Economics Mr. Bekemeyer

Supply, Demand, Market Disruptions & EEEElasticity [Unit III Exam -- Practice Problems (ANSWERS)] 1.

If Manchester United tickets are an inferior good, an increase in income will result in

D) a decrease in the demand for Manchester United tickets. 2.

An increase in the price of Disneyland admission tickets will cause the demand curve for hotels near Disneyland to shift in which direction?

B) To the left, because Disneyland admission tickets and hotels near Disneyland are complements 3.

Assume that coal is a normal good. If the price of coal increases and the quantity sold increases, which of the following is consistent with these observations?

A) The price of oil increased, oil and coal being substitutes. 4.

Which of the following will not change the demand for oranges?

C) A change in the price of oranges 5.

If there is an increase in demand for a good, what will most likely happen to the price and quantity of the good exchanged? Price

B) Increase 6.

Quantity

Increase

During a Roseville Raider soccer match, it starts to rain and the temperature drops. The RAHS Senior Class, which runs the concession stand and is taking AP Microeconomics, raises the price of coffee from 50 cents to 75 cents a cup. They sell more than ever before. Which answer explains this?

D) The demand for coffee increased.

Exam Practice # ________

7.

Assume that the demand for apples is downward sloping. If the price of apples falls from $.80 per pound to $.65 per pound, which of the following will occur?

B) A larger quantity of apples will be demanded. 8.

Which of the following will not cause the demand curve for Adidas Predator soccer boots to shift?

E) A decrease in the price of Adidas Predator soccer boots 9.

During the 1990s, the price of VCRs fell by about 30 percent, and quantity sold decreased by the same amount. The demand for VCRs must D) have shifted to the left.

10. Which of the following will occur if a legal price floor is placed on a good below its free-market equilibrium?

D) The equilibrium price will ration the good. 11. A marketing survey shows that gate receipts would increase if the price of tickets to a summer rock concert increased, even though the number of tickets sold would fall. What does this imply about the price elasticity of demand for concert tickets?

A) Demand is inelastic. 12. Compare 2012 with 2013. Which of the following statements is (are) true? Year Quantity Sold Price 2012 30,000 $10 2013 50,000 $20 I. Demand has increased. II. Quantity demanded has increased. C) I, II, IV, only III. Supply has increased. IV. Quantity supplied has increased. V. Supply has decreased.

13. If the price of lunch at the San Pedro Café in Hudson, Wisconsin increases and San Pedro Café revenue remains constant, the elasticity of demand for an amazing lunch in Hudson, Wisconsin must be

C) unit elastic. 14. If the price of soccer balls increases and consumer expenditures on soccer balls also increase, which of the following is necessarily true? UNIT

Microeconomics SAMPLE QUESTIONS E)2The demand for soccer balls is inelastic. MULTIPLE-CHOICE

(continued)

20. If the price of lunch at the school cafeteria increases and cafeteria revenue remains constant, the elasticity of demand for a school lunch must be

PRICE

S

(A) elastic. (B) perfectly elastic. (C) unit elastic. X

(D) inelastic. (E) perfectly inelastic. D

21. If an excise tax is imposed on a product, consumer surplus and producer surplus for this QUANTITY OF TICKETS good will most likely change in which of the 18. Accordingto to the above, which ofwhich the fol- of the following ways?will occur if a According thegraph graph above, following lowing will occur if a legal price ceiling is Consumer Surplus Producer Surplus legalimposed priceatceiling price X? is imposed at price X? (A) Decrease Decrease (A) Shortages will occur. (B) Decrease Increase Q

15.

Q1

A) Shortages will occur. (B) Surpluses will occur.

(C) Decrease

Not change

(C) Demand will increase.

(D) Not change is true? Increase 16. Which of the following statements about price controls (D) Q1 will be purchased.

(E) Not change

Not change

Supplyceilings will decrease. E) (E) Price and price floors result in a misallocation of resources. 22. If the price of paperback books increases and 19. Which of the following statements about price controls is true?

17. The (A) substitution consumer A price ceilingeffect causes a causes shortage ifathe ceiling increases price is above because the equilibrium the price theprice.

