MICROECONOMICS’ PROBLEM SET 2

Chapter 2: The Market Forces of Supply and Demand

Price $20 $24 $28 $32 $36 $40

Quantity
10 9 8 7 6 5
demanded
Quantity
1 3 5 7 9 11
supplied

a. Plot the supply and demand curves to scale and establish the equilibrium price and
quantity.
b. What is the excess supply or demand when price is $24? When price is $36?
c. Describe the market adjustments in price induced by these two prices.
d. The functions underlying the example in the table are linear and can be presented as P
=18 + 2Q (supply) and P = 60 - 4Q (demand). Solve the two equations for the equilibrium
price and quantity values.
2. Suppose we are analyzing the market for hot chocolate. What will happen to the
equilibrium price and quantity of hot chocolate if:
a. The price of tea, a substitute for hot chocolate, falls and a better method of harvesting
cocoa beans is introduced.
b. Winter starts and the weather turns sharply colder and the price of cocoa beans increases.
c. The price of tea, a substitute for hot chocolate, increases and producers expect the price
of hot chocolate to increase next month.
3. Consider the market for apple juice. In this market, the supply curve is given by Q S = 10PJ
− 5PA and the demand curve is given by QD = 100 − 15PJ + 10PT, where J denotes apple
juice, A denotes apples, and T denotes tea.
a. Assume that PA is fixed at $1 and PT = 5. Calculate the equilibrium price and quantity in the
apple juice market.
b. Suppose that a poor harvest season raises the price of apples to P A = 2. Find the new
equilibrium price and quantity of apple juice. Draw a graph to illustrate your answer.
c. Suppose PA = 1 but the price of tea drops to P T = 3. Find the new equilibrium price and
quantity of apple juice.
d. Suppose PA = 1, PT = 5, and there is a price ceiling on apple juice of = 5. What is the excess
demand for apple juice as a result? Draw a graph to illustrate your answer.
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4. The demand of Vietnam’s rice for both domestic and export is given by: Q = 3550 – 266P,
where domestic demand is: Qd = 1000 – 46P.
Vietnam’s rice supply is: Q = 1800 + 240P (Q: ton; P: million dong/ton)
a. Find the equilibrium price and quantity.
b. What happens with price of Vietnam’s rice if demand for export decreases 40%?
5. Suppose the demand curve for a product is given by Q = 300 - 2P + 4I, where I is average
income measured in thousands of dollars. The supply curve is Q = 3P - 50.
a. If I = 25, find the market-clearing price and quantity for the product.
b. If I = 50, find the market-clearing price and quantity for the product.
c. Draw a graph to illustrate your answers
6. Consider a competitive market for which the quantities demanded and supplied (per year)
at various prices are given as follows:
Price (dollars) Demand (millions) Supply (millions)
60 22 14
80 20 16
100 18 18
120 16 20

a. Calculate the price elasticity of demand when the price is $80 and when the price is $100.
b. Calculate the price elasticity of supply when the price is $80 and when the price is $100.
c. What are the equilibrium price and quantity?
d. Suppose the government sets a price ceiling of $80. Will there be a shortage, and if so, how
large will it be?

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 Multiple Choices
1. When evaluating differences or similarities between an increase in supply and an increase
in quantity supplied, what do we know
A) The former is a shift of the curve and the latter is a movement along the curve.
B) The former is a movement along the curve and the latter is a shift of the curve.
C) Both are shifts of the supply curve.
D) Both are movements along the curve.
2. Workers at a bicycle assembly plant currently make minimum wage. If the provincial
government increases the minimum wage by $1.00 an hour, what will likely happen
A) Demand for bicycle assembly workers will increase.
B) Supply of bicycles will shift to the right.
C) Supply of bicycles will shift to the left.
D) The firm must increase output to maintain profit levels.
3. If a car manufacturer purchases new labor-saving technology for its assembly line, what
would we NOT expect
A) less labor to be used
B) the supply of cars produced to increase
C) costs to the firm to fall
D) the price of cars to be increased by the firm
4. Recent pine beetle infestations that are destroying trees in the western provinces are
expected to cause the price of lumber to rise in the next six months. As a result, what can
we expect to happen to the supply of lumber
A) It will fall in six months, but not now.
B) It will increase in six months when the price goes up.
C) It will fall now.
D) It will increase now to meet as much demand as possible.
5. If suppliers expect the price of their product to fall in the future, what will they do
A) decrease supply now
B) increase supply now
C) increase supply in the future, but not now
D) increase supply now and decrease it in the future
6. Wheat is the main input in the production of flour. All else equal, if the price of wheat
decreases, what would we expect
A) the supply of flour to decrease
B) the demand for flour to decrease
C) the supply of flour to increase
D) the demand for flour to increase

