- In the market for print newspapers, consumer preferences are shifting to online news, and the cost of paper pulp, a key input, has increased. What are the expected effects on the equilibrium price and quantity of print newspapers?
Answer: Equilibrium quantity will decrease, and the effect on equilibrium price is indeterminate.
The shift in preferences to online news decreases the demand for print newspapers (shifts left). The increased cost of paper pulp decreases the supply (shifts left). Both shifts cause the equilibrium quantity to decrease. The decrease in demand lowers the price, while the decrease in supply raises the price, making the final effect on price indeterminate.
- Assume the market for lumber is in equilibrium. A widespread pest infestation destroys a significant portion of the forests used for lumber production. What is the most likely effect on the equilibrium price and quantity of lumber?
Answer: Price will increase, and quantity will decrease.
The destruction of forests represents a decrease in the availability of a key input for lumber production, which causes the supply curve for lumber to shift to the left. This results in a higher equilibrium price and a lower equilibrium quantity.
- Corn is a key ingredient in ethanol fuel. The government increases the legal requirement for ethanol content in gasoline. How will this policy affect the equilibrium price and quantity in the market for corn?
Answer: Equilibrium price will rise, and equilibrium quantity will rise.
The government mandate increases the demand for ethanol, which in turn increases the demand for corn from ethanol producers. This is represented by a rightward shift of the demand curve for corn, leading to a higher equilibrium price and a higher equilibrium quantity.
- A major technological breakthrough reduces the cost of producing solar panels. In the market for solar panels, this will result in
Answer: a decrease in equilibrium price and an increase in equilibrium quantity.
A reduction in production costs causes an increase in supply, which is represented by a rightward shift of the supply curve. This leads to a new equilibrium at a lower price and a higher quantity.
- An effective (binding) minimum wage law is an example of a price floor. What is the direct result of imposing such a minimum wage above the equilibrium wage in the labor market?
Answer: A surplus of labor, where the quantity of labor supplied exceeds the quantity of labor demanded.
A binding minimum wage is a price floor set above the equilibrium wage. At this higher wage, more people are willing to supply labor than firms are willing to demand (hire). This gap between quantity supplied and quantity demanded creates a surplus of labor, which is also known as unemployment.
- The equilibrium wage for entry-level retail workers in a city is 15perhour.Ifthecitygovernmentimposesaminimumwageof12 per hour, which of the following will occur?
Answer: The minimum wage will be non-binding and will not directly create unemployment or a shortage of workers.
A minimum wage is a price floor, or a legal minimum price. For it to be effective or binding, it must be set above the equilibrium price (wage). Since the minimum wage of 12isbelowthemarketequilibriumwageof15, the market can legally pay the equilibrium wage. The floor is non-binding and will have no effect on employment or wages in this market. - A new pest infests cotton crops across the country, significantly reducing the yield. Since cotton is a primary input for T-shirts, what will be the immediate impact on the market for cotton T-shirts?
Answer: The supply of T-shirts will decrease, leading to a higher equilibrium price and lower equilibrium quantity.
The reduced yield of cotton increases the price of a key input for T-shirt production. This increase in input cost leads to a decrease in the supply of T-shirts (a leftward shift of the supply curve), resulting in a higher equilibrium price and a lower equilibrium quantity.
- If tablet computers are considered a normal good, what will happen to the equilibrium price and quantity of tablet computers if consumer incomes decrease significantly?
Answer: Equilibrium price will decrease, and equilibrium quantity will decrease.
For a normal good, a decrease in consumer income leads to a decrease in demand, shifting the demand curve to the left. The result is a lower equilibrium price and a lower equilibrium quantity.
- If the government imposes an effective (binding) price ceiling on the rental housing market, which of the following outcomes is expected?
Answer: A shortage of rental units, as the quantity demanded will exceed the quantity supplied at the ceiling price.
A binding price ceiling is set below the equilibrium price. At this lower price, the quantity of housing demanded by renters will be greater than the quantity supplied by landlords, resulting in a persistent shortage.
- In a competitive market, the equilibrium price is the price at which the
Answer: quantity of the good supplied is equal to the quantity of the good demanded.
Market equilibrium occurs at the specific price where the quantity that sellers are willing and able to sell is identical to the quantity that buyers are willing and able to purchase. This point represents a balance in the market with no inherent pressure for the price to change.
- In the market for smartphones, if consumer preferences shift strongly in favor of the latest model due to a successful advertising campaign, which of the following will occur in the short run?