B)

(B) A price floor causes a surplus if the price product is now more expensive floor is below the equilibrium price. (C) A price ceiling causes an increase in demand if the ceiling price is set below the equilibrium price. (D) A price ceiling causes a decrease in demand if the price floor is set above the equilibrium price. (E) Price ceilings and price floors result in a misallocation of resources.

consumer expenditures on paperback books increase, which of the following is necestoalso buy less of a product when sarily true? (A) Paperback books are normal goods.

(B) Paperback books are inferior goods. compared to similar products. (C) The demand for paperback books is unit elastic. (D) The demand for paperback books is elastic. (E) The demand for paperback books is inelastic.

Product A B C D

% Change in Income +5 +5 -10 -10

% Change in Quantity +5 -5 -10 +10

18. Based on the information in the table above, which product(s) is / are inferior?

E) Product B and D only 19. If the price of a good decreases by 3 percent and total revenue increases, the elasticity of demand for the good could possibly be

A) 1.3 20. Advocates of higher minimum wages for unskilled labor defend their position by arguing that

A) low-income workers deserve to earn incomes above the poverty level. 21.

During the first years of the French Revolution, Jacques Necker, Joseph Mounier, Gérard de Lally-Tollendal, and other leaders ordered price controls placed on all essential items in order to help the peasants pay for these important necessities. The result of this was that many peasants starved. Once the National Constituent Assembly convened after successfully defending the revolution, it passed a law which,

D) 22.

Which of the following will shift the demand curve for milk?

A) 23.

overrode previous laws and repealed the price controls.

change in the income of buyers of milk

A shift in the demand curve for sailboats resulting from an increase in incomes will lead to

A)

higher prices for sailboats.

24.

Last year, 1,000 cases of elixir were sold at $10; this year, 1,200 cases were sold at $12. The most probable interpretation of these data is that the

D) 25.

demand curve has shifted to the right, with no change in supply.

The Bluefin Bay Resort in Northern Minnesota charges $99 per room in the winter ski season and $94 during the summer months. The number of rooms and operating costs are constant year round. These prices indicate

B)

a rightward shift in demand in the winter.

Short Response 1.

I sit in the back row of the barbers’ union where they are discussing a proposal to raise the price of haircuts from $18 to $20. The argument gets nowhere, and someone suggests asking me, as an economist, whether it is a good idea or not. I reply, “Many studies have shown that the demand for haircuts is elastic.” What are they to make of this? Why? Be as brief as possible in making the major point that the barbers ought to see in this situation.

If the demand for haircuts is elastic, total revenue would fall if the price were raised. 2.

True, false or uncertain, and explain why? “Other things being the same, the surplus of workers associated with a price floor will be greater the greater the elasticity of both supply and demand.” Discuss this statement. Use graphs to illustrate your explanation.

The more elastic the supply and demand curves, the greater the surplus.

associated with a price floor will be greater the greater the elasticity of both supply and demand.”

(B) The city of Toledo institutes an effective price ceiling on tickets. Explain where the price ceilDiscuss this statement. Use graphs to illustrate your explanation. ing would be set. Explain impact of the ceiling curves, on each of thegreater following: The more elastic thethe supply and demand the the surplus. (i)Inelastic The quantity of tickets demanded Demand Elastic Demand S supplied (ii) The quantity of tickets

S

PRICE

PRICE

The price ceiling must be set below the equilibrium price with the new trapeze act (1 point). The quantity demanded will increase (1/2 point), however the quantity supplied will remain the same (fixed at 40,000) (1/2 point). Grading Rubric: Part (B) = 2 points Setting the price ceiling below the equilibrium price (1 point) D Quantity demand increases (1/2 point) Surplus Surplus Quantity supplied unchanged (1/2 point)

3.

D

QUANTITY QUANTITY (C) Will everyone who attends the circus pay the ceiling price set by the city of Toledo? Why or why not?

