Chapter 3: Review questions – solutions – 2024-2025

Introductory Multiple Choice Questions:

1. Which of the following may shift the demand for watches to the left?

a. a decrease in the price of watches

b. a change in the cost of producing watches
c. a decrease in the price of smart watches
d. an increase in consumer income

2. All of the following shift the supply of watches to the right except

a. an advance in the technology used to manufacture watches.

b. an increase in the price of watches.
c. a fall in the cost of metals used in watch production
d. a decrease in the wage of workers employed to manufacture watches.

3. If the price of a good is above the equilibrium price at a certain point in time,

a. there is a surplus and the price will rise.

b. there is a shortage and the price will fall.
c. there is a shortage and the price will rise.
d. there is a surplus and the price will fall.

4. When the demand for a good shifts to the right due to an increase in consumers’
incomes:
a. The equilibrium price and quantity increase.
b. The equilibrium price increases and the equilibrium quantity decreases.
c. The equilibrium price decreases and the equilibrium quantity increases.
d. The equilibrium price and quantity decrease.

5. An inferior good is a good for which an increase in income causes a(n)

a. decrease in supply. c. increase in supply.

b. increase in demand. d. decrease in demand.

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 6. Suppose there is an increase in both the supply and demand for personal computers.
In the market for personal computers, we would expect

a. the equilibrium quantity to rise and the equilibrium price to rise.

b. the equilibrium quantity to rise and the equilibrium price to fall.
c. the change in the equilibrium quantity to be ambiguous and the equilibrium
price to rise.
d. the equilibrium quantity to rise and the change in the equilibrium price to be
ambiguous.

7. Which of the following statements is true about the impact of an increase in the price
of lettuce?

a. The supply of lettuce will shift to the left.

b. The demand for lettuce will shift to the left.
c. The equilibrium price and quantity of salad dressing will fall.
d. The equilibrium price and quantity of salad dressing will rise.

8. Suppose both buyers and sellers of wheat expect the price of wheat to rise in the
near future. What would we expect to happen to the equilibrium price and quantity
in the market for wheat today?

a. The impact on both price and quantity is ambiguous.

b. Price will decrease; quantity is ambiguous.
c. Price will increase; quantity will decrease.
d. Price will increase; quantity is ambiguous.

Theoretical Questions:

1. What is a market? Give some examples of markets.

2. What is a competitive market? Give an example of a competitive market and an
example of a non-competitive market.
3. What is the individual demand for a good? What is the market demand for a good?
4. List four determinants of demand. Explain how each of them affects demand.
5. List four determinants of supply. Explain how each of them affects supply.
6. When are two goods substitutes for a consumer? When are they complements? Give
an example of substitute goods and an example of complement goods.
7. Explain what happens when the price of a good is above the equilibrium price level.
8. Describe the role of prices in allocating resources market economies.

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Exercises

1. Explain each of the following statements using supply and demand diagrams.
a. When there is a drought in Southern Europe, the price of fruit rises in
supermarkets throughout Europe.
b. When a report is published linking a product with an increased risk of cancer,
the price of the product concerned tends to fall.
c. When a conflict breaks out in the Middle East, the price of petrol in Europe
rises and the price of a used Mercedes falls.

2. During the 1990s, technological advances reduced the price of computer chips. How
do you think this affected the markets for computers and for computer software?
a. The price of computers increases, the price of computer software decreases.
b. The price of computers decreases, the price of computer software increases.
c. Both prices of computers and of computer software increase.
d. Both prices of computers and of computer software decrease.

3. Using supply and demand diagrams, determine the effect of the following events on
the market for sweatshirts:
a. A revolution in Egypt reduces cotton production.
a. The price increases, the quantity decreases.
b. The price decreases, the quantity increases.
c. Both price and quantity decrease.
d. Both price and quantity increase.

b. The price of jeans jackets falls.

a. The price increases, the quantity decreases.
b. The price decreases, the quantity increases.
c. Both price and quantity decrease.
d. Both price and quantity increase.

c. High schools and universities no longer require students to dress formally.

a. The price increases, the quantity decreases.
b. The price decreases, the quantity increases.
c. Both price and quantity decrease.
d. Both price and quantity increase.

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 4. Suppose that in the year 2020 the number of births is temporarily high. Hoes does
this baby boom affect the price of baby-sitting services in 2025 and 2035? (Hint: Five-
year-olds need baby sitters, whereas fifteen year-olds can be baby sitters).
a. In 2025 the price of baby-sitting services will decrease, in 2035 it will
increase.
b. In 2025 the price of baby-sitting services will increase, in 2035 it will
decrease.
c. The price of baby-sitting services will increase in 2025 and in 2035.
d. The price of baby-sitting services will decrease in 2025 and in 2035.

5. Because bacon and eggs are often eaten together, they are complements.

We observe that both the equilibrium price of eggs and the equilibrium quantity of
bacon have risen. What could be responsible for this pattern-a fall in the price of
chicken feed or a fall in the price of pig feed? Illustrate and explain your answer.

6. Market research has revealed the following information about the market for
chocolate bars. The demand curve can be represented by the equation Q D=1500-30P,
where QD is the quantity demanded and P is the price. The supply curve can be
represented by the equation QS=1400+70P, where QS is the quantity supplied and P is
the price. Calculate the equilibrium price and quantity in the market for chocolate
bars. Represent the equilibrium in a graph.

7. Consider the following supply and demand curves for a certain product: Q S =2500P
and QD =50 000-10 000P.

Compute the equilibrium price and quantity and represent the equilibrium in a graph.

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8. Suppose that the price of tickets to see your local football team play at home is
determined by market forces. Currently, the demand and supply schedules are as
follows:

Price (euros) Qs Qd
10 30.000 50.000
20 30.000 40.000
30 30.000 30.000
40 30.000 20.000
50 30.000 10.000

a. Draw the demand and supply curve. What is unusual about this supply curve?
Why might this be true?
b. What are the equilibrium price and quantity of tickets?
c. Your team plans to increase total capacity in its stadium by 5000 seats next
season. What admission price should it charge if its aim is to fill the stadium?