True False test

1. Market price of a product is always market equilibrium price (market clearing price).
2. Increase in consumers’ incomes is an incentive for all the producers to raise output.
3. If demand for a good is perfectly inelastic, a demand curve for that good is downward sloping.
4. Demand for a given good depends on a price of that good, but does not depend on prices of other
goods.
5. When consumers’ incomes raise, share of expenditures for normal goods always increases.
6. Drop in production cost results in shift of the supply curve to the right.
7. When a good satisfies basic needs of a consumer and has no substitutes, demand for such a good is
perfectly inelastic.
8. Raise of price of a given good causes shift of a demand curve to the right.
9. Market may go out of equilibrium when a change of non-price determinants of demand and/or supply
takes place.
10. Market mechanism is a tendency to equate demand and supply through change of a price level.
11.Relationship between supply of a given good and its price is positive.

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12.If a supply curve is vertical, supply does not depend on price.
13.When market price of a good is higher than market clearing price, then there will be tendency for a
price to fall.
14.If income increases, there is a move up along the demand curve.

Choice test

1. A shift in the demand curve for butter may not be caused by:
a. drop in price of butter
b. raise in price of margarine
c. increase of consumers’ incomes
d. change in consumers’ preferences in relation to butter.

2. The demand curve for coffee shifted to the right. This might be a result of:
a. drop in price of coffee substitutes (for example tea)
b. drop in price of complementary goods (for example sugar)

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c. decrease of consumers’ incomes (assuming that coffee is a normal good)
d. drop in price of coffee.

3. Location of a supply curve does not depend directly on:

4. The most important non-price determinants of supply are as follows:

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5. Demand equation is given by the formula: D=400-4P, supply equation: S=160+2P, where P means price
of a good. What is equilibrium price of that good?
a. 10 zlotys
b. 20
c. 30
d. 40.

6. If demand equation is given by the formula: P=100-4D, supply equation: P=40+2S, then equilibrium
price and equilibrium quantity of that good are as follows:
a. P=60 zlotys, D=S=10
b. P=10, D=S=6
c. P=40, D=S=6
d. P=20, D=S=20.

7. When drop in price of a good X results in raise in demand for a good Y, then:
a. goods X and Y are substitutes

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b. goods X and Y are complementary goods
c. X is an inferior good
d. none answer is true.

8. When consumers’ incomes decrease, then:

9. Which of the following will not cause a shift in the demand for baseballs?
a. very good weather
b. a decrease in the price of baseball bats
c. an increase in the price of baseballs
d. all of the above will shift the demand curve for baseballs.

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 10.If a market is in equilibrium:
a. buyers and sellers can buy and sell all they wish at the current price
b. there is no tendency for the price to raise or fall
c. the quantity supplied equals the quantity demanded.
d. all of the above are correct.

Exercises

Exercise 1.
Consider the original equilibrium on four markets: market for copper, market for wheat, market for
automobiles, and market for steel. What will happen to the market equilibrium price and quantity on these
markets in the result of the following events? Show how each of the following changes would shift the
demand curve, the supply curve, or both.

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 a. Market for copper: rapid development of the world economy caused an increase in demand for copper.
At the same time the costs of producing copper raise as the resources are depleted and it becomes
harder to extract them from the earth.
b. Market for wheat: due to the floods, half of the wheat crop in the country is destroyed. At the same
time, the price of oats (a substitute for wheat) decreases due to a sharp raise in a number of farmers
growing oats in response to consumer demand for health food.
c. Market for automobiles: an increase in welfare of the society occurred. At the same time there was a
drop in petrol price due to an increase in oil supply.
d. Market for steel: the workers in the steel companies went on strike demanding higher wages. The
managers accepted the wage increase.

Exercise 2.
Supply of the good is affected by the price of that good and by the average cost of producing one unit of the
good. The supply equation is: QS = 2p-2C, where p is price and C is average cost of production. Assume that
if the producers use the “A” technology of production , then the average cost of production is 10.
a. At what bottom level of price the producers will decide to offer the good for sale?

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 b. What is the level of supply at p=12?
c. Draw the supply curve for “A” technology.
Assume now that the producers use more up-to-date “B” technology that allows to cut the production cost by
30%.
d. what is now the supply at p=12?
e. Draw the new supply curve for “B” technology (use the same graph).

Exercise 3.

Consider the demand for beer during the summer months. Let
QD=30-5p+0.01I-2R
be the demand formula, where Q is measured in thousands of six-packs, p is the price per six-pack in euros, I
is income, and R is the number of rainy days during the summer. The supply curve is given by
QS= -100+205p
a) Plot the supply and demand curves if I=20000, and R=15. What is the equilibrium price and quantity?

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 b) If I=20000, and R=10, plot the new demand curve and find the new market equilibrium. Compare this
to the original equilibrium. Does the movement in p and Q make sense with the decline in the number
of rainy days from 15 to 10?

Exercise 4.

The demand for tea depends on price of tea, consumers’ incomes, and price of coffee (substitute for tea). It is
given by the following formula:
D=0.025I-5PT+3PC,
where I is income, PT is price of tea, while PC is price of coffee. Assume, that PC =2, I=300.
The supply of tea depends on its price and average cost of production of one kilo of tea. It is given by the
following formula:
S=3PT-C, where C is average cost of production of one kilo of tea. Assume that C=1.
a. what is the equilibrium price of tea?
b. at which range of prices there will be an excessive demand of tea on the market?
c. at which range of prices there will be an excessive supply of tea on the market?

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d. What happens to the equilibrium price of tea when consumers’ incomes raise by 2%?
e. What happens to the equilibrium price of tea when the price of coffee raises by 0.5 zlotys?
f. What happens to the equilibrium price of tea when production costs drop by 20%?

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Exercise 5.

The demand and supply equations are as follows: QD=50-5p, QS= 2+3p.
a. What is the equilibrium price and quantity?
b. Fill in the table on the basis of the above formulas:
p 0 2 4 6 8 10
QD
QS

c. draw a picture presenting the demand and supply curves and the equilibrium point.
Assume now that demand for a good raised. The new demand equation is given by: QD=66-5p.
d. What is the new equilibrium price and quantity?
e. Put the new demand curve into the same picture, indicate the new equilibrium point.

Exercise 6.

Formulate economic arguments and attach graphs to the following propositions:

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a. When demand and price are negatively correlated (related), while demand and income are positively
related, and supply is perfectly inelastic in relation to price, then increase in consumers incomes will
result in raise in equilibrium price of a good.
b. When demand is perfectly inelastic on price, supply and price are positively related, and supply and
production cost are negatively related, then raise in production cost will cause raise in equilibrium
price.
c. When demand and price are negatively related, while demand and income are positively related, and
supply and price are positively related, then drop in consumers’ incomes will cause drop in equilibrium
price.
d. When demand for good A is negatively related both to its price and to price of good B (what kind of
goods are A and B?), and supply of good A and its price are positively related, then raise in price of
good B will result in drop in equilibrium price of good A.
e. When good A is an inferior good, and supply of that good and its price are not related at all, then
increase in consumers’ incomes will cause drop in equilibrium price of that good.

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f. If good A is a substitute for good B and complementary good for C, and supply of good A and its price
are positively related, then raise in price of good B and/or drop in price of good C will cause raise in
equilibrium price of good A.

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