Answer: The equilibrium price will increase and the equilibrium quantity will increase.
A shift in consumer preferences in favor of a product causes the demand curve to shift to the right. This leads to a new equilibrium point at a higher price and a higher quantity exchanged.
- When a shortage exists in a competitive market, which of the following correctly describes the market adjustment process toward equilibrium?
Answer: The price will rise, which will decrease the quantity demanded and increase the quantity supplied.
A shortage puts upward pressure on the price as buyers compete for limited goods. As the price rises, it causes a movement up along the demand curve (quantity demanded decreases) and a movement up along the supply curve (quantity supplied increases). This process continues until the shortage is eliminated and the market reaches equilibrium.
- A surplus occurs in a competitive market when
Answer: the current market price is above the equilibrium price, resulting in quantity supplied exceeding quantity demanded.
A surplus, or excess supply, is a state of disequilibrium where the current price is higher than the equilibrium price. At this elevated price, producers supply more of the good than consumers are willing to purchase, creating downward pressure on the price.
- Suppose that scientific research reveals that a popular vitamin supplement is ineffective. Simultaneously, a new production method lowers the cost of making the supplement. What will be the resulting change in the equilibrium price and quantity of the supplement?
Answer: The equilibrium price will decrease, and the effect on equilibrium quantity will be indeterminate.
The negative research findings will decrease demand (shift left), while the lower production cost will increase supply (shift right). Both of these changes put downward pressure on the equilibrium price, so the price will definitely decrease. The decrease in demand reduces quantity, but the increase in supply increases quantity, so the net effect on equilibrium quantity is indeterminate.
- Assume the equilibrium price for a gallon of milk is 3.50.Ifthegovernmentestablishesapriceceilingof4.00 per gallon, what will be the effect on the market for milk?
Answer: The market will be unaffected and will continue to operate at the equilibrium price of $3.50.
A price ceiling is a legal maximum price. For it to be effective or binding, it must be set below the equilibrium price. Since the ceiling of 4.00isabovetheequilibriumpriceof3.50, the market price can legally reach equilibrium. Therefore, the price ceiling is non-binding and has no effect on the market outcome. - If the current market price for a product is above the equilibrium price, creating a surplus, how will the market naturally adjust to restore equilibrium?
Answer: The price will fall, causing the quantity demanded to increase and the quantity supplied to decrease.
When a surplus exists, sellers have an incentive to lower their prices to sell their excess inventory. As the price falls, there is a movement down along the supply curve (quantity supplied decreases) and a movement down along the demand curve (quantity demanded increases) until the surplus is eliminated at the new equilibrium.
- The demand for avocados increases due to perceived health benefits, while a severe drought reduces the avocado harvest. In the market for avocados, these two events will definitely result in
Answer: a higher equilibrium price and an indeterminate change in equilibrium quantity.
The increase in demand (rightward shift) and the decrease in supply (leftward shift) both put upward pressure on the equilibrium price, so the price will definitely increase. The increase in demand tends to increase quantity, while the decrease in supply tends to decrease quantity, making the overall effect on equilibrium quantity indeterminate.
- A shortage exists in a market for a good when
Answer: the current price is below the equilibrium price, leading to quantity demanded exceeding quantity supplied.
A shortage, or excess demand, is a state of disequilibrium that occurs when the price is below the equilibrium level. At this lower price, consumers wish to buy more of the good than producers are willing to sell, creating upward pressure on the price.
- Consider the market for electric bicycles. If the government offers a new subsidy to buyers and, at the same time, foreign manufacturers enter the market, what is the effect on equilibrium price and quantity?
Answer: The effect on equilibrium price is indeterminate, and equilibrium quantity will increase.
The subsidy to buyers increases demand (shifts right). The entry of new manufacturers increases supply (shifts right). Both shifts cause the equilibrium quantity to increase. However, the increase in demand puts upward pressure on price, while the increase in supply puts downward pressure on price, so the net effect on the equilibrium price is indeterminate.
- In the market for coffee, a popular new diet promotes drinking three cups per day. At the same time, ideal weather conditions lead to a record coffee bean harvest. Which of the following is the certain outcome in the coffee market?
Answer: The equilibrium quantity will increase.
The new diet increases the demand for coffee (shifts demand right). The record harvest increases the supply of coffee (shifts supply right). Since both shifts lead to a larger quantity being exchanged, the equilibrium quantity will definitely increase. The effect on price is indeterminate because the demand increase pushes the price up while the supply increase pushes it down.