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7. What happens at the equilibrium price
A) Buyers have an incentive to buy more.
B) It is possible for there to be a shortage.
C) Firms have an incentive to increase production.
D) Everyone in the market has been satisfied.
8. What happens if there is a shortage of a good at the current price
A) Sellers are producing more than buyers wish to buy.
B) The market must be in equilibrium.
C) The price is below the equilibrium price.
D) Quantity demanded equals quantity supplied.
9. Refer to the Figure 2.1.What could cause the movement from S₁ to S
A) a decrease in the price of the good
B) an improvement in technology S S1
C) an increase in income
D) an increase in input prices
10. What happens if there is a surplus of a good at the current price
A) Sellers are producing more than buyers wish to buy.
B) The market must be in equilibrium.
C) The price is below the equilibrium price.
D) Quantity demanded equals quantity supplied.
11. Which chain of events is listed in the correct order
A) quantity supplied increases, price increases, demand increases
B) price increases, demand increases, quantity supplied increases
C) demand increases, price increases, quantity supplied increases
D) demand increases, quantity supplied increases, price increases
12. If a surplus exists in a market, what do we know
A) The actual price is above equilibrium price, and quantity supplied is greater than
quantity demanded.
B) The actual price is above equilibrium price, and quantity demanded is greater than
quantity supplied.
C) The actual price is below equilibrium price, and quantity demanded is greater than
quantity supplied.
D) The actual price is below equilibrium price, and quantity supplied is greater than
quantity demanded.
13. Suppose you wish to analyze the change in the equilibrium price of lumber as a result of
pine beetle infestations that are destroying trees in the West. What would your first step be
A) to identify the new equilibrium point

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 B) to decide whether the fires affect the quantity demanded
C) to decide whether the fires affect the price
D) to decide whether the fires shift demand or supply
14. Suppose there is an earthquake that destroys several seaside resorts. Which of the
following would NOT occur as a direct result of this event
A) Sellers would not be willing to produce and sell as much as before at each relevant
price.
B) The supply would decrease.
C) Buyers would not be willing to buy as much as before at each relevant price.
D) The equilibrium price would rise.
15. Which of the following will definitely cause equilibrium quantity to fall
A) demand increases and supply decreases
B) demand and supply both decrease
C) demand decreases and supply increases
D) demand and supply both increase
16. Suppose that the number of buyers in a market increases and a technological advancement
occurs. What would we expect to happen in the market
A) The equilibrium price would increase, but the impact on the amount sold in the market
would be ambiguous.
B) The equilibrium price would decrease, but the impact on the amount sold in the market
would be ambiguous.
C) Equilibrium quantity would increase, but the impact on equilibrium price would be
ambiguous.
D) Equilibrium quantity would decrease, but the impact on equilibrium price would be
ambiguous.
17. What would happen if both supply and demand increase
A) Equilibrium price would definitely increase.
B) Equilibrium price would definitely decrease.
C) Equilibrium quantity would definitely decrease.
D) Equilibrium quantity would definitely increase.
18. Refer to the Table 2.1.What is the space that would represent an increase in equilibrium
price and an indeterminate change in equilibrium quantity
A) space A
B) space B
C) space C
D) space D
An increase in supply A decrease in supply

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 An increase in demand A B
A decrease in demand C D
19. Refer to the Table 2.1.What is the space that would represent a decrease in equilibrium
quantity and an indeterminate change in equilibrium price
A) space A
B) space B
C) space C
D) space D
20. Smart phones are normal goods. What will happen to the equilibrium price and quantity of
smart phones if phone plans become cheaper, more firms start producing smart phones, and
smart phone users experience an increase in income
A) price will fall and the effect on quantity is ambiguous
B) price will rise and the effect on quantity is ambiguous
C) quantity will fall and the effect on price is ambiguous
D) quantity will rise and the effect on price is ambiguous
21. Market demand is given as QD = 80 - P. Market supply is given as Q S = 3P. In a perfectly
competitive equilibrium, what will be price and quantity traded in the market
A) price will be $20 and quantity will be 60
B) price will be $45 and quantity will be 15
C) price will be $40 and quantity will be 20
D) price will be $15 and quantity will be 45
22. Market demand is given as Q D =150 - 3P. Market supply is given as Q S = 2P.What would
result if the market price were $25
A) a shortage of 25
B) a surplus of 25
C) a surplus of 70
D) a shortage of 70
23. What happens in a competitive market
A) Only a few sellers sell the same product.
B) Each seller has limited control over the price of his product.
C) If one buyer chooses to purchase a large quantity of the product, the price will rise.
D) If one seller withholds his product from the market, prices will rise.
24. Which of the following is NOT a determinant of demand
A) the price of an input
B) the price of a complementary good
C) the price of the good next month
D) the price of a substitute good

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25. Suppose you make jewellery. If the price of silver increases, what would we expect you to
do
A) be willing and able to produce less jewellery than before at each possible price
B) be willing and able to produce more jewellery than before at each possible price
C) face a greater demand for your jewellery
D) face a weaker demand for your jewellery
26. When are price controls usually used
A) Price controls are usually used when the market is inefficient.
B) Price controls are usually used when policymakers believe that the market price of a
good or service is unfair to buyers or sellers.
C) Price controls are usually used when there is monopoly power in the market.
D) Price controls are usually used when there are profits in the market.
27. Why do policymakers choose to enact price controls in a market
A) They believe the market's outcome to be unfair.
B) Enacting price controls will directly increase tax revenues.
C) They are required by law to improve market conditions.
D) They believe that the market system is inefficient and their actions will improve
efficiency.
28. Refer to Figure 6-1.Which of the above figures represent price control correctly
A) panel (a) and panel (c)
B) panel (b) and panel (d)
C) panel (a) and panel (d)
D) panel (b) and panel (c)

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29. What is a legal maximum price at which a good can be sold
A) a price floor
B) a price stabilization
C) a price support
D) a price ceiling
30. What will result when a price ceiling is a binding constraint
A) The actual price will be below the price ceiling.
B) The actual price will be above the price ceiling.
C) The equilibrium price will equal the price ceiling.
D) The actual price will equal the price ceiling.