Managerial Economics, 7e (Keat)

Chapter 3 Supply and Demand (Appendix 3A)

Multiple-Choice Questions

1) How long is the "short-run" time period in the economic analysis of the market?
A) three months or one business quarter
B) total time in which sellers already in the market respond to changes in demand and
equilibrium price
C) total amount of time it takes new sellers to enter the market
D) total amount of time it takes original sellers to leave the market
Answer: B
Diff: 2

2) Which of the following best applies to the distinction between the "long run" and the "short
run"?
A) The short run is a period of approximately 1-6 months while the long run is any time frame
which is longer.
B) In the short run, only new firms may enter, while in the long-run firms may either enter or
exit the market.
C) The rationing function of price is a short-run phenomenon whereas the guiding function is a
long-run phenomenon.
D) All of the above statements are correct.
Answer: C
Diff: 2

3) In the short-run if there is a surplus in the market for a product, the rationing function of price
can be expected to cause
A) an increasing shift in the demand for the product.
B) a decreasing shift in the supply of the product.
C) an increase in the market price of the product.
D) a decrease in the market price of the product.
Answer: D
Diff: 2

4) In the long run if there is a shortage in the market for a product, the guiding (allocation)
function of price can be expected to cause
A) an increasing shift in the demand for the product.
B) a decreasing shift in the demand for the product.
C) an increasing shift in the supply of the product.
D) a decreasing shift in the supply of the product.
Answer: C
Diff: 2

1
Copyright © 2014 Pearson Education, Inc.
5) The rationing function of price
A) occurs when there is a movement of resources into or out of markets as a result of changes in
the equilibrium market price.
B) is also known as the guiding function of price.
C) occurs when consumers change their tastes and preferences.
D) occurs only when the market experiences severe shortages.
Answer: C
Diff: 2

6) Which of the following best describes the "guiding function" of price?

A) In response to a surplus or shortage in two markets, price serves as a "guiding function" by
decreasing in one market and increasing in the other market in the short run.
B) The guiding function of price is the movement of resources into or out of markets in response
to a change in the equilibrium price of a good or service.
C) The guiding function of price occurs when the market price changes to eliminate the
imbalance between supply and demand caused by a shortage or surplus at the original price.
D) The guiding function usually occurs in the short run while the rationing function usually
occurs in the long run.
Answer: B
Diff: 2

7) The guiding function of price is

A) the movement of price to clear the market of any shortages or surpluses.
B) the use of price as a signal to guide government on the use of market subsidies.
C) a long-run function resulting in the movement of resources into or out of markets.
D) the movement of price as a result of changes in the demand for a product.
Answer: C
Diff: 2

8) The "law" of demand can be best described by

A) people will buy things that they enjoy.
B) if incomes rise, people will buy more.
C) a rise in price will cause shortages.
D) a fall in price will increase quantity demanded.
Answer: D
Diff: 1

9) A movement along a demand curve may be caused by a change in

A) the non-price determinants of demand.
B) the change in consumer expectations.
C) the change in demand.
D) the change in supply.
Answer: D
Diff: 1

2
Copyright © 2014 Pearson Education, Inc.
10) All of the following are non-price determinants of demand except
A) tastes and preferences.
B) income.
C) technology.
D) future expectations.
Answer: C
Diff: 1

11) Which of the following will result in a decrease in demand for residential housing in the
short run?
A) a decrease in the price of lumber
B) an increase in the wages of carpenters
C) a decrease in real household incomes
D) a decrease in the prices of residential housing
Answer: C
Diff: 1

12) Which of the following would cause a decrease in the demand for fish?
A) The price of red meat increases.
B) The price of fish increases.
C) The price of chicken decreases.
D) The number of fishing boats decreases.
Answer: C
Diff: 2

13) Which of the following refers to a shift in the demand curve?

