If a price in a competitive market is “too high to clear the market,” what does

Question

If a price in a competitive market is “too high to clear the market,” what does this usually mean? Assume upward-sloping supply curves.
a.    No producer can cover the costs of production at that price.
b.    Quantity supplied exceeds quantity demanded at that price.
c.    Producers are leaving the industry.
d.    Consumers are willing to buy all the units produced at that price.


    4. Which of the following statements is incorrect? Assume upward-sloping supply curves.
a.    If the supply curve shifts left and the demand remains constant, equilibrium price will rise.
b.    If the demand curve shifts left and the supply increase, equilibrium price will rise.
c.    If the supply curve shifts right and the demand curve shifts left, equilibrium price will fall.
d.    If the demand curve shifts right and the supply curve shifts left, price will rise.



        5. Which of the following is true?
a.    Efficiency refers to the size of the economic pie; equity refers to how the pie is divided.
b.    Government policies usually improve upon both equity and efficiency.
c.    As long as the economic pie continually gets larger, no one will have to go hungry.
d.    Efficiency and equity can both be achieved if the economic pie is cut into equal pieces.


    6.    The negative relationship between price and quantity demanded
a.    applies to most goods in the economy.
b.    is represented by a downward-sloping demand curve.
c.    is referred to as the law of demand.
d.    All of the above are correct.


    7.    Ford Motor Company announces that it will offer $3,000 rebates on new Mustangs starting next month. As a result of this information, today’s demand curve for Mustangs
a.    shifts to the right.
b.    shifts to the left.
c.    shifts either to the right or to the left, but we cannot determine the direction of the shift from the given information.
d.    will not shift; rather, the demand curve for Mustangs will shift to the right next month.


    8.    When the price of a good is higher than the equilibrium price,
a.    a shortage will exist.
b.    buyers desire to purchase more than is produced.
c.    sellers desire to produce and sell more than buyers wish to purchase.
d.    quantity demanded exceeds quantity supplied.


    9.    If a person only occasionally buys a cup of coffee, his demand for coffee is probably
a.    represented by a vertical or nearly-vertical demand curve.
b.    not easily represented by a demand schedule or demand curve.
c.    inelastic.
d.    elastic.


    10. Other things equal, the demand for a good tends to be more inelastic, the
a.    fewer the available substitutes.
b.    longer the time period considered.
c.    more the good is considered a luxury good.
d.    more narrowly defined is the market for the good.


    11. A person who takes a prescription drug to control high cholesterol most likely has a demand for that drug that is
a.    inelastic.
b.    unit elastic.
c.    elastic.
d.    highly responsive to changes in income.


    12. The demand for Chocolate Chip Cookie Dough ice cream is likely quite elastic because
a.    ice cream must be eaten quickly.
b.    this particular flavor of ice cream is viewed as a necessity by many ice-cream lovers.
c.    the market is broadly defined.
d.    other flavors of ice cream are good substitutes for this particular flavor.

        13. A perfectly inelastic demand implies that buyers
a.    decrease their purchases when the price rises.
b.    purchase the same amount as before when the price rises or falls.
c.    increase their purchases only slightly when the price falls.
d.    respond substantially to an increase in price.


        14. If the price elasticity of supply for wheat is less than 1, then the supply of wheat is
a.    inelastic.
b.    elastic.
c.    unit elastic.
d.    quite sensitive to change in price.

        15. If the price elasticity of supply is zero, then
a.    supply is more elastic than it is in any other case.
b.    the supply curve is horizontal.
c.    the quantity supplied is the same, regardless of price.
d.    a change in demand will cause a relatively small change in the equilibrium price.

Section Two: Short Answer (5 points for each question)

Define elasticity of demand. Provide an example.









2.    One tradeoff society faces is between efficiency and equity. Define each term. If the U.S. government redistributes income from the rich to the poor, explain how this action affects equity as well as efficiency in the economy.









3.    Determine if the demand for the following products is price elastic or price inelastic, and explain your answer.

a.    Box of cereal sold in a grocery store



b.    Gasoline as a commodity



c.    Fast food sold at a restaurant



d.    Hotel rooms for people planning a vacation



e.    Hotel rooms for people on business to meet an important client




4.    Define the law of demand and the law of supply. Provide an example for each law.














Section Three: True or False (1 point for each question)

1.    Baseballs and baseball bats are substitute goods.
True/False

2.    An increase in the price of pizza will shift the demand curve for pizza to the left.
True/False

3.    The market demand is the average of all of the individual demands for a particular good or service.
True/False

4.    Whenever a determinant of demand other than price changes, the demand curve shifts.
True/False

5    A decrease in the price of a product and an increase in the number of buyers in the market affect the demand curve in the same general way.
True/False

Explanation / Answer

If a price in a competitive market is “too high to clear the market,” what does this usually mean? Assume upward-sloping supply curves.

b. Quantity supplied exceeds quantity demanded at that price.


