DSME 1030

Problem Set 3
Professor: Junji Xiao
Please hand in the hardcopy of HW 3 to the course drop box provided on 2/F in
CYT building by 14 Oct 5pm. NO late submission or electronic copy is accepted.
1.The buyer's reservation price of a particular good or service is the
A) minimum amount one would be willing to pay for it.
B) same as the market price.
C) maximum amount one would be willing to pay for it.
D) price at which one develops reservations about its quality.
E) price one must pay to ensure one gets it.
2.Shelly purchases a leather purse for $400. One can infer that
A) she paid too much. D)her reservation price was less than $400.
B) her reservation price was at least $400. E) she paid too little.
C) her reservation price was exactly $400.
3.The buyer's reservation price of a good or service is a monetary measure of the
__________ to the consumer.
A) necessity of the good
D) benefit of the good
B) quality of the good
E) prestige of the good
C) lowest price acceptable
4.As the price of a good rises,
A) firms earn larger profits.
B) more firms can cover their opportunity costs of producing the good.
C) firms find they can raise price by even more.
D) consumers become more willing to purchase the good.
E) government regulation becomes more justified.
5.Which of the following is NOT a characteristic of a market in equilibrium?
A) Quantity demanded equals quantity supplied.
B) Excess supply is zero.
C) All consumers are able to purchase as much as they wish.
D) Excess demand is zero.
E) The equilibrium price is stable, i.e., there is no pressure for it to change.
6.In a free market, if the price of a good is above the equilibrium price, then
A) government needs to set a higher price.
B) suppliers, dissatisfied with growing inventories, will raise the price.
C) demanders, wanting to ensure they acquire the good, will bid the price lower.
D) government needs to set a lower price.
E) suppliers, dissatisfied with growing inventories, will lower the price.

7.A regulated maximum price that is above the equilibrium price

A) will lead to black markets.
D) will lead to excess demand in the
market.
B) will have no effect on the market.
E) Both (a) and (d) are true.
C) will lead to excess supply in the market.
Use the following to answer questions 8-12:
P r ic e
10
S
8

6
4
D

10
Q u a n tity

8. At a price of $10, quantity demanded will be

A) 0. B) 2. C) 4. D) 6. E) 8.
9. At a price of $3, quantity supplied is
A) 0. B) 2. C) 4. D) 6. E) 7.
Answer: B Learning Objective: Define a supply curve Level of Learning:
Knowledge Type: Graphical Problem Source: Unique
10. The equilibrium price and quantity for this market is
A) $10, 0. B) $8, 6. C) $6, 4. D) $4, 6. E) $2, 8.
Answer: C Learning Objective: Economic equilibrium Level of Learning:
Comprehension Type: Graphical Problem Source: Unique
11. At a price of $9, the market will experience ______________ in the amount of
__________ units.
A) excess demand, 1 unit
D) excess demand, 5 units
2

B) excess supply, 6 units

C) equilibrium, 4 units

E) excess supply, 5 units

12. What are consumer surplus and producer surplus in equilibrium?

A) 8 & 24 B) 16 & 12 C) 8 & 12 D) 4 & 6 E) 16 & 24
Use the following to answer questions 13-14:
Demand for coffee last Monday is shown in bold (labeled D(Monday)).
M a rk e t fo r C o ffe e
P r ic e

D (B )
D (A )

D (M o n d a y )
Q u a n tity

13. On Tuesday the news featured a story that a storm wiped out the entire coffee crop
in Brazil. On Wednesday,
A) the demand function remained at D(Monday), but the quantity demanded
increased.
B) demand shifted to D(A) in anticipation of future price increases.
C) demand shifted to D(B) in anticipation of future price increases.
D) there would be no change in either the demand function or the quantity
demanded because not enough time had passed for the storm's effects to be
felt.
E) the demand function remained at D(Monday), but the quantity demanded
decreased.
14. All of the residents of Junkville eat doughnuts with their coffee and use lots of
cream and sugar in their coffee. In this graph, Demand would shift from
D(Monday) to
A) D(B) if the price of sugar fell.
D) D(A) if the price of coffee
increased.
B) D(A) if the price of doughnuts fell.
E) Both A and B are correct.
C) D(B) if the price of cream increased.

15.Mad cow disease has been discovered in the United States. One likely result is
A) an increase in buyers' reservation prices for beef.
B) a decrease in demand for chicken.
C) a decrease in demand for beef.
D) a decrease in the quantity demanded of beef.
E) an increase in the quantity supplied of beef.
16.As the price of cookies increases, firms that produce cookies will
A) increase the supply of cookies. D)decrease the quantity supplied of cookies.
B) increase the quantity supplied of cookies. E) leave their production
unchanged.
C) decrease the supply of cookies.
17.As the price of flour (an input into the cookie production process) increases, firms that
produce cookies will
A) increase the supply of cookies.
D) decrease the quantity of cookies
supplied.
B) increase the quantity of cookies supplied. E) leave their production
unchanged.
C) decrease the supply of cookies.
Use the following to answer questions 18-22:
P r ic e o f a c u p o f c o ffe e
O r ig in a l S u p p ly

$ 3 .5 0
3 .0 0

N e w S u p p ly

2 .5 0
2 .0 0
1 .5 0
1 .0 0
N ew D em and
$ .5 0

O r ig in a l D e m a n d
0

10

20

30

40

50

60

70

C u p s s o ld in a n h o u r

18. In the original market equilibrium

A) 50 cups of coffee are sold for $1.00 each. D) 60 cups of coffee are sold for
$1.50 each.
B) 50 cups of coffee are sold for $2.50 each. E) 30 cups of coffee are sold for
$1.50 each.
C) 40 cups of coffee are sold for $2.00 each.
4

