Formative Assessment-2

1. Movie tickets and film streaming services are substitutes. If the price of film streaming
increases, what happens in the market for movie tickets?
a. The supply curve shifts to the left.
b. The supply curve shifts to the right.
c. The demand curve shifts to the left.
d. The demand curve shifts to the right.

2. The discovery of a large new reserve of crude oil will shift the ________ curve for gasoline,
leading to a ________ equilibrium price.
a. supply, higher
b. supply, lower
c. demand, higher
d. demand, lower

3. (i) Consider the markets for film streaming services, TV screens, and tickets at movie
theaters. For each pair, identify whether they are complements or substitutes:
b. Film streaming and TV screens
c. Film streaming and movie tickets

(ii) Suppose a technological advance reduces the cost of manufacturing TV screens. Draw a
diagram to show what happens in the market for TV screens.

4. The market for pizza has the following demand and supply schedules:
Price Quantity Demanded Quantity Supplied
4 135 pizzas 26 pizzas
5 104 53
6 81 81
7 68 98
8 53 110
9 39 121
a. Graph the demand and supply curves. What are the equilibrium price and quantity in this
market?
b. If the actual price in this market were above the equilibrium price, what would drive the
market toward the equilibrium?
c. If the actual price in this market were below the equilibrium price, what would drive the
market toward the equilibrium?

5. Consider the market for paperbound economics textbooks. Explain whether the following
events would cause an increase or a decrease in supply or an increase or a decrease in the
quantity supplied.
a. The market price of paper increases.
b. The market price of economics textbooks increases.
c. The number of publishers of economics text-books increases.
d. Publishers expect that the market price of economics textbooks will increase next month. 6.
Consider the market for smart-phones. Explain whether the following events would cause an
increase or a decrease in supply or an increase or a decrease in the quantity supplied. Illustrate
each, and show what would happen to the equilibrium quantity and the market price. a. The price
of touch screens used in smart-phones declines.
b. The price of machinery used to produce smart-phones increases.
c. The number of manufacturers of smart-phones increases.

7. Consider the market for cable-based Internet access service, which is a normal good. Explain
whether the following events would cause an increase or a decrease in demand or an increase or
a decrease in the quantity demanded.

a. Firms providing wireless (an alternative to cable) Internet access services reduce their
prices. b. Firms providing cable-based Internet access services reduce their prices. c. There is a
decrease in the incomes earned by consumers of cable-based Internet access ser vices.
d. Consumers’ tastes shift away from using wire-less Internet access in favor of cable-
based Internet access services.

8. In the market for flash memory drives (a normal good), explain whether the following events
would cause an increase or a decrease in demand or increase or a decrease in the quantity
demanded. Also explain what happens to the equilibrium quantity and the market clearing price.
a. There are increases in the prices of storage racks for flash memory drives. b. There is a
decrease in the price of computer drives that read the information contained on flash memory
drives.
c. There is a dramatic increase in the price of secure digital cards that, like flash
memory drives, can be used to store digital data.
d. Consumers of flash memory drives anticipate that the price of this good will decline in
the future.

9. Consider the diagram below, which depicts the labor market in a city that has adopted a
“living wage law” requiring employers to pay a minimum wage rate of $11 per hour. Answer the
questions that follow:

13
12
11
10 wage
9
8
7

0 94 96 98 100 102 104 106 Quantity of Workers

(thousands)
a. What condition exists in this city’s labor market at the present minimum wage of $11 per
hour? How many people are unemployed at this wage?
b. A councilman has offered a proposal. In his view, the current minimum wage is too low and
should be increased to $12 per hour. Assuming that the labor demand and supply curves remain
in their present positions, how many people would be unemployed at a new $12 minimum wage?

10. ‘Setting price below the equilibrium price as an outcome of a policy measure would have
adverse impact’. Explain what does this statement implies give reasons and examples in support
of your answer.