Question

5. I told you that the price of bags of potatoes has fallen, and the number of bags of potatoes sold has also fallen from the initial equilibrium . Given this information, what can you infer about the market for potatoes in equilibrium? (2 points)

a. There has been a violation of Law of Demand

b. There is a surplus of potatoes in the market

c. There is a shortage of potatoes

d. The demand for potatoes has decreased.

6. What happens to the equilibrium price and quantity of chocolate cakes in the market if the price of chocolate (input) decreases? (2 points)

a. Equilibrium price increases, equilibrium quantity increases

b. Equilibrium price increases, equilibrium quantity decreases

c. Equilibrium price decreases, equilibrium quantity increases

d. Equilibrium price decreases, equilibrium quantity decreases

e. None of the above

8. What happens to the equilibrium price and equilibrium quantity in the market for ice cream if the price of cream (an input) rises, along with a decrease in the price of frozen yogurt (a substitute)? (2 points)

a. The equilibrium price will increase but the impact on equilibrium quantity is uncertain

b. The equilibrium price will decrease but the impact on equilibrium quantity is uncertain

c. The equilibrium quantity will increase but the impact on equilibrium price is uncertain

d. The equilibrium quantity will decrease but the impact on equilibrium price is uncertain

e. None of the above

9. Which of the following will increase the market price of chocolate cakes? (2 points)

a. A discovery that cakes cause heart diseases

b. A decrease in the price of vanilla cakes (a substitutes)

c. An increase in the price of cocoa powder (an input)

d. An increase in the price of milk (a complement)

e. None of the above

10. A certain disease has destroyed a large number of tea plants in India. What can we expect as a result of this event ? (2 points)

a. The price of tea to increase

b. The price of coffee to increase, given that tea and coffee are substitutes

c. The quantity of tea consumed to increase

d. The supply of tea to increase

e. All of the above

f. Only a and b

g. Only c and d

Answer 1

5 a)

Violation of law of demand. The law of demand says that when price falls, quantity demanded will increase and when price rises, quantity demanded will fall, other factors remaining the same. There is an inverse relationship between price of the good and quantity demanded.

6 c)

When the price of inputs falls, then cost of production falls. The supply curve will shift to the right ( increase). The equilibrium price will fall and quantity will increase.

8)

When the price of input increases, the cost of production increases. The supply curve shifts to the left ( decreases).

Because the price of substitute goods, frozen yogurt, falls then demand for ice cream will fall. The demand curve will shift to the left ( decrease), If both demand and supply decrease, there will be a decrease in the equilibrium output, but the effect on price cannot be determined. Choice D.

9 Choice C is the answer. An increase in price of cocoa powder, an input, will cause the cost of production to increase. The supply curve shifts to the left ( decreases). The equilibrium price will increase and quantity will fall.

Choice a, b, and d are wrong as the demand will decrease, causing the equilibrium price and quantity to fall.