Assignment 2 Demand and Supply

Multiple Choice
1. If demand increases while supply decreases for a particular good:
a. its equilibrium price will increase while the quantity of the good produced and sold could
increase, decrease, or remain constant.
b. the quantity of the good produced and sold will decrease while its equilibrium price could
increase, decrease, or remain constant.
c. the quantity of the good produced and sold will increase while its equilibrium price could
increase, decrease or remain constant.
d. its equilibrium price will decrease while the quantity of the good produced and sold could
increase, decrease, or remain constant.
2. Surplus is a condition of:
a. excess supply.
b. a deficiency in supply.
c. market equilibrium.
d. excess demand.
3. The quantity of product X supplied can be expected to rise with a fall in:
a. prices of competing products.
b. price of X.
c. energy-saving technical change.
d. input prices.
4. Derived demand is directly determined by:
a. utility.
b. the profitability of using inputs to produce output.
c. the ability to satisfy consumer desires.
d. personal consumption.
5. A demand curve expresses the relation between the quantity demanded and:
a. income.
b. advertising.
c. price.
d. all of the above.

6. Holding all else equal, an increase in mandatory payments by employers for universal health care
coverage for workers would lead to a decrease in the:
a. supply of workers.
b. the quantity supplied of workers.
c. the quantity demanded of workers.
d. demand for workers.
7. Demand is the total quantity of a good or service that customers:
a. are willing to purchase.
b. are able to purchase.
c. are willing and able to purchase.
d. need.
8. Demand for consumption goods and services is:
a. derived demand.
b. direct demand.
c. product demand.
1
 Assignment 2 Demand and Supply

d. utility.

9. The demand function for a product states the relation between the aggregate quantity demanded and:
a. all factors that influence demand.
b. the aggregate quantity supplied.
c. consumer utility.
d. the market price, holding all the other factors that influence demand constant.
10. The supply of a product does not depend on:
a. raw material costs.
b. wage rates.
c. consumer incomes.
d. technology.

11. The supply curve expresses the relation between the aggregate quantity supplied and:
a. price, holding constant the effects of all other variables.
b. aggregate quantity demanded, holding constant the effects of all other variables.
c. profit, holding constant the effects of all other variables.
d. each factor that affects supply.
12. The equilibrium market price of a service is the:
a. price that buyers are willing and able to pay.
b. price where shortages exceed surpluses.
c. price that maximizes profit for sellers.
d. price where the quantity demanded equals the quantity supplied.
13. If the market price is higher than the equilibrium price a:
a. shortage exists and the equilibrium price will rise until it equals the market price and the
shortage is eliminated.
b. surplus exists and the market price will fall until it equals the equilibrium price and the
surplus is eliminated.
c. surplus exists and the equilibrium price will rise until it equals the market price and the
surplus is eliminated.
d. shortage exists and the market price will fall until it equals the equilibrium price and the
shortage is eliminated.
14. If demand and supply both increase, the:
a. equilibrium price will decrease while the quantity produced and sold could increase,
decrease or remain constant.
b. quantity produced and sold will increase while the equilibrium price could increase,
decrease, or remain constant.
c. quantity produced and sold will decrease while the equilibrium market price could
increase, decrease, or remain constant.
d. equilibrium price will increase while the quantity produced and sold could increase,
decrease, or remain constant.

1) For a want to become a demand, it must be backed by the __________. (desire to buy a product /
ability to buy a product)

2) _______________relationship exists between the price and quantity demanded. . (direct /inverse)

2
 Assignment 2 Demand and Supply

3) __________ indicates the changes in consumers purchasing habits, depending on the price variation of
a particular product. (Demand schedule / Purchasing Power Parity)

4) The demand curve slopes ________. (Downward from left to right / Upward from left to right)

5) Increase in the price of a product ___________ the purchasing power (PP) of the consumer. (increases
/ decreases)

6) When the price of petrol goes up, demand for automobiles decreases. It implies that petrol and
automobiles are ___________. (complementary / substitutes)

7) In normal circumstances, if the government increases the tax on any product, the demand for the
product __________ in the short run.(increases / decreases)

8) If the demand for petrol remains the same even after the increase in petrol prices, it means petrol is
a__________________ (necessity /luxury)

9) Extension and contraction of demand for a good occurs as a result of ________. (change in the price of
the good / change in the quality of good)

10) Change in demand, as a result of the factors other than price is known as ______. (shift in demand
/contraction or expansion of demand)

PROBLEMS:
1. Demand and Supply Curves. The following relations describe demand and supply conditions in the
lumber/forest products industry:
QD = 75,000 - 10,000P (Demand)
QS = -15,000 + 50,000P (Supply)

where Q is quantity measured in thousands of board feet (one square foot of lumber, one inch thick)
and P is price in dollars.