A) "This new advertising campaign should really increase our demand."
B) "Let's drop our price to increase our demand."
C) "We dare not raise our price because our demand will drop."
D) "If new sellers enter the market, the demand for the product is bound to increase."
Answer: A
Diff: 2

14) Which of the following can result in a decrease in the demand for I-Pods in the short run?
A) a decrease in the population
B) a decrease in real household incomes
C) a decrease in the price of MP4s
D) All of the above
Answer: A
Diff: 1

3
Copyright © 2014 Pearson Education, Inc.
15) A good that is similar to another, and can be consumed in place of it, is called
A) a normal good.
B) an inferior good.
C) a complementary good.
D) a substitute good.
Answer: D
Diff: 1

16) Two goods are ________ if the quantity consumed of one increases when the price of the
other decreases.
A) normal
B) superior
C) complementary
D) substitute
Answer: C
Diff: 1

17) If the price of a substitute increases, which of the following is most likely to happen in the
market for the product under consideration in the short run?
A) Supply will increase.
B) Firms will leave the market.
C) Firms will devote more variable inputs in the production of this good.
D) Firms will devote less variable inputs in the production of this good.
Answer: C
Diff: 2

18) Which of the following will not cause the demand curve for good X to shift?
A) a change in the price of X
B) a change in the price of Y, a complement
C) a change in the price of Z, a substitute
D) an increase in average disposable real income
Answer: A
Diff: 2

19) Which of the following will change only the quantity demanded of oranges?
A) an increase in the population
B) a change in the price of tangerines
C) a change in the price of oranges
D) a decrease in the taste and preferences for oranges
Answer: C
Diff: 1

4
Copyright © 2014 Pearson Education, Inc.
20) Coke and Pepsi are substitutes if
A) the demand for Coke increases when the price of Pepsi falls.
B) the demand for Coke increases when the price of Pepsi rises.
C) the supply of Coke increases when the price of Pepsi falls.
D) the demand for Coke and Pepsi rise and fall together.
Answer: B
Diff: 1

21) All of the following are non-price determinants of supply except

A) costs.
B) technology.
C) income.
D) future expectations.
Answer: C
Diff: 1

22) Which of the following would cause a short-run decrease in the quantity supplied of personal
computers?
A) The price of CPUs decreases.
B) The price of software decreases.
C) The number of PC manufacturers decreases.
D) The cost of manufacturing PCs decreases.
Answer: A
Diff: 1

23) Which of the following will not cause a short-run shift in the supply curve?
A) a change in the number of sellers
B) a change in the cost of resources
C) a change in the price of the product
D) a change in future expectations
Answer: C
Diff: 1

24) Which of the following applies most generally to supply in the long run?
A) Average total cost must decline.
B) Producers are able to make change in all their factors of production.
C) Producers are only able to make change in their variable factors of production.
D) All original producers will leave the market.
Answer: B
Diff: 2

5
Copyright © 2014 Pearson Education, Inc.
25) Which of the following could cause a long-run shift in demand as part of the "guiding
function of price"?
A) a change in tastes and preferences
B) an increase in price caused by a shift in supply
C) income shift caused by an economic recession
D) an increase in number of buyers
Answer: B
Diff: 3

26) Which of the following is a common determinant of both supply and demand?
A) income
B) future expectations
C) tastes and preferences
D) sales tax
Answer: B
Diff: 1

27) Which of the following indicates that there is a shortage in the market?
A) Demand is rising.
B) Demand is falling.
C) Price is rising.
D) Price is falling.
Answer: C
Diff: 2

28) Which of the following is correct? The supply curve will shift when
A) income, preferences, or the number of suppliers change.
B) income, preferences, or the number of buyers change.
C) income, preferences, or production technology changes.
D) the number of sellers and the number of buyers change.
E) production technology and input prices change.
Answer: E
Diff: 3

29) A fall in the price of pesticide use in the production of cotton will
A) decrease the supply of cotton, causing the supply curve of cotton to shift to the left.
B) increase the supply of cotton, causing the supply curve of cotton to shift to the left.
C) cause a downward movement along the supply curve of cotton.
D) have no effect on the supply of cotton.
E) None of the above
Answer: E
Diff: 3

6
Copyright © 2014 Pearson Education, Inc.
30) Which of the following would lead to a short-run market surplus for tomatoes?
A) The price of tomatoes increases.
B) A new government study shows that tomatoes have a greater risk of contamination from
salmonella.
C) An increase in the price of potatoes.
D) A decrease in the number of tomato growers.
Answer: B
Diff: 3

31) Which of the following would cause a leftward shift in the demand curve for a good?
A) an increase in income
B) an increase in the price of a complementary good
C) an increase in the price of a substitute
D) the expectation that there will be a shortage in the availability of the good
Answer: B
Diff: 2

32) Which of the following would cause a decrease in the price of a good?
A) an increasing shift in the supply of a good and no shift in demand
B) a decreasing shift in the supply of a good and no shift in demand
C) an increasing shift in the demand for good and no shift in supply
D) an increasing shift in the demand for good and a decreasing shift in supply
Answer: A
Diff: 3