A news paper headline “The Coldest Winter insome 20circus Years No, a secondary market or resellingsays, of tickets or scalping of tickets will have goersBrings S point). Record Heating Oil.” paying morePrices than thefor ceiling price (1 PRICE

Grading Rubric: Part (C) = 1 point (some version of the above) (A) Radio Using a graph of and home heating show and explain how (Note: give-aways, coupons employees do notoil, change with the existence of a price $5.00 changed. ceiling; therefore that type of answer is incorrect.)

price

The record increases theindemand forRecord heating oilHeating to run 6. A newspaper headline cold says, “The Coldest Winter 20 Years Brings Prices for Oil.” D

heaters, the demand increases, the price and quantity (A) Using a graphso of home heating oil, show and explainraising how price changed. The record cold increases the demand for heating oil to run heaters, so the demand increases, 40,000 sold. QUANTITY OF TICKETS raising the price and quantity sold. PRICE

*5. An arena holds a maximum of 40,000 people, as indicated in the graph above. Each year the cirS cus holds eight performances, all of which are sold out. (A) P1 Analyze the effect on each of the following of the addition of a fantastic new death-defying P trapeze act that increases the demand for tickets. (i) The price of tickets (ii) The quantity D of 1 tickets sold The trapeze actDwill cause an increase in demand (shift right in the demand curve) increasing the price, but the quantity will remain the same because the quantity is fixed at 40,000 seats. Q Rubric: Q1 Grading Part (A) = 2 points PriceQUANTITY increases as a result of the demand increases (1 point) Quantity remains the same (1 point)

(B) What factors could factors cause the price of heating to increase? (B) other What other could causeoilthe price

of heating oil to

* Actual free-response question from a past AP test. Reprinted by permission of the College Entrance Examination Board, the copyright owner.Any For factor limitedthat use increased by NCEE.demand could increase price and quantity.

increase?

Any factor that decreased supply could increase price and decrease quantity.

Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y.

Any factor that increased demand could increase price and quantity. Any factor that decreased supply could increase price and decrease quantity.

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UNIT

24.2 Microeconomics SAMPLE QUESTIONS Microeconomics SAMPLE QUESTIONS In a recent year, the price of wheat fell. For each of the following, draw 2 7.Microeconomics SAMPLE QUESTIONS a recent year, price of wheat fell. For each of theafollowing, drawin a supply andwith demand aIn supply andthedemand graph showing decrease prices the stated Answer Answer Key Answer Key Key

SHORT FREE-RESPONSE SHORT FREE-RESPONSE SHORT FREE-RESPONSE

UNIT UNIT

7. graph In a recent year, the pricein ofprices wheatwith fell. For each ofimpact the following, draw a supply and demand showing a decrease the stated on quantity. on 7. impact Ingraph a recent year,quantity. the price ofinwheat Forthe each of the following, draw a supply and demand showing a decrease pricesfell. with stated impact on quantity. (A) The quantity of wheatin decreasing graph showing a decrease prices with the stated impact on quantity. (A) The quantity of wheat decreasing (A) The quantity of wheat decreasing S decreasing (A) The quantity of wheat PRICE PRICE PRICE

S S

D1

QUANTITY D1 D QUANTITY 1 QUANTITY

D D D

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PRICE PRICE PRICE

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S S1 S S1 S1

D D D QUANTITY QUANTITY QUANTITY

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PRICE PRICE PRICE

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D D D

S S S S 1

S1 Q S1 QUANTITY Q Q QUANTITY QUANTITY

OR OR OR

PRICE PRICE PRICE

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D D D D 1

D1 Q D1 QUANTITY Q Q QUANTITY QUANTITY

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$5.00 D

40,000 QUANTITY OF TICKETS

5.

An arena holds a maximum of 40,000 people, as indicated in the graph (A) AnalyzeEach the effect year on each of the following of the addition eight of a fantastic new death-defying above. the circus holds performances, all of which are trapeze act that increases the demand for tickets. sold(i)out. The price of tickets

*5. An arena holds a maximum of 40,000 people, as indicated in the graph above. Each year the circus holds eight performances, all of which are sold out.

(ii) The quantity of tickets sold

(A) Analyze the effect on each of the following of the addition of a fantastic new death-defying trapeze act that increases the demand for tickets. (i)

The price of tickets

(ii)

The quantity of tickets sold

* Actual free-response question from a past AP test. Reprinted by permission of the College Entrance Examination Board, the copyright owner. For limited use by NCEE.

