A complements B substitutes.
C unrelated goods. D perfect substitutes.

Supply and Demand -1- Exercise session 3

Microeconomics 1 -2- Lectures and exercise sessions are complementary goods!
9. In the following problem you need to write all of the possible shifts of the demand curve.
A. An increase in income will:
B. A decrease in income will:
C. An increase in the price of a
substitute good will:
D. A decrease in the price of a
substitute good will:
E. An increase in the price of a
complement good will:
F. A decrease in the price of a
complement good will:
G. An increase in the expected
future price of the good will:
H. A decrease in the expected
future price of the good will:
I. An increase in the expected
future income or in the
availability of a credit will:
J. A decrease in the expected
future income or in the
availability of a credit will:
K. An increase in the population
will:
L. A decrease in the population
will:
M. An increase in the preferences
for the good will:
N. A decrease in the preferences
for the good will:
10. An increase in demand for Samsung phones would likely be caused by:
A an increase in the price of a substitute good B an increase in the price of Samsung phones.
C an increase in the price of a complementary good. D a decrease in the price of laptop computers.

11. Joe now receives 300 dollars more than last month. Under ceteris paribus, his demand for cinema tickets will probably increase.
A True B False

12. Which of the following would be most likely to cause the demand curve for Dr. Pepper to shift to the left?
A an increase in income, assuming that Dr. Pepper is a normal B a decrease in the price of 7-UP, assuming 7-UP is a substitute
good for Dr. Pepper
C an increase in the price of Dr. Pepper D an increase in the price of sugar used to make Dr. Pepper

13. The quantity demanded of Coca Cola has increased. The best explanation for this is that:
A the price of Pepsi has decreased. B Coca Cola has instituted a new, successful advertising
campaign.
C the price of Coca Cola has decreased. D Coca Cola consumers had an increase in income.

14. A change in the ________ of a good or service leads to a change in ________ that leads to a
________ .
A supply; demand; change in price. B demand; quantity demanded; change in supply.
C price; quantity demanded; movement along the demand curve. D quantity; supply; change in demand

The demand curve can be described by the following equation (and function): Qd = a-bP. The intercept of the demand curve with the x-axis is at
a, the slope of the demand curve is -b (the minus indicates a negative relationship), Qd is the quantity demanded and P is the price. Δ (Greek
latter delta) Qd refers to the change in the quantity demanded, where delta means change. ΔP is the change in the price. Here are some useful
formulas:

ΔQd = QdNew - QdOld ΔP = PNew - POld

ΔQd= -b*ΔP -b = ΔQd/ΔP

The formulas should be obvious, because the demand function is linear. An increase in a will shift the demand curve to the right, and a decrese in

Supply and Demand -2- Exercise session 3

Microeconomics 1 -3- Lectures and exercise sessions are complementary goods!
a will shift the demand curve to the left. The parameter a captures the part of the quantity demanded that is NOT connected to the price. In other
words, things that change the demand for a good with a constant at any price are expressed by using the intercept a. For example an increase in
income with 5 will push the demand curve to the right via a rise in a. This however will not change the responsiveness of the quantity demanded
to a change in the price level.

Percentage changes that affect the demand are captured by multiplying the whole equation. For example: if the demand falls to 80%, the
relationship will now be Qd = 0.8(a-bP). This will not only shift the demand curve (in our case to the left, because 0.8a < a), but also rotate it (the
parameter b also changes).

15. The initial quantity demanded for ice cream is 100, at price 1. When the price changes to 2, the quantity demanded will decrease to 80. Find the
slope of the demand curve.
A -2 B 2
C 20 D -20
16. If the initial price is 11 levas and the new price is 22 levas, find the change in the quantity demanded ΔQd if the slope is -1.
A -11 B 11
C -1 D 1
17. Calculate the quantity demanded, given the following information: the intercept a = 10, the slope -b = -2 and the P=2
A 14 B 6
C -6 D 2

18. Use the graphs bellow to work on the questions that follow.

19. Extract the demand function from the above figure (panel a). Then assume that a decrease in income leads to a decrease in the demand by 4 at
any price level. Describe the new demand function and draw it on the graph. Is what we observe on this new graph consistent with what we
know about the movement of the demand curve?

20. Using the extracted demand function , assume that the demand falls to 60% of its previous level. Describe the new demand function and draw
its graph on panel b.

