ECON 2113: Microeconomic (L5 and L10)

Assignment 2 (Chapter 3and Chapter 4)

Due: 11:45pm on 7 October, 2022
Instructions:
 Please upload your answers on Canvas by 11:45pm, 7 October (Friday).
 Late submissions will not be accepted.
 Please put your name and student ID at the upper right corner of the first page.

Part 1: Multiple Choice Questions (Please choose the best answer)

1) A change in which of the following alters buying plans for cars but does NOT shift the
demand curve for cars?
A) a 5 percent increase in people's income
B) a 10 percent decrease in the price of car insurance
C) a 20 percent increase in the price of a car
D) an increased preference for walking rather than driving

2) Cupcakes and granola bars are substitutes in consumption. The price of a granola bar
increases so the demand for
A) granola bars will increase, that is, the demand curve will shift rightward.
B) cupcakes will increase, that is, the demand curve will shift rightward.
C) granola bars will decrease, that is, the demand curve will shift leftward.
D) cupcakes will decrease, that is, the demand curve will shift leftward.

3) Which of the following shifts the supply curve for gasoline rightward?
A) a situation in which the quantity demanded exceeds the quantity supplied
B) an increase in the price of gasoline
C) a decrease in the price of a resource used to produce gasoline, such as crude oil
D) an increase in the demand for gas-guzzling, sport utility vehicles

4) Which of the following shifts the supply curve rightward?

A) an increase in the population
B) a positive change in preferences for the good
C) a decrease in the price of the good
D) None of the above answers is correct

5) In 2015, the price of peanut butter was rising, which lead peanut butter buyers to expect
the price of peanut butter would rise in the future. Consequently, in the current market for
peanut butter there was ________ which resulted in ________ in the price of peanut butter
and ________ in the quantity of peanut butter.
A) an increase in demand for peanut butter; an increase; an increase
B) an increase in supply of peanut butter; a decrease; an increase
C) a decrease in demand for peanut butter; a decrease; a decrease
D) a decrease in supply of peanut butter; an increase; a decrease

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6) In the market for oranges, the demand and supply of oranges decrease by the same amount.
The equilibrium quantity will ________ and the equilibrium price will ________.
A) decrease; not change
B) decrease; fall
C) remain the same; either rise or fall
D) remain the same; rise

7) Students can rent a Blu-ray movie at Campus Video for $4. As the price of Blu-ray players
fall, the
A) quantity supplied of Blu-ray movies will decrease.
B) demand for Blu-ray movies will increase.
C) supply of Blu-ray movies will decrease.
D) quantity demanded of Blu-ray movies will increase.

8) Which of the following is TRUE?

A) For an inferior good, when income increases, the demand curve shifts leftward.
B) The demand curve for a good shifts leftward when the price of a substitute rises.
C) If consumers expect the price of a good will rise in the future, the demand curve shifts
leftward.
D) An increase in population shifts the demand curve for most goods leftward.

9) When the price of a pizza decreases from $12 to $10, it is definitely the case that the
A) income effect means people buy less pizza.
B) substitution effect means people buy more pizza.
C) quantity demanded of pizza will not change.
D) None of the above answers is correct.

10) Growers expect that the price of a bushel of wheat will increase in one month. This belief
results in
A) an increase in current supply of wheat.
B) a decrease in current supply of wheat.
C) a decrease in future supply of wheat.
D) no change in current or future supply of wheat.

11) If the demand curve for oranges is a downward sloping straight line, the price elasticity of
demand will increase the
A) higher the price of oranges.
B) higher the price of other fruits.
C) higher the income level of consumers.
D) lower the price of oranges.

12) "Last October, due to an early frost, the price of a pumpkin increased by 10 percent
compared to the price in the previous Halloween seasons. As a result, the quantity demanded
county-wide decreased from 2 million to 1.5 million." Based on this statement, the
A) demand for pumpkins is elastic.
B) demand for pumpkins is inelastic.
C) demand for pumpkins is unit elastic.
D) demand curve for pumpkins shifted rightward.
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13) Which of the following represents a price elastic supply?
A) The quantity demanded increases 18 percent as a result of a decrease in the price of 8
percent.
B) The price rises by 8 percent causing the quantity demanded to fall by 10 percent.
C) The quantity supplied increases by 21 percent as a result of an increase in the price of 12
percent.
D) The price rises by 22 percent causing the quantity supplied to increase by 3 percent.

