Question

8. Suppose the government purchases a large amount of two-by-fours from lumber mills. What would happen to the equilibrium price and quantity of sawdust? Assume that two-by-fours and sawdust are complements in production(they are produced in the same production process).

a)The equilibrium price and quantity of sawdust would increase.

b)The equilibrium price and quantity of sawdust would decrease.

c)The equilibrium price of sawdust would increase and the quantity would decrease.

d)The equilibrium price of sawdust would decrease and the quantity would increase.

19. In perfect competition, the market demand curve is,

a)downward sloping, which the demand curve for an individual firm’s product is horizontal.

b)horizontal, while the demand curve for an individual firm’s product is downward sloping.

c)downward sloping, as is the demand curve for an individual firm’s product.

d)horizontal, as is the demand curve for an individual firm’s product.

Answer 1

8. The correct answer is The equlibrium price and quantity of sawdust would increase.

Reason= when government purchase large quantity of two by fours the demand for two by fours shift right ward due to there price and quantity increases. As we know the two by fours and sawdust are complementary goods so the demand for sawdust also increases due to which the demand and price of sawdust also increases.

19. The correct answer is a) downward sloping, which the demand curve for individual firm's product is horizontal.

Reason

The market demand curve downward sloping represent that when price of goods Increases the demand of good decreases and vice versa.

The individual firm has horizontal demand curve because in perfect competition there are very large number of buyer and sellers selling homogenous product at a price fixed by the market. Therefore each firm is a price taker and faces a perfectly elastic( horizontal) demand curve.