118

The trapeze act will cause an increase in demand (shift right in the demand curve) increasing the price, but the quantity will remain the same because the quantity is fixed at 40,000 seats. Advanced Placement Economics Microeconomics: Student Activities © National Council on Economic Education, New York, N.Y.

(B)

The city of Roseville institutes an effective price ceiling on tickets. Explain where the price ceiling would be set. Explain the impact of the ceiling on each of the following: (i) The quantity of tickets demanded (ii) The quantity of tickets supplied

The price ceiling must be set below the equilibrium price with the new trapeze act. The quantity demanded will increase, however the quantity supplied will remain the same (fixed at 40,000). (C) Will everyone who attends the circus pay the ceiling price set by the city of Roseville? Why or why not? No, a secondary market or reselling of tickets or scalping of tickets will have some circus goers paying more than the ceiling price.

6.

The market for many commodities is seasonal in nature. Their sales (equilibrium quantity) increase dramatically during certain times of the UNIT SHORT FREE-RESPONSE year. Poofy prom dresses and fresh strawberries, are two examples. UNIT SHORT FREE-RESPONSE SAMPLE QUESTIONS (continued) Poofy prom dress sales increase during the last three months of the SAMPLE QUESTIO school year, and the sales of fresh strawberries increase during the 8. The market for many commodities is seasonal in nature. Their sales (equilibrium quantity) 8.(equilibrium) Thetimes market for year. many commodities seasonal in nature. Their summer the price movement of these two increase months. dramaticallyBut during certain of the Christmas cardsisand fresh strawberries, at sales (equilibriu increase dramatically during certain times of the year. Christmas least in the North, are two examples. Christmas-card sales peak increasesales duringseason: the last three months of cards and fres commodities is quite different during their Poofy least in the are two examples. sales increase the year, and the sales of fresh strawberries in North, the North increase duringChristmas-card the summer months. But during the la prom dresses increase in price during the last three months of the the year, and the sales of fresh strawberries in the North increase the (equilibrium) price movement of these two commodities is quite different during their peak during the sum the (equilibrium) price movement of during theseoftwo school year,Christmas where cards as strawberries inthree price the sales season: increase in price decrease during the last months the commodities year, summer. whereas is quite different d

2 Microeconomics 2 Microeconomics

salesthe season: Christmas cards increase in price during the last three months of t strawberries decrease in price during summer. strawberries pricebe during summer. in the (A)(A) Show on the graph below howdecrease thereincan an the increase Show on the graph below how there can be an increase in the equilibrium quantity and an (A) Show the cards graphduring below there canmonths be an price increase in the equilibrium q equilibrium quantityprice and an on increase in thehow of increase in the equilibrium of Christmas theequilibrium last three of the year, increase in the equilibrium price of Christmas cards during the last three m and briefly explaindresses what has happened. Poofy prom during the last three months of the school and briefly explain what has happened.

Christmas Market year, andCard briefly explain Christmas what hasCard happened. Market

P

S

PRICE

PRICE

S P1 P

D1

D

D

Q QUANTITY

Q Q1 QUANTITY

With other things constant, there is an increase in the demand for Christma

With other things constant, three there is an increase in the demand for months of the year. This causes a rightward shift of demand and cause quantity sold months to increase. of the school year. This Poofy prom dresses in the last three causes a rightward shift of demand andfor causes the price and (B) Change in be thean North to show (B) Change the graph for fresh strawberries inthe thegraph North to fresh show strawberries how there can increase in how there can quantity sold to increase. the equilibrium quantity and a decrease in the equilibrium the equilibrium quantity and a decrease in the equilibrium price of strawberries in the sum- price of strawbe mer, and briefly explain what has happened. mer, and briefly explain what has happened.

Strawberry Market in the North Strawberry Market in the North S S1

PRICE

PRICE

S

P

P P1 D

D Q QUANTITY

Q Q1 QUANTITY

Other things constant, there is an increase in the supply of fresh strawberries areas of the United States in the warmer months when the berries are harves areas. This causes a rightward shift in the supply curve and causes the price quantity sold to increase.