14) Suppose inter-city bus travel is a substitute for transportation by train. Which of the
following could then be TRUE?
A) The cross elasticity between bus and train travel could equal 0.65.
B) The cross elasticity between bus and train travel could equal 1.0.
C) The cross elasticity between bus and train travel could equal 1.25.
D) All of the above could be true.

15) If the price of gasoline rose from $2.85 to $2.95 per gallon, your expenditure on gasoline
would increase if your price elasticity of demand for gasoline equals
A) 1.25.
B) 1.00.
C) 0.75.
D) Total revenue would increase at all of the above elasticities.

16) Donuts and coffee are complements. When the price of a donut increases, the demand for
coffee ________ and the cross elasticity of demand for coffee with respect to the price of a
donut is ________.
A) decreases; negative
B) increases; negative
C) increases; positive
D) decreases; positive

17) Peter's monthly income increases from $1,500 to $1,600. As a result, he increases the
number of DVDs he buys per month from 2 to 3. Peter's demand for DVDs is
A) price elastic.
B) price inelastic.
C) income elastic.
D) income inelastic.

18) The supply of lettuce in the short run will be ________ than the supply in the long run
and ________ than the supply today.
A) more elastic; less elastic
B) more elastic; more elastic
C) less elastic; more elastic
D) less elastic; less elastic

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19) When the price of milk goes up as a result of a rightward shift of the demand curve for
milk, the total revenue collected by milk producers will
A) increase only if milk is inelastic in supply.
B) decrease only if milk is elastic in supply.
C) remain constant only if milk has a unitary price elasticity of supply.
D) none of the above

20) Suppose Target decided to lower the price on all shirts as part of its Back to School
promotion. The cross elasticity of demand between pants and shirts is negative. Lowering the
price on shirts will ________ the demand for pants because shirts and pants are ________.
A) increase; substitutes
B) decrease; substitutes
C) increase; complements
D) decrease; complements

Part 2: Short and Long Questions

Question 1
Dairies make low-fat milk from full-cream milk, and in the process they produce cream,
which is made into ice cream. The following events occur one at a time:
(a) The wage rate of dairy workers rises.
(b) The price of cream rises.
(c) The price of low-fat milk rises.
(d) With a drought forecasted, dairies raise their expected price of low-fat milk next year.
(e) New technology lowers the cost of producing ice cream. Explain the effect of each event
on the supply of low-fat milk.

Question 2
The demand and supply schedules for gum are in the table.

Price Quantity demanded Quantity supplied

(cents per pack) (millions of packs a week)
20 180 60
40 140 100
60 100 140
80 60 180

(a) Suppose that the price of gum is 70¢ a pack. Describe the situation in the gum market and
explain how the price adjusts.
(b) Suppose that the price of gum is 30¢ a pack. Describe the situation in the gum market and
explain how the price adjusts.

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Suppose a fire destroys some factories that produce gum and the quantity of gum supplied
decreases by 40 million packs a week at each price.

(c) Explain what happens in the market for gum and draw a graph to illustrate the changes.
(d) At the time as the fire, the teenage population increases and the quantity of gum
demanded increases 40 million packs a week at each price. What is the new market
equilibrium? Show the changes on your graph.

Question 3
The demand schedule for computer chips is

Price Quantity demanded

(dollars per chip) (millions of chips per year)
200 50
250 45
300 40
350 35
400 30

(a) What happens to total revenue if the price falls from (i) $400 to $350 a chip and from (ii)
$350 to $300 a chip?
(b) At what price is total revenue at a maximum?
(c) At an average price of $350, is the demand for chips elastic, inelastic, or unit elastic? Use
the total revenue test to answer this question.
(d) At $250 a chip, is the demand for chips elastic or inelastic? Use the total revenue test to
answer this question.

Question 4
(a) When Judy’s income increased from $130 to $170 a week, she increased her demand for
concert tickets by 15 percent and decreased her demand for bus rides by 10 percent.
Calculate Judy’s income elasticity of demand for (i) concert tickets and (ii) bus rides.

(b) If a 12 percent rise in the price of orange juice decreases the quantity of orange juice
demanded by 22 percent and increases the quantity of apple juice demanded by 14
percent, calculate the (i) Price elasticity of demand for orange juice and (ii) Cross
elasticity of demand for apple juice with respect to the price of orange juice.