33) A market is in equilibrium when

A) supply is equal to demand.
B) the price is adjusting upward.
C) the quantity supplied is equal to the quantity demanded.
D) tastes and preference remain constant.
Answer: C
Diff: 2

34) In the short run, a change in the equilibrium price will

A) always lead to inflation.
B) cause a shift in the demand curve.
C) cause a shift in the supply curve.
D) cause a change in the quantity demanded or supplied.
Answer: D
Diff: 3

7
Copyright © 2014 Pearson Education, Inc.
35) Comparative statics analysis in economics is best illustrated as
A) the comparison of equilibrium points before and after changes in the market have occurred.
B) a comparison of two types of markets.
C) the comparison of the percentage of change in the one variable divided by the percentage
change in the other variable.
D) an analytical technique used to show best case scenarios of demand and supply curves.
Answer: A
Diff: 2

36) An increase in input prices will cause

A) supply to shift rightward, equilibrium price to rise, and equilibrium quantity to fall.
B) supply to shift leftward, equilibrium price to rise, and equilibrium quantity to fall.
C) supply to shift rightward, equilibrium price to fall, and equilibrium quantity to rise.
D) supply to shift leftward, equilibrium price to fall , and equilibrium quantity to rise.
Answer: B
Diff: 3

37) The switch to the use of ethanol in gasoline is driven primarily by its relatively lower price.
Assuming a competitive market, what effect would this change have on the equilibrium price and
output for gasoline?
A) Price rises, output falls.
B) Price falls, output rises.
C) Price rises, output rises.
D) Price falls, output falls.
Answer: B
Diff: 2

38) Which of the following would indicate that price is temporarily above its market
equilibrium?
A) There are a number of producers who are left with unwanted inventories.
B) There are a number of customers who are looking for a good but cannot find sellers.
C) New firms decide to enter the market.
D) The government must step in and impose a tax on the good.
Answer: A
Diff: 2

39) Which of the following statements is false?

A) An increase in demand causes equilibrium price and quantity to rise.
B) A decrease in demand causes equilibrium price and quantity to fall.
C) An increase in supply causes equilibrium price to fall and quantity to rise.
D) A decrease in supply causes equilibrium price to rise and quantity to rise.
Answer: D
Diff: 3

8
Copyright © 2014 Pearson Education, Inc.
40) Holding supply constant, an increase in demand will
A) increase both the quantity and price.
B) increase the equilibrium price and decrease the equilibrium quantity.
C) decrease the equilibrium price and increase the equilibrium quantity.
D) decrease both the quantity and price.
Answer: A
Diff: 2

Analytical Questions

1) Suppose that the demand for oranges increases. Explain the long-run effects of the guiding
function of price in this scenario.
Answer: In the long run, the higher price of oranges will signal more firms to enter the orange
market, as it will seem more profitable than some other markets. As firms enter, supply
increases, causing the price to fall relative to the short-run price and quantity to increase further.
The higher short-run price has guided more resources into the market.

2) Suppose that the demand for oranges increases. Carefully explain how the rationing function
of price will restore market equilibrium.
Answer: The increase in demand causes a shortage at the original equilibrium price; the quantity
supplied is less than the new quantity demanded at that price. The existence of the shortage will
cause the price to rise. As price rises, the quantity supplied will increase and the quantity
demanded will decrease (along the new demand curve) until equilibrium is reached at a higher
price (and quantity).

3) For each of the following changes, show the effect on the demand curve and state what will
happen to market equilibrium price and quantity in the short run.

a. Consumers expect that the price of the good will be higher in the future.
b. The price of a substitute good rises.
c. Consumer incomes fall, and the good is normal.
d. Consumer incomes fall, and the good is inferior.
e. A medical report is published showing that this good is hazardous to your health.
f. The price of the good rises.
Answer:
a. Demand increases (now); equilibrium price and quantity increase.
b. Demand increases; equilibrium price and quantity increase.
c. Demand decreases; equilibrium price and quantity fall.
d. Demand increases; equilibrium price and quantity increase.
e. Demand decreases; equilibrium price and quantity fall.
f. This is a movement along the demand curve, and the quantity demanded will decrease.