19. What might cause Demand to shift from the Original Demand to the New
Demand?
A) An expectation that coffee prices will fall in the future.
B) An increase in the price of coffee creamer.
C) An decrease in the price of tea.
D) A report that coffee is bad for your health.
E) An increase in incomes.
20. What might cause Supply to shift from the Original Supply to the New Supply?
A) A storm in South America wipes out the entire coffee crop.
B) New technology reduces the amount of coffee beans necessary to make a
good-tasting pot of coffee.
C) A news report that coffee consumption greatly increases productivity.
D) An increase in the price of tea.
E) An increase in the coffee drinking population.
21. In this market, if consumers' reservation price for a cup of coffee increased by
$1.00
A) the equilibrium price would increase by $1.00.
B) the equilibrium price would increase by less than $1.00.
C) the equilibrium price would increase by more than $1.00.
D) the equilibrium price would not change.
E) not enough information to know.
22. Suppose the coffee lobby convinced the legislature to impose a price control
requiring that coffee prices must be at least $2.50 at a time when the original
(bold) demand function and supply function were applicable. The most likely
result would be
A) a short term excess demand for coffee, followed by an increase in price.
B) a short term excess supply of coffee, followed by a decrease in price.
C) excess demand for coffee that would not correct itself because price is set by
law.
D) excess supply of coffee that would not correct itself because price is set by
law.
E) new equilibrium at a price of $2.50 and a quantity of 50 cups.
23.Assume that Joe is willing to produce another hamburger that costs $1 to make. Mary
is hungry and is willing to buy a hamburger for $3. According to the No Cash on
the Table principle, Joe and Mary
A) will make a trade.
B) will only make a trade if Joe can get Mary to spend more than $3 for the
hamburger.
C) will only make a trade if Mary can get Joe to charge less than $1 for the
hamburger.
D) may or may not make a trade.
E) will never trade; they will look for better deals.

24.When two people agree to a price in a negotiation, we can assume that

A) each one will receive equal benefits from the transaction.
B) the seller will receive more benefit from the transaction than the buyer.
C) only one of the parties will benefit, but there is not enough information to
determine which one it will be.
D) both parties will benefit.
E) There is not enough information to make any of these statements
25.When a market is not in equilibrium then
A) it is always possible to identify unexploited opportunities.
B) demanders are dissatisfied with the market.
C) suppliers are dissatisfied with the market.
D) government intervention is necessary.
E) it will have a tendency to remain in disequilibrium.
Part II
1.Price elasticity of demand is a measure of
A) consumer response to a change in a good's price.
B) the slope of the supply curve.
C) a market's ability to restore equilibrium after a change in a good's price.
D) the demand for a good or service.
E) consumer response to excess demand.
2.If the price of textbooks increases by one percent and the quantity demanded falls by
one-half percent, then the price elasticity of demand has a value of
A) 0.05. B) 0.5. C) 1. D) 5. E) one-fifth.
3.If the price elasticity of demand for a good is less than one, then the demand for that
good, with respect to price, is
A) elastic. B) inelastic. C) unitary elastic. D) perfectly elastic. E)
perfectly inelastic.
4.When the price of hot dog is $1.50 each, 500 hot dogs are sold every day. After
lowering the price to $1.35 each, 510 hot dogs are sold every day. At the original
price, what is the price elasticity of demand for hot dog?
A) 66.67 B) 5 C) 1 D) 0.2 E) 0.015
5.Generally speaking, demand for a good will be more inelastic
A) if few substitutes exist.
B) when the good represents a large share of the consumer's budget.
C) in the long run.
D) when many substitutes exist.
E) if the price change is great.

6.Big-ticket items such as refrigerators have a_____ price elasticity of demand compared
to low budget items such as paper towels.
A) higher B) lower C) very low D) unitary E) cross

Use the following to answer questions 7-10:

P
12
11
10

D 1

9
8
7
6
5
4
3
2
D 2

1
1

10

11 1 2 Q

7. The slope of the demand curve D1 is _______ and the slope of D2 is_______.
A) 3; 1/3 B) 1/3; 3 C) 1; 3 D) 3; 1 E) 1; 1/3
8. When P=3,the price elasticity of demand for the demand curve D1is______ and
D2 is_____.
A) 3; 1/3 B) 1/3; 3 C) 1; 3 D) 3; 1 E) 1; 1/3
9. At P=3 and Q=3, D1 is ______ D2.
A) less elastic than B) more elastic than C) exactly as elastic as D) greater
than E) less than
10. At the intersection of D1 and D2, D1 has a different elasticity than D2 because
A) D1 has a negative slope but D2 doesn't. D) D1 has the same slope as D2.
B) D1 has a steeper slope than D2.
E) None of the above.
C) D1 has a flatter slope than D2.
Use the following to answer questions 11-14:

P r ic e o f
s te a k p e r lb
$3
$4
$5
$6
$7

L o r ie s q u a n t it y
dem anded
5
3
2
1
0

J e f f s q u a n t it y
dem anded
10
8
6
4
2

M a t t s q u a n t it y
dem anded
19
13
9
7
5

11. Total expenditures for steak when the price is $5 are

A) $49. B) $72. C) $85. D) $96. E) $102.
12. Total revenues to steak producers when the price is $3 are
A) $49 B) $72. C) $85. D) $96. E) $102.
13. If the price of steak increases from $5 to $6,
A) producers will sell more.
D) consumers purchase more steak.
B) total expenditures for steak rise.
E) total expenditures on steak do
not change.
C) total revenues to steak producers fall.
14. If the price of steak increases from $6 to $7, total revenues _________,
suggesting that market demand is ________.
A) increase; elastic
D) decrease; inelastic
B) decrease; elastic
E) remain constant; unitary elastic
C) increase; inelastic