Advanced Placement Economics Microeconomics: Student Activities © National Council on Economic Education, New York, N.Y. 121 118 Advanced Placement Economics Teacher Resource Manual © National Council on Econom

1

QUANTITY

With other things constant, there is an increase in the demand for Christm three months of the year. This causes a rightward shift of demand and cau quantity sold to increase. fresh strawberries to show how there can be

(B) Change the graph for (B) an Change the graph fresh strawberries in the North to and show how there can bein an increase in increase inforthe equilibrium quantity astrawberries decrease Change theequilibrium graph for fresh in theinthe North to show how there c the equilibrium quantity and a (B) decrease in the price of strawberries the sumequilibrium price of strawberries in the summer, and briefly the equilibrium quantity and a decrease in the equilibrium price of straw mer, and briefly explain what has happened. mer, and briefly explain what has happened. explain what has happened. Strawberry Market in the North Strawberry Market in the North

S

S

PRICE

PRICE

S1

P

P P1

D Q QUANTITY

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Other things constant, there is an increase in the supply of fresh strawberr of the United States in the warmer months when the berries are harv Other things constant, there areas is an increase in the supply of fresh areas. This causes a rightward shift in the supply curve and causes the pric strawberries in the northern quantity areas sold of the United States in the to increase. Advanced Placement Economics Microeconomics: Student Activities © National Council on Economic Education, New York, N.Y. 121

warmer months when the berries are harvested in the northern Advanced Placement Economics Teacher Resource Manual © National Council on Eco areas. This causes a118 rightward shift in the supply curve and causes the price to fall and the quantity sold to increase.

7.

Make the assumption that one day you will be a college graduate (even more special, an Indiana University graduate). Would you support a law to raise the legal minimum wage of college graduates to $50,000? This is a price floor and would probably increase unemployment among college graduates if the controlled price is above the equilibrium price. There would be incentives for college graduates to work and incentives for employers to hire non-college graduates at lower wages. This would cause a surplus of workers or higher unemployment.

UNIT

2 Microeconomics 8.

LONG FREE-RESPONSE

You are a member of the city council and are considering a law to SAMPLE QUESTIONS control rents below the free- market rent. Answer the following questions, and Free-Response use a graph in yourQuestions explanation. Sample Long

Answer Key

(A) What would be the effect of this rent-control law in the short run?

1. You are a member of the city council and are considering a law to control rents below the freemarketWhy? rent. Answer the following questions, and use a graph in your explanation. (A) What would be the effect of this rent-control in the short run? (B) What would be the effect of this law rent-control lawWhy? in the long run? (B) What would be the effect of this rent-control law in the long run? Why? Why? S Pum Pe Pc

Ceiling D Q Qs Qd

Note: In the figure, Pum stands for “Price – underground market.”

(A) In In the short run, thisrun, wouldthis causewould a shortage. Thereais shortage. no time to sellThere or convert (A) the short cause isapartments. no time Quantity supplied (Qs ) stays the same, but quantity demanded increases to Qd . A shortage toQsell or convert apartments. Quantity supplied (Qs) stays the from s to Qd exists. same, but quantity demanded increases to Qd. A shortage from Qs to Qd exists.

(B) the run, long thewould shortage be more acute because (B) In In the long therun, shortage be more would acute because there would be fewer incentives to build morewould apartments. would be converted to condominiums or sold for other there be Apartments fewer incentives to build more apartments. businesses. Quantitywould supplied be would move to Q. Also, underground markets develop, Apartments converted to condominiums orcould sold for and creative apartment owners could actually charge a price of Pum . other businesses. Quantity supplied would move to Q. Also, underground markets could develop, and creative apartment owners could actually charge a price of Pum. *2. In a perfectly competitive market in long-run equilibrium, what would be the immediate results of imposing and enforcing a price ceiling below the equilibrium price of the product? What would be the long-run effect of continuing to enforce the ceiling price, assuming underground markets don’t develop? Be sure to explain why the predicted effects will occur. A price ceiling would cause a shortage. Quantity demanded would increase and quantity supplied would decrease. The shortage would be greater in the long run. This is because supply and demand are both more elastic in the long run. This could also be shown by shifting the supply curve leftward in the long run.