Supply and Demand -3- Exercise session 3

Microeconomics 1 -4- Lectures and exercise sessions are complementary goods!

Supply and the supply curve.

21. According to the law of ________, there is a positive relationship between price and ________.
A supply; the change in supply B supply; the quantity supplied
C demand; quantity demanded D demand; change in demand
22. In the following problem you need to write all of the possible shifts of the supply curve.
A. An increase in the price of a
factor of production will:
B. A decrease in the price of a
factor of production will:
C. An increase in the price of a
substitute in production will:
D. A decrease in the price of a
substitute in production will:
E. An increase in the price of a
complement in production will:
F. A decrease in the price of a
complement in production will:
G. A natural event that decreases
the production will:
H. A natural event that increases
the production will:
I. A technology change that
increases the production will:
J. A technology change that
decreases the production will:
K. A decrease in the number of
producers will:
L. An increase in the number of
producers will:
M. An increase in the future prices
will:
N. A decrease in the future prices
will:
23. If there is a natural disaster that damages the crops in some region of Bulgaria, we can conclude that the supply of wheat in this region will
increase.
A True B False

24. The price of circuit boards used in the manufacturing of LCD televisions has fallen. This will lead to ________ LCD televisions.
A an increase in the supply of B a decrease in the supply of
C an increase in the quantity supplied of D a decrease in the quantity supplied of

25. If the price of spinach increases, there will be ________ of spinach enchiladas.
A an increase in the supply B a decrease in the supply
C an increase in the quantity supplied D a decrease in the quantity supplied

26. An increase in the wage rate of pizza makers will cause a shift of the supply curve to the:
A The supply curve wont shift. B right
C left D None of the above answers is a correct one.
27. Which of the following statements is false?
A A producer is producing components for headphones. Some B If new technology is introduced, the supply curve will shift to
parts of these components are made by copper. If the price of the right.
copper decreases, the supply of headphones will increase and
the supply curve will shift to the right.
C A storm destroyed parts of the electrical grid of a city. The D A fisherman captures 2 tons of fish per month. An oil tanker
supply of electricity will decrease and the supply curve will crashes into the near rocks and oil is flowing into the water.
shift to the right. The supply of fish will decrease and the supply curve will shift
to the left.

Supply and Demand -4- Exercise session 3

Microeconomics 1 -5- Lectures and exercise sessions are complementary goods!
The supply curve can be described by the following equation: Qs = c+dP (also a linear function). The intercept of the supply curve with the x-
axis is at c, the slope of the supply curve is d (the plus indicates a positive relationship), Qs is the quantity supplied and P is the price. ΔQs
refers to the change in the quantity supplied, where delta means change. ΔP is the change in the price. Here are some useful formulas:

ΔQs = QsNew - QsOld ΔP = PNew - POld

ΔQs= d*ΔP d = ΔQs/ΔP

The supply curve represents a linear function Qs=f(P). An increase in c will shift the supply curve to the right, and a decrease in c will shift the
supply curve to the left. The parameter c captures the part of the quantity supplied that is not connected to the price. In other words, things that
change the supply for a good with a constant at any price are expressed by using the intercept c. This however will not change the
responsiveness of the quantity supplied to a change in the price level. This was also true when we talked about the demand curve.

Percentage changes that affect the supply are captured by multiplying the whole equation. For example: if the supply decreases by 40% at any
price, the relationship will now be Qs = 0.6(c+dP). This will not only shift the supply curve (in our case to the left, because 0.6c < c), but it will
also rotate it (because d also changes).

You may note that in your textbooks the supply and the demand functions are written in the form P = c+dQs and P = a-bQd. These are known as
inverse supply and demand functions. We will study them when we talk about monopoly.
28. Calculate the quantity supplied if the intercept is c = 0.2, the slope d =1 and the price P = 10
A 9.8 B -9.8
C -10.2 D 10.2
29. Find the intercept of the supply curve c by using the following information: Qs = 10, d = 1, P=9
A 1 B -1
C 2 D -2
30. Use the graphs bellow to work on the questions that follow.

31. Extract the supply function from the above figure (panel a). Then assume that an increase in technology increases the supply with one.
Describe the new supply function and draw it on the graph. Is what we observe on this new graph consistent with what we know about the
movement of the supply curve?