A. Complete the following table:

Quantity Quantity Surplus (+) or

Price Supplied Demanded Shortage (-)
(1) (2) (3) (4) = (2) - (3)
Rs.3.00
2.50
2.00
1.50
1.00

3
 Assignment 2 Demand and Supply

2. Demand Analysis. The demand for automobiles is often described as highly cyclical, and very sensitive to
automobile prices and interest rates. Given these characteristics, describe the effect of each of the
following in terms of whether it would increase or decrease the quantity demanded or the demand for
automobiles. Moreover, when price is expressed as a function of quantity, indicate whether the effect
of each of the following is an upward or downward movement along a given demand curve or instead
involves an outward or inward shift in the relevant demand curve for autos. Explain your answers.

A. A decrease in auto prices

B. A fall in interest rates

C. A rise in interest rates

D. A severe economic recession

E. A robust economic expansion

3. Comparative Statics. Demand and supply conditions in the market for unskilled labor are important
concerns to business and government decision makers. Consider the case of a government mandated
minimum wage set above the equilibrium or market clearing wage level. Some of the following factors
have the potential to influence the demand or quantity demanded of unskilled labor. Influences on the
supply or quantity supplied may also result. Holding all else equal, describe these influences as
increasing or decreasing, and indicate the direction of the resulting movement along or shift in the
relevant curve(s).

A. An increase in the popularity of self-service gas stations, car washes, and so on.

B. A fall in welfare benefits

C. An increase in the minimum wage

D. A rise in interest rates

E. A decrease in the quality of secondary education

4. Comparative Statics. Coupon Promotions, Inc., is a coupon book publisher with markets in several n
states of India. CPI coupon books are either sold directly to the public, or sold through religious and
other charitable organizations, or given away as promotional items. Operating experience during the
past year suggests the following demand function for its coupon books:

Q = 10,000 - 5,000P + 0.02Pop + 0.4I + 0.6A

where Q is quantity, P is price (Rs.), Pop is population, I is disposable income per capita (Rs.), and A
is advertising expenditures (Rs.).

A. Determine the demand curve faced by CPI in a typical market where P = 5, Pop = 1,000,000
persons, I = 35,000 and A = 10,000. Show the demand curve with quantity expressed as a
function of price, and price expressed as a function of quantity.

4
 Assignment 2 Demand and Supply

B. Calculate the quantity demanded at prices of Rs.5, Rs.2.50, and rs.0.

C. Calculate the prices necessary to sell 10,000, 25,000, and 50,000 units.

5. Demand Curve Analysis. Air India. is a regional airline providing service between Mumbai, Delhi
and Kolkatta. An analysis of the monthly demand for service has revealed the following demand
relation:

Q = 45,000 - 250P - 300PC + 250BAI + 10,000S

Where Q is quantity measured by the number of passengers per month, P is the price ($), PC is a price
index for connecting flights (1982 = 100.), BAI is a business activity index (1982 = 100) and S, a
binary or dummy variable, equals 1 in summer months, zero otherwise.

A. Determine the demand curve facing the airline during the winter month of January if
P = $100, PC = 150, BAI = 200, and S = 0.

B. Calculate the quantity demanded and total revenues during the summer month of July if all
price-related variables are as specified above.

6. Supply Curve Analysis. A review of industry-wide data for the frozen grape juice manufacturing
industry suggests the following industry supply function:

Q = -3,000,000 + 500,000P - 800,000PL - 1,000,000PK + 300,000W

where Q is cases supplied per year, P is the wholesale price per case ($), PL is the average price paid
for unskilled labor ($), PK is the average price of capital (in percent), and W is weather measured by
the average seasonal temperature in growing areas (in fahrenheit).

A. Determine the industry supply curve for a recent year when P = $40, PL = $10, PK = 15%,
and W = 70 degrees Fahrenheit. Show the industry supply curve with quantity expressed as a
function of price and price expressed as a function of quantity.

B. Calculate the quantity supplied by the industry at prices of $30, $40 and $50 per case.

C. Calculate the prices necessary to generate a supply of 10 million, 25 million, and 40 million
cases.

7. .Market Equilibrium. Tangy Orange Juice is a product of Nagpur's Orange Growers' Association.
Demand and supply of the product are both highly sensitive to changes in the weather. During hot
summer months, demand for orange juice and other beverages grows rapidly. On the other hand, hot
dry weather has an adverse effect on supply by reducing the size of the orange crop.

Demand and supply functions for Tangy orange juice are as follows:

QD = 4,500,000 - 1,200,000P + 2,000,000PS + 1,500Y + 100,000T (Demand)

QS = 8,000,000 + 2,400,000P - 500,000PL - 80,000PK - 120,000T (Supply)

5
Assignment 2 Demand and Supply

where P is the average price of Tangy orange juice ($ per case), PS is the average retail price of canned
soda ($ per case), Y is income (GNP in $billions), T is the average daily high temperature (degrees),
PL is the average price of unskilled labor ($ per hour), and PK is the average cost of capital (in percent).

A. When quantity is expressed as a function of price, what are the Tangy orange juice demand
and supply curves if P = $11, PS = $5, Y = $12,000 billion, T = 75 degrees, PL = $6, and PK
= 12.5%.

B. Calculate the surplus or shortage of Tangy orange juice when P = $5, $10, and $15.

C. Calculate the market equilibrium price-output combination.