Economics736

Question 1

If hot dogs are inferior goods, the demand for hot dogs will rise as consumer income falls.

a)      True

Inferior goods are goods whose demand and income are inversely related such as that an increase in income leads to decrease in demand and a decrease in income leads to increase in demand. If hot dogs are inferior goods, then more of the good will be purchased if the income drops.

Question 2

Whenever the price of Good A decreases, the demand for Good B increases. What do Goods A and B appear to be?

d)     complements

Complements are goods which are used together. The demand for one good depends on the price of the other and hence when the price of good A decreases, consumers demand more of the good and consequently consume its complement (good B) as well.

Question 3

Farmland can be used to produce either cattle or wheat. If the demand for cattle increases, what will happen in the market for wheat?

b)     The supply of wheat will decrease.

If Farmland can be used to produce either wheat or cattle, this implies that as demand for cattle goes up, more of cattle will be produced because of the increase in prices. Thus, less Farmland will be used in production of wheat hence its supply declines.

Question 4

Why does the quantity of a good demanded decrease when its price increases?

d)     Substitutes become relatively cheaper when the price of a good increases.

Demand for a good is mainly influenced by availability of substitutes, which cost less. If the price of good A increases, consumers will consider purchasing a close substitute that costs less (Good b).

Question 5

What will occur in the market if producers expect the price of televisions to fall in the near future?

b)     The supply of televisions will rise today.

When producers expect the price of televisions to fall in the future, they will increase the production today to maximize profit at the current prices. This does not affect quantity supplied, rather, it affects the supply in general. The only factor that causes a change in quantity supplied is price.

Question 6

Which of the following would most likely cause a reduction in the supply of Xbox video games?

a)      an increase in the price of computer chips used to make Xbox games

One factor that can cause a decline in supply of a good is when the cost of production rises. The cost of production increases when resources and raw materials used in production of the good becomes expensive. Less Xbox games will be produced when computer chips used in their production becomes expensive than before.

Question 7

The law of demand suggests that a decrease in the price of a product will increase the demand for that product.

b)     False

The law of demand suggests that a decrease in the price of a product will increase the QUANTITY DEMANDED for that product. Remember, only non-price factors can change the supply of the good while price itself affects the quantity demanded.

Question 8

When Mom buys more Jell-O(™) because the price of pudding has risen, it is an example of the substitution effect.

a)      True

Substitution effect means that consumers will shift to cheaper alternatives when the price of a good rises. Hence, demanding more of a cheaper Jell-O because of a rise in price of pudding is an example of substitution effect.

Question 9

A supply curve illustrates a direct relationship between what two items?

c)      price and quantity supplied

The supply curve indicates the relationship between price and the quantity supplied of a good. It shows the amount of a good that the suppliers is willing and able to supply at a given price. The quantity supplied is on the X axis and the Y axis indicates the price. The supply curve is always upward sloping as the supplier is willing and able to supply more of a product as its price increases.

Question 10

The law of supply suggests that a decrease in the price of a product will increase the quantity supplied for that product.

b)     False

The law of supply suggests that as the price of a good increases, the supplier is willing and able to supply more of the good and vice versa. This is explained by the upward sloping supply curve which shows a direct relationship between price and quantity supplied.