Question

1. If prices of substitute goods (for consumers) decrease at the same time prices of substitute goods (for producers) decrease, what will happen to prices in this market?

a Prices will not change.

b Prices will decrease.

c Prices will increase.

d One cannot tell without more information.

2. A change in demand will cause the equilibrium price to change by ______________and the equilibrium quantity to change by ______________ with an inelastic supply than if supply were elastic.

a more; more

b more; less

c less; less

d less; more

e the same amount; the same amount

3. A new law prohibits increases in prices in a market that is currently in equilibrium. What will happen in that market if costs of producing the good increase?

a The allocatively efficient amount will still be produced but there will be a shortage.

b The allocatively efficient amount will still be produced but there will be a surplus.

c More than the allocatively efficient amount will be produced.

d Less than the allocatively efficient amount will be produced.

4. Suppose the price of wheat decreases. Wheat is a substitute for soybeans for consumers and producers. What will happen to the price of soybeans?

a increase

b decrease

c not change

d One cannot tell.

5. An increase in supply combined with a decrease in demand will do what to quantities sold in a market?

a quantities will increase

b quantities will decrease

c quantities will not change

d We cannot tell without more information.

6. The same changes as in the previous question will cause which of the following change in prices of textbooks?

a an increase

b a decrease

c no change

d one cannot tell

Answer 1

1. In this case both the supply and demand curve will shift leftward and hence prices will not change. So option a is correct.

2.a change in demand will cause the equilibrium price to change by more and the equilibrium quantity to change by less with an inelastic supply than if supply were elastic. Inelastic supply means that a large change in price level will cause the quantity supplied to change by small amount. Hence option b is correct.

3. If cost of producing increases and firm can't increase the price level due to law than it means that it would not be profitable for producers to produce more output and hence they will produce less than allocative amount will be produced. Hence option d is correct.

4. When price of wheat decreases which is a substitute for soyabean then it means demand for wheat increase or demand of soyabean will decrease. Since the both the goods are substitute for consumers and producers as well and hence producers will also shift the supply to the left because they will not have any incentives to produce soyabean because the demand of soyabean has decreased. So price will not change because both the demand and supply of soyabean will shift leftward. Hence option c is correct.

5. An increase in supply combined with a decrease in demand will cause the quantity sold to decrease. Because if supply increases and demand decreases it will increase the price level but quantity sold will decrease. So option b is correct.

6.The same change as in the previous question will cause the change in price level of textbook to increase. Hence option a is correct.