* Actual free-response question from a past AP test. Reprinted by permission of the College Entrance Examination Board, the copyright owner. For limited use by NCEE. Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y.

119

9.

In a perfectly competitive market in long run equilibrium, what would be the immediate results of imposing and enforcing a price ceiling below the equilibrium price of the product? What would be the longrun effect of continuing to enforce the ceiling price, assuming underground markets don’t develop? Be sure to explain why the predicted effects will occur. A price ceiling would cause a shortage. Quantity demanded would increase and quantity supplied would decrease. The shortage would be greater in the long run. This is because supply and demand are both more elastic in the long run. This could also be shown by shifting the supply curve leftward in the long run.

10.

Assume the market for unskilled workers is perfectly competitive and in equilibrium. Then a minimum wage is imposed, which increases the wage rate of unskilled workers. (A) Use supply and demand analysis to explain how this increase in the wage rate will affect each of the following: (i)

The number of workers employed in the market

(ii)

The number of unskilled workers seeking employment in the market

(B) Assume that the fast-food industry is perfectly competitive and employs only one factor of production: unskilled workers. Use supply and demand analysis to explain how the increase in the wage rate resulting from the imposition of the minimum wage will affect each of the following in the fast-food industry in the short run. (i)

Price of fast food

(ii)

Quantity of fast food produced

(A) This is a price floor. (i)

The minimum wage would decrease the number of workers employed in the industry (quantity of workers demanded).

(ii) It would also increase the number of workers seeking employment (quantity of workers supplied). (B) Higher wages increase the costs of production, so supply would decrease, or shift to the left. This would cause the price of fast food to increase and the quantity of fast food produced to decrease.

11.

A consumer group believes the prices of necessities such as food, housing, energy and medical care should be controlled by the government. “People can afford higher prices for luxuries,” they reason, “but all of us, and especially the poor, suffer when the prices of necessities rise.” Evaluate the effects of this plan. This is a price ceiling and will probably cause a shortage of necessities. This, of course, will happen only if the administered controlled price is lower than the equilibrium price. This administered price will provide incentives for consumers to buy more necessities (an increase in quantity demanded) and incentives for producers to produce less (a decrease in quantity supplied).

12.

State Senator John Marty feels that Minnesota can raise revenue 500 percent by increasing license plate and registration fees by 500 percent. Will the government increase its revenue by 500 percent? Why or why not? Senator Marty is wrong. The demand for license plates is inelastic but not perfectly inelastic. Therefore, a 500 percent rise in price would not yield 500 percent more revenue. There are substitutes for cars, such as carpooling and use of mass transit.

UNIT

2 Microeconomics Microeconomics 22 5.Microeconomics 13. UNIT

UNIT

Answer Recently the price of beef rose. Use graphs show that increase in LESSON 6 ■toACTIVITY 23 the Key Answer price could be consistent with the following. sure to a graph LESSON 6 ■(Be ACTIVITY 23draw Answer Key LESSON 6 ■ ACTIVITY 23 Key and provide brief forthateach situation.) Recently the price of abeef rose. explanation Use graphs to show the increase in price could be consistent

PRICE PRICE PRICE

the following. surerose. to draw graph to and provide a brief explanation eachbesituation.) 5.with Recently the price (Be of beef Use agraphs show that the increase in pricefor could consistent (A) The quantity of beef consumed falls. 5. (A) Recently the price of beef rose. Use graphs to show that the increase in price could be consistent The of beef consumed with thequantity following. (Be sure to drawfalls. a graph and provide a brief explanation for each situation.) with the following. (BeSsure to draw a graph and provide a brief explanation for each situation.) 1 consumed falls. (A) The quantity of beef (A) The quantity of beefSconsumed falls. S1 S1 S S

P1

P

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rises.

S

P1 P P1 P1P P

S D1

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D

S1

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stays the same. S

PRICE PRICE PRICE

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D of S S same. (C) The quantity beef consumed stays the 1 (C) The quantity of beef consumed (C) The quantityDof beef Sconsumed stays the Ssame.