4. Which of the following statements is incorrect? Assume upward-sloping supply curves.

a. If the supply curve shifts left and the demand remains constant, equilibrium price will rise.





5. Which of the following is true?
a. Efficiency refers to the size of the economic pie; equity refers to how the pie is divided.

6. The negative relationship between price and quantity demanded

d. All of the above are correct.


7. Ford Motor Company announces that it will offer $3,000 rebates on new Mustangs starting next month. As a result of this information, today’s demand curve for Mustangs

b. shifts to the left.

8. When the price of a good is higher than the equilibrium price,

c. sellers desire to produce and sell more than buyers wish to purchase.



9. If a person only occasionally buys a cup of coffee, his demand for coffee is probably

d. elastic.


10. Other things equal, the demand for a good tends to be more inelastic, the
a. fewer the available substitutes.

11. A person who takes a prescription drug to control high cholesterol most likely has a demand for that drug that is
a. inelastic.

12. The demand for Chocolate Chip Cookie Dough ice cream is likely quite elastic because
d. other flavors of ice cream are good substitutes for this particular flavor.

13. A perfectly inelastic demand implies that buyers
b. purchase the same amount as before when the price rises or falls.

14. If the price elasticity of supply for wheat is less than 1, then the supply of wheat is
a. inelastic.

15. If the price elasticity of supply is zero, then
c. the quantity supplied is the same, regardless of price.

Section Two: Short Answer (5 points for each question)

Define elasticity of demand. Provide an example.

Ans)
Demand is a need of a customer backed by his ability and will to pay.
Ex: A student earning $1000 has a desire to buy a Mercedes, but since he doesn’t have the ability or money to pay for it, there is no demand from him.

In the same way, when you are having money, but you will mot buy the goods if you don’t have the will to buy it. Like an orthodox Christian will not buy a burkha, if it was given away for half a cent, because he doesn’t use it.

So demand is an ability to buy + will to pay



2. One tradeoff society faces is between efficiency and equity. Define each term. If the U.S. government redistributes income from the rich to the poor, explain how this action affects equity as well as efficiency in the economy.

Efficiency: The allocation of the scarce resources in an optimum proportion for getting an optimum out put or higher productivity is called efficiency.
Ex: How big we can make the pie with available resources.

Equity:
Here the economic prosperity is distributed equally between the society.

When US distribute the income equally among all citizens: It affects the efficiency, as there is no incentive for the people who work to create a better product. So this induces laziness in the society. Because, if you work creatively or don’t put extra effort also there will be equal incentive, so the people will stick to an easy option of becoming lazy or working less.
Equality: By this redistribution of wealth, there will be absolute equality in the society.






3. Determine if the demand for the following products is price elastic or price inelastic, and explain your answer.

a. Box of cereal sold in a grocery store

Price inelastic,
It is a necessity, so people buy the product if there is a price fluctuation.


b. Gasoline as a commodity



c. Fast food sold at restaurant:

It is relatively elastic, because the product is having substitutes and not an absolute necessity.

d. Hotel rooms for people planning a vacation

It is highly elastic, the vacation and hotel rooms are a luxury. And available time period is long, so the customers can browse through different links and can get a best one at lower prices. So at lower price demand will be more, and at higher price it declines.

e. Hotel rooms for people on business to meet an important client

It is in elastic, because here the time period is short, and they have to hire that room to meet the client, so the customer will pay the price demanded.


4. Define the law of demand and the law of supply. Provide an example for each law.



Law of Demand: When all the factors are constant i.e at ceteris paribus, the demand for a product is inversely proportional to its price.

When the price of Ipod increase the demand increases and when price increases the demand decreases.


Law of Supply: When all other factors remaining constant ( at ceterius paribus) the supply of a good or service is directly proportional to its price.
I.e, when the price of the good or service is high than the producers are more willing to supply the product and vice versa.




Section Three: True or False (1 point for each question)

1. Baseballs and baseball bats are substitute goods.
False

2. An increase in the price of pizza will shift the demand curve for pizza to the left.
True/

3. The market demand is the average of all of the individual demands for a particular good or service.
False

4. Whenever a determinant of demand other than price changes, the demand curve shifts.
True/

5 A decrease in the price of a product and an increase in the number of buyers in the market affect the demand curve in the same general way.

False

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