Micro Chapter 3 study guide questions Multiple Choice Identify the choice that best completes the statement or answers the question. ____

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1. If the price of tickets to the World Series were set below the equilibrium price, a. the quantity demanded would be smaller than the quantity supplied. b. the demand for World Series tickets would be highly responsive to the price. c. there would be no transactions between buyers and sellers of the tickets. d. the number of persons seeking to obtain tickets to World Series games would be greater than the number of tickets available. 2. Which of the following would cause the price of automobiles to rise? a. a decrease in the wages of autoworkers b. a reduction in the price of bus travel c. an increase in the price of gasoline d. an increase in consumer income 3. Which of the following would be the best example of consumer surplus? a. Jane pays $30 a month for phone service even though it is worth $70 to her. b. Sam refuses to pay $10 for a haircut because it is only worth $8 to him. c. Fred buys a car for $4,000, the maximum amount that he would be willing to pay for it. d. When Sue purchases a candy bar for $.50, she uses a $20 bill to pay for it. 4. If cigars and cigarettes are substitute goods, an increase in the price of cigars would result in a. an increase in the demand for cigarettes. b. a decrease in the price of cigarettes. c. a decrease in the demand for cigarettes. d. a decrease in the demand for cigars. 5. Which of the following would most likely cause the current demand for DVD players to fall? a. an increase in consumer income b. an increase in the price of DVD players c. an increase in the price of Blu-ray players, a substitute good d. the expectation that the price of DVD players will decrease sharply during the next six months 6. (I) The height of the demand curve for a commodity indicates the maximum amount the consumer would be willing to pay for each unit of the good. (II) The height of the supply curve for a commodity indicates the minimum price the seller would accept for each unit of the good. a. I is true; II is false. b. I is false; II is true. c. Both I and II are false. d. Both I and II are true. 7. All things constant, a decrease in bus, train, and airplane fares will a. shift the demand curve for automobiles to the left. b. cause a movement along the demand curve for automobiles. c. shift the demand curve for automobiles to the right. d. have no impact on the demand curve for automobiles.

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8. If coffee and cream are complements, a decrease in the price of coffee will cause a. the demand for cream to decrease. b. the demand for cream to increase. c. the demand for coffee to increase. d. no change in the demand for cream; only quantity demanded would be affected. 9. If the market price is above the equilibrium price, there will be a tendency for price to decrease, causing a. the quantity demanded to decrease and the quantity supplied to increase until they are equal. b. the quantity demanded to increase and the quantity supplied to decrease until they are equal. c. both quantity demanded and quantity supplied to decrease until they are equal. d. both quantity demanded and quantity supplied to increase until they are equal. 10. According to the law of supply, as the price of a good decreases a. buyers will buy more of the good. b. sellers will produce more of the good. c. buyers will buy less of the good. d. sellers will produce less of the good. 11. John advertises his used car for $3,000 in the newspaper. He would be willing to sell his used car for as low as $2,000. He is offered $2,600 for it from a buyer and accepts it. In this trade, John receives a. producer surplus of $3,000. b. producer surplus of $2,600. c. producer surplus of $600. d. consumer surplus of $400. 12. Economic efficiency requires that a. individuals take all actions within their power. b. only long-lasting, high-quality products be produced. c. income be distributed equally among individuals. d. all economic activity generating more benefits than costs to individuals in the economy be undertaken. 13. If the demand for a certain product increased, what would be the effect on the equilibrium price and quantity? a. price increases, quantity decreases b. price decreases, quantity decreases c. price increases, quantity increases d. price decreases, quantity increases

Figure 3-24

____ 14. In Figure 3-24, which of the following is true? a. At P3, consumer surplus and producer surplus are equal. b. At P2, consumer surplus is greater than producer surplus. c. At P1, consumer surplus is greater than producer surplus. d. At P1, consumer surplus and producer surplus are equal. ____ 15. "If gasoline were taxed, the price of gasoline would rise. Consequently, the demand for gasoline would fall, causing the price to fall to the original level." This statement is a. essentially correct. b. incorrect--after the demand falls, the price would fall but to some level higher than the original level. c. incorrect--demand and quantity demanded are confused. The price increase would reduce quantity demanded, not demand. d. incorrect--after the demand falls, the price would fall but to some level lower than the original level. ____ 16. Over the past 20 years both the quantity of health care provided and health care prices have been rising rapidly. Economic theory would suggest that the observed data could best be explained as a. an increase in supply, while demand remained relatively constant. b. a decrease in both supply and demand. c. an increase in demand, while supply remained relatively constant. d. a sharp increase in both supply and demand. ____ 17. A decrease in the supply of a good will a. decrease the demand for the good. b. cause the price of the good to fall. c. lead to an increase in the price of the good. d. increase the quantity of the good bought and sold. ____ 18. Which of the following would most likely decrease the price of beef? a. lower prices of grains used to produce cattle feed b. higher prices for chicken, a substitute for beef c. a cow disease that destroys millions of cattle (and makes their meat unfit for consumption) before they are ready for market d. an increase in consumer income