1

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DD D 1 D1 Q Q P D QUANTITY QUANTITY D P D P 1 Q D QD QUANTITY QUANTITY Q Q A perfectly inelastic demand curve,QUANTITY a perfectly inelastic supply curve or a simultaneous QUANTITY QUANTITY

P

Q QUANTITY Q QUANTITY Q

P

increase in demand decrease in supply. Students havesupply the most trouble with this concept. A perfectly inelasticand demand curve, a perfectly inelastic curve or a simultaneous This question also illustrates that the reason for a price change is more complicated than many AAincrease perfectly inelastic demand perfectly supply perfectlyininelastic demand curve, a perfectly inelastica supply or ainelastic simultaneous demand and decrease in supply.curve, Students have thecurve most trouble with this concept. armchair think. increase ineconomists demand and decrease supply. Students havechange the most trouble with this concept. This question also illustrates thatinthe reason for a price is more complicated than many

curve or a simultaneous increase in demand and decrease in This question also illustrates armchair economists think. that the reason for a price change is more complicated than many supply. armchair economists think.

Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y. Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y.

Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y.

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14.

You stumble across a heated debate in the cafeteria. It seems that a bunch of friends just bought concert tickets from Ticketmaster, a ticket-handling agency, and paid a $4.00 surcharge for each ticket. “It’s outrageous! It’s not like they actually do anything worth $4.00,” complains a friend. Comment on her complaint. Ticketmaster brought buyers and sellers together. If Ticketmaster didn’t provide a service, people wouldn’t pay the $4.00 fee. Evidently, both the concert promoter and the consumer are willing to pay for the service of bringing buyers and sellers together.

15.

You learn that a prominent economist is going to give a lecture, and you rush to get tickets. At the lecture the economist says, “We economists don’t know much, but we know how to create shortages and surpluses.” (At this moment, the large Target Center crowd bursts into loud, raucous laugher.) (A) How can government create a shortage in a competitive market? Illustrate this with a graph. Can you provide examples of this? Have an administered maximum price below market equilibrium. Rent controls and price freezes are examples.

(B) How can government produce a surplus in a competitive market? Illustrate this with a graph. Can you provide examples of this? Have an administered minimum price above market equilibrium. Examples are minimum-wage laws and farm-price supports.

16.

I.M. Politico, a candidate for the state legislature, is proposing a large increase in the tax on cigarettes and liquor. He says, “I’m not proposing these taxes to raise revenue but to discourage reckless drinking and the filthy smoking habit. If the prices of cigarettes and liquor go up, most people will quit using them. After all, no one needs to drink or smoke.” (A) I.M. is wrong. (B) He assumes that demand for these products is elastic, but it is not. He therefore falsely concludes that a tax increase on cigarettes and liquor will curb their consumption a great deal. In fact, taxes on these commodities will curb their consumption very little.

17. U.R. Kool, a candidate for Congress, proposes freezing the price of gasoline. “There is no substitute for gasoline,” he says “People have to get from one place to another. Economists who say higher prices will discourage people from buying as much gas as before don’t live in the real world.” (A) U.R. is wrong. (B) There are many methods of saving gasoline, including driving cars with smaller engines, car pooling and using public transportation. In fact, following the huge increases in price of gasoline in 1973, people conserved on the use of gas, and sales were lower than they would have been if prices had not risen. 18. Councilman Vic Acqua opposed a price increase for water during a recent drought. He claimed that there is no substitute for water. He believes an increase in the price of water (water taxes) will result in the same quantity of water used as before the price went up. (A) Vic is wrong. (B) Demand for water is inelastic, but raising its price will curb consumption somewhat.

19.

Sky King, world traveler, says if the airlines want to increase total revenue, they should lower fares for business travelers as well as for vacationers. Both groups should respond equally to a price decrease. (A) Sky is wrong (B) He assumes that both business travelers and vacationers have an elastic demand for air travel. Business travelers’ demand for air travel is inelastic because they cannot easily postpone or give up their air travel. Vacationers con postpone their air travel, use other means of transportation or change their destination so as not to require air travel or to require less of it.