# Gm545 Quiz 1

Topics: Supply and demand, Cost, Inflation Pages: 35 (10078 words) Published: March 4, 2012
GM545_QUIZ_1
1.| Question :| (TCO A) There is a decrease in the cost of labor for producing bicycles. (4 pts.) What happens to bicycle supply?
(6 pts.) What happens to bicycle demand?|
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| Student Answer:| | Nothing happens to supply, but demand will increase becasuse there will be an decrease in the price of the bicycles. | | Instructor Explanation:| Since a change in costs to produce the product is a supply factor, a decrease in costs would be expected to increase bicycle supply. Remember that supply is a schedule of how many units suppliers are willing to offer at different prices. When costs fall, the supply curve increases or shifts to the right. Since changes in producer costs is not a demand factor, there would be no impact on demand 2.| Question :| (TCO A) Peanut butter and jelly are complements in consumption. The price of jelly falls. (4 pts.) What happens to the demand for peanut butter?

(6 pts.) What happens to the demand for jelly?|
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| Student Answer:| | The demand for peanut butter increases because the price of jelly will bring down the price of peanut butter as it complement, but supply stays the same. | | Instructor Explanation:| When the price of a complimentary good falls, the demand for the other good rises. Price of jelly falls -- demand for peanut butter rises. This tests your ability to distinguish between a change in demand and a change in quantity demanded. When the price of jelly falls THERE IS NO EFFECT ON THE DEMAND for jelly. Only the quantity demanded would change -- rise in this case. Remember that a change in demand means that THE WHOLE CURVE SHIFTS. | |

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| Points Received:| 10 of 10 |
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3.| Question :| (TCO A) The number of new home sellers in a given market decreases. (4 pts.) What happens to the supply of new homes?
(6 pts.) What happens to the demand for new homes?|
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| Student Answer:| | The supply decreases because of the decrease in the new homes sellers but the number of demand stays the same. | | Instructor Explanation:| The supply of new homes would decrease, or shift to the left. The number of suppliers is obviously a supply factor, so the less suppliers thare are, the smaller would be the supply. The demand for new homes remains the same as before because the number of suppliers is a supply factor, not a demand factor. | |

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| Points Received:| 10 of 10 |
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4.| Question :| (TCO A) A market is in equilibrium with equilibrium quantity Q* and equilibrium price P*. (2 pts.) What happens to P* if there is an increase in supply? (4 pts.) What happens to Q* if there is a decrease in supply and a decrease in demand? (4 pts.) What happens to P* if there is an increase in demand followed by a decrease in supply followed by another increase in demand?|

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| Student Answer:| | If P* goes down there is a decrease in supply. If there is a decrease supply and demand Q* will go down. And the equilibrium price change will go up based on an increase in demand followed by and decrease in supply and another increase in demand. | | Instructor Explanation:| An increase in supply will create a surplus at the price of P*. Surpluses put pressure on prices to fall. Hence, the new market equilibrium will be at a price that is lower than P*. The result will be that Q* will fall. A decrease in supply will decrease the equilibrium quantity (Q*), and a decrease in demand will also decrease the equilibrium quantity (Q*). Clearly Q* must fall. Both an increase in demand and a decrease in supply put upward pressure on P*. Therefore, the new market equilibrium will be at a higher P* price.| |

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| Points Received:| 10 of 10 |
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5.| Question :| (TCO B) The following table shows part of the demand for tickets to a local sporting event: Price(P)...Quantity(Q)
15...........40
10..........100
6............150...