____ 19. A decrease in the price of flour will shift the supply curve for donuts a. leftward, causing the equilibrium price to increase and quantity to decrease. b. leftward, causing the equilibrium price and quantity to decrease. c. rightward, causing the equilibrium price to decrease and equilibrium quantity to increase. d. rightward, causing the equilibrium price and quantity to increase. ____ 20. When Adam Smith said economic activity was directed by an "invisible hand," he was referring to the fact that a. competitive markets motivate altruistic individuals to pursue productive activities that only serve their private interests. b. when economic activity is directed by competitive markets, the actions of self-interested individuals will generally serve the public interest. c. invisible forces will lead to economic chaos unless wise central planning directs economic activity. d. scarcity is largely the result of invisible forces that would be eliminated if individuals were free to pursue their own self-interests. ____ 21. A hurricane damaged much of the housing in Miami. Shortly thereafter, the price of plywood rose significantly. The events suggest that a. a decrease in the supply of plywood caused the price of plywood to rise. b. an increase in the supply of plywood caused the price of plywood to rise. c. a decrease in the demand for plywood caused the price of plywood to rise. d. an increase in the demand for plywood caused the price of plywood to rise. ____ 22. If the demand for a good increases, which of the following will generally occur in a market setting? a. The price of the good will decrease. b. The supply of the good will increase. c. The quantity supplied will increase. d. Producer profits will fall. ____ 23. A freeze in Florida devastates the orange crop at the same time a new study is released showing the health benefits of vitamin C (leading consumers to want to buy more orange juice). How will the equilibrium price and quantity of orange juice change in response to the combination of these two events? a. Equilibrium quantity will decrease, equilibrium price will increase. b. Equilibrium price will decrease, the effect on quantity is ambiguous. c. Equilibrium price will increase, the effect on quantity is ambiguous. d. Equilibrium quantity will increase, the effect on price is ambiguous. Critical Thinking and Application  24. Suppose a person defects from Cuba (a country that generally disregards the use of markets) to the United States and asks to see a market in action. Where would you take her? Did you give her a complete showing of this market? 25. Economists maintain that the price of a product has no effect on demand. How can this be true? 26. Susan says, "If the price of wool coats goes up, suppliers will offer more of the coats for sale." Brad replies, "It takes three months to harvest wool and employ all the steps necessary to produce a wool coat. Quantity supplied cannot possibly increase for three months." Is Brad correct? Why or why not? 27. A question on an economics exam asks, "What happens in the market for jelly when the price of peanut butter increases?" Allison, an excellent student, shows the demand for jelly increasing. Is she necessarily wrong? Why or why not?

28. A terrible storm wipes out 70 percent of the peanut crop. Explain and show graphically how this will affect the market for peanut butter and the market for jelly, a complementary good. 29. Sam lives in a town with a population of 3,000. He says, "This town really needs a pizza restaurant. People want pizza and would be willing to pay a lot for it, but no one will open a pizza place because they couldn't make any money." Evaluate Sam's statement. 30. A recent editorial in a local newspaper argues, "Consumers need to know more about products than just their price. They need to know how these prices are determined, who owns the businesses, and the wages of the workers." Is the editorial writer correct? Why or why not? 31. An agricultural economist reports that corn prices are very high this year and that corn growers are earning substantial profits. He concludes that government action is needed to direct more farmers to grow corn. Is such action necessary? Why or why not? 32. Around Easter time, the price of eggs rises. Some consumers complain about this and claim stores are 'price gouging.' Are there any positive functions played by the higher price of eggs around Easter? What would happen if the price of eggs were not permitted to rise by law?

Micro Chapter 3 study guide questions Answer Section 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23.

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