SUPPLY, DEMAND, AND MARKET EQUILIBRIUM
Practice Problems

Multiple choice questions.

1. A local grocery store orders 200 cases of Pepsi each week and sells them at a price of $6.00 per case. At the end of the first week, they have only sold 160 cases. What economic situation is the grocery store facing and what will have to happen to price in order for equilibrium to be attained?
a. surplus; price will rise.
b. surplus; price will fall.
c. shortage; price will rise.
d. shortage; price will fall.
e. nothing since the market is in equilibrium.

2. Which of the following can lead to an increase in the supply for good X?
a. a decrease in the number of sellers of good X.
b. an increase in the price of inputs used to make good X.
c. an increase in consumers' income, assuming good X is a normal.
d. an improvement in technology used in production of good X.
e. none of the above

3. An increase in the price of electricity will:
a. increase the demand for kerosene heaters
b. increase the demand for light bulbs
c. increase the demand for stereos
d. increase the demand for TVs.

4. Which of the following events will cause an increase in the market demand for Guinness (a brand of beer)?
a. A decrease in the price of Guinness.
b. An increase in the price of Heineken (another brand of beer).
c. An increase in the price of Planters peanuts (a complementary good).
d. An increase in income, if Guinness is an inferior good.
e. None of the above will cause an increase in demand.


Short-answer questions.

1. The following table gives the daily supply and demand for hot dogs at a sporting event:

Price, $
Quantity demanded
Quantity supplied
2.10
800
7,200
1.80
1,600
4,800
1.60
2,400
2,400
1.40
3,200
800
1.20
4,100
200

a. What is the equilibrium price of hot dogs? What makes you think so?
b. If the organizers of the sporting event decide to set the price at 1.80, how many hot dogs will be sold?

2. True or False? Explain.
In economics, "normal good" is the name for a good a normal individual can afford.

3. a. State the Law of Demand.
b. During the last two decades, tuition fees at Purdue University have increased by 50%. At the same time, the number of students enrolled has increased from 22,000 to over 35,000.
Does this example demonstrate that the Law of Demand is false? Explain why or why not. Use graphs.

4. The total demand for wheat and the total supply of wheat per month in the Kansas City grain market are as follows:

Thousands of bushels
demanded
Price per bushel, $
Thousands of bushels supplied
Surplus (+)
or shortage (--)
85
3.40
72
 
80
3.70
73
 
75
4.00
75
 
70
4.30
77
 
65
4.60
79
 
60
4.90
81
 

a. Fill in the surplus/shortage column. Use the information in that column to state the equilibrium price and equilibrium quantity in this market.

b. Graph the demand for wheat and the supply of wheat.

c. Why is $3.40 not the equilibrium price in this market? How about $4.90?

d. "Surpluses drive prices up; shortages drive them down." Do you agree?

e. Now suppose that the government establishes a ceiling (maximum legal) price for wheat at $3.70. Carefully explain the effects of such a ceiling and demonstrate your answer graphically.

 


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