Question

In: Economics

Assume that you are able to determine that the equilibrium price for a good will definitely...

Assume that you are able to determine that the equilibrium price for a good will definitely decrease, and the equilibrium quantity will definitely increase. Which of the following MUST have occurred for you to be able to make these conclusions?
a. Demand decreased and supply decreased
b. Demand increased.
c. Demand decreased and supply increased.
d. Demand increased and supply decreased.
e. Supply increased.

When demand and supply both change in the same direction (for example, they both decrease), the change in the equilibrium quantity can be predicted with certainty.
a. True
b. False

Consider the market for wood flooring. The economic downturn has caused many firms selling wood flooring to go out of business. At the same time, consumers are expressing a preference for wood flooring over alternatives like carpet and tile. Based on this information, what would you expect to happen to the price of wood flooring?
a. The price will definitely stay the same.
b. More information is needed to answer this question.
c. The price will definitely decrease.
d. The price will definitely increase.

The result of a cross price elasticity calculation between goods A and B is –2.4. From this you can conclude that A and B are substitutes.
a. True
b. False

The income elasticity of demand for laptops is 0.8. From this information you can conclude that laptops are normal goods.
a. True
b. False

Solutions

Expert Solution

1. When you can determine the definite change in equilibrium price and Quantity, it means either the demand curve or the supply curve shifts. If both curves shift, the change in equilibrium quantity and price depends on the magnitude of shifts and they may increase, decrease or remain unchanged.

When supply increases, supply curve shifts Rightward. As a result, equilibrium price decreases and equilibrium quantity increases.

Answer: option E

2. Suppose demand and supply curves both shift leftward.

When demand curve shifts leftward, both equilibrium price and Quantity decrease. When the supply curve shifts leftward, equilibrium price increases but the equilibrium quantity decreases. As a combined result, equilibrium quantity decreases but change in equilibrium price depends on the magnitude of shifts of both curves.

Now suppose both curves shift Rightward. When demand curve shifts Rightward, both equilibrium price and Quantity increase. When the supply curve shifts Rightward, equilibrium price decreases but equilibrium quantity increases. As a combined result, you can see that, equilibrium quantity increases but equilibrium price may increase or decrease based on the magnitude of shifts.

Answer: True


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