9
Copyright © 2014 Pearson Education, Inc.
4) For each of the following changes, show the effect on the supply curve and state what will
happen to market equilibrium price and quantity in the short run.

a. The government requires pollution control filters that raise costs on goods.
b. Wages of workers in this industry fall.
c. There is an improvement in technology.
d. The price of the good falls.
e. Producers expect that the price of the good will fall in the future.
Answer:
a. Supply decreases; equilibrium price rises and quantity falls.
b. Supply increases; equilibrium price falls and quantity rises.
c. Supply increases; equilibrium price falls and quantity rises.
d. This is a movement along the supply curve, and the quantity supplied will decrease.
e. Supply increases (now); equilibrium price falls and quantity rises.

5) For each of the following sets of supply and demand curves, calculate equilibrium price and
quantity.

a. QD = 2000 - 2P; QS = 2P
b. QD = 500 - P; QS = 50 + P
c. QD = 5000 - 10P; QS = -1000 + 5P
Answer:
a. Q = 1000, P = 500
b. Q = 275, P = 225
c. Q = 1000, P= 400

6) Annual demand and supply for the Entronics company is given by:

QD = 5,000 + 0.5 I + 0.2 A - 100P, and QS = -5000 + 100P

where Q is the quantity per year, P is price, I is income per household, and A is advertising
expenditure.

a. If A = $10,000 and I = $25,000, what is the demand curve?

b. Given the demand curve in part a., what is equilibrium price and quantity?
c. If consumer incomes increase to $30,000, what will be the impact on equilibrium price and
quantity?
Answer:
a. QD = 19,500 - 100P
b. P = $122.50, Q =7,250
c. The new demand curve is QD = 22,000 - 100P. Thus the new equilibrium price is $135, and
the new quantity is 8,500.

10
Copyright © 2014 Pearson Education, Inc.
7) Industry supply and demand are given by QD = 1000 - 2P and QS = 3P.

a. What is the equilibrium price and quantity?

b. At a price of $100, will there be a shortage or a surplus, and how large will it be?
c. At a price of $300, will there be a shortage or a surplus, and how large will it be?
Answer:
a. P = $200, Q = 600.
b. At a price of $100, there will be a shortage. The quantity demanded will be 800, and the
quantity supplied will be 300, and thus there will be a shortage of 500 units.
c. At a price of $300, there will be a surplus. The quantity demanded will be 400, and the
quantity supplied will be 900, and thus there will be a surplus of 600 units.

8) A good's Demand Curve is QD = 50 - 2P, and its Supply Curve is QS = 40 + P.

a. When P = $10, what is the difference, if any, between QD and QS?

b. When P = $2, what is the difference, if any, between QD and QS?
c. What are the equilibrium values of P and Q?
Answer:
a. QD = 30 and QS = 50
b. QD = 46 and QS = 42
c. Q = 43.33 and P = $3.33

9) A good's Demand Curve is QD = 25 - P, and its Supply Curve is QS = 10 + 2P.

a. When P = $20, what is the difference, if any, between QD and QS?

b. When P = $3, what is the difference, if any, between QD and QS?
c. What are the equilibrium values of P and Q?
Answer:
a. QD = 5 and QS = 50
b. QD = 22 and QS = 16
c. Q = 20 and P = $5

10) List the major non-price determinants of demand.

Answer: Consumer preferences (tastes), income, prices of related goods (complements and
substitutes), future expectations, and number of buyers.

11) List the major non-price determinants of supply.

Answer: Input costs, technology, prices of other goods that can be sold by the firm
(complements and substitutes), future expectations, weather conditions, and number of sellers.

11
Copyright © 2014 Pearson Education, Inc.
12) The market for milk is in equilibrium. Recent health reports indicate that calcium is absorbed
better in natural forms such as milk, and at the same time, the cost of milking equipment rises.
Carefully analyze the probable effects on the market.
Answer: The heath reports are likely to cause an increase in the demand for milk. Alone, this
would increase both the equilibrium price and quantity of milk. The increase in equipment costs
will cause a decrease in the supply of milk, and this alone would cause an increase in equilibrium
price and a decrease in equilibrium quantity. Taken together, both effects will lead to an increase
in price, and thus we can be certain that the equilibrium price will rise. The effect on quantity is
unclear as the supply and demand shifts move quantity in different directions.

13) Suppose that macroeconomic forecasters predict that the economy will be expanding in the
near future. How might managers use this information?
Answer: Economic expansion increases consumer incomes, which will increase the demand for
normal goods and decrease the demand for inferior goods. Thus a producer of normal goods
might be anticipating a future increase in demand and thus considering expansion, while a
producer of inferior goods might be preparing for a decrease in demand and considering
contraction or a movement into a different good line.

12
Copyright © 2014 Pearson Education, Inc.