Supply and Demand -5- Exercise session 3

Microeconomics 1 -6- Lectures and exercise sessions are complementary goods!
32. Using the extracted supply function, assume that the supply increases by 100% of its previous level. Describe the new supply function and
draw it graph on panel b.

Equilibrium

33. When quantity demanded equals quantity supplied:

A there must be no government intervention in the market. B the demand curve must be the same as the supply curve.
C the market is in equilibrium. D all of the above
34. When there is a surplus of a product in an unregulated market, there is a tendency for:
A price to rise. B price to fall.
C quantity demanded to increase. D quantity supplied to decrease.
35. If the market for bluetooth headsets is unregulated and is presently characterized by excess demand, you can accurately predict that price will:
A decrease, the quantity demanded will rise, and the quantity B decrease, the quantity demanded will fall, and the quantity
supplied will fall. supplied will rise.
C increase, the quantity demanded will fall, and the quantity D increase, the quantity demanded will rise, and the quantity
supplied will rise supplied will fall.
36. Cell phones and blue tooth headsets are complements. An increase in the price of bluetooth headsets would cause which of the following in
the market for cell phones?
A The equilibrium price and quantity of cell phones would B The equilibrium price of cell phones would increase and the
increase. equilibrium quantity would decrease.
C The equilibrium price and quantity of cell phones would D The equilibrium price of cell phones would decrease and the
decrease. equilibrium quantity would increase.
37. Suppose that Palm Pilots are a normal good. If the income of Palm Pilot users decreases, you predict that in the market for Palm Pilots:
A both equilibrium price and quantity will fall. B both equilibrium price and quantity will increase.
C equilibrium price will increase and quantity will decrease. D equilibrium price will fall but quantity will increase.
38. If increases in government regulations have increased the cost of producing gasoline-powered lawnmowers, you accurately predict that in the
market for gasoline-powered lawnmowers, there will be a(n):
A decrease in the quantity supplied of gasoline-powered B decrease in the supply of gasoline-powered lawnmowers, an
lawnmowers, a reduction in the price, and an increase in the increase in the price, and a decrease in the quantity demanded.
quantity demanded.
C decrease in the supply of gasoline-powered lawnmowers, an D increase in the supply of gasoline-powered lawnmowers, an
increase in the price, and a decrease in the demand. increase in the price, and a decrease in the demand.

The supply curve can be described by the following equation: Qs = c+dP.

The demand curve can be described by the following equation: Qd = a-bP.
At equilibrium we know that Qs = Qd and c+dP = a-bP . These relationships allow us to solve for the equilibrium price: Peq = (a-c)/(b+d). From
here you can find the equilibrium quantity by substituting with Peq in the supply or demand equations. Try doing the algebra yourselves.

39. Find the equilibrium price and quantity if the market is described by the following curves:
Qs = 1+0.5 P
Qd = 10-0.2 P
A Peq = 11.84, Qeq = 8.33 B Peq = 14.11, Qeq = 5.89
C Peq = 13.68, Qeq = 6.92 D Peq = 12.86, Qeq = 7.43
40. A market is described by the following curves: Qs = 2+0.3*P and Qd = 8-0.3*P. The eq. quantity is 10 and the eq. price is 5.
A True B False

Supply and Demand -6- Exercise session 3

Microeconomics 1 -7- Lectures and exercise sessions are complementary goods!
41. Use the following graph to find the equilibrium quantity and the equilibrium price. Hint: You need to find a,b,c and d first.

A Peq = 6.05, Qeq = 3.05 B Peq = 6, Qeq = 3.05

C Peq = 5.95, Qeq = 2.95 D Peq = 6, Qeq = 3
42. Assume that the income increases and the demand in the above graph increases by 2. Find the equilibrium quantity and the equilibrium price.
A Peq = 8.33, Qeq = 5.33 B Peq = 7.33, Qeq = 4.33
C Peq = 6.33, Qeq = 6.33 D Peq = 7.53, Qeq = 4.33
43. Assume that a new technology is introduced and the supply in the above graph increases by 3. The __________ curve will shift to the
_________ , the new equilibrium quantity will be _________ and the new equilibrium price will be __________ .
A supply/right/5/4 B demand/right/5/2
C supply/left/2/5 D supply/right/4/4
44. Assume that the demand falls by 25% at any price level. Describe the new demand curve, draw it on the graph above. After that calculate the
new equilibrium point and show it on the graph.

Supply and Demand -7- Exercise session 3