Problem Set 1



Problem Set 2

Econ 201 (03,04) Spring 2002

(Dr. Tin-Chun Lin)

1. Suppose that one of the following events occurs:

a) The price of gasoline rises.

b) The price of gasoline falls.

c) All speed limits on highways are abolished.

d) A new fuel-effective engine that runs on cheap alcohol is invented.

e) The population doubles.

f) Robotic production plants lower the cost of producing cars.

g) A law banning car imports from Japan is passed.

h) The rates for auto insurance double.

i) The minimum age for drivers is increased to 19 years.

j) A massive and high-grade oil supply is discovered in Mexico.

k) The environmental lobby succeeds in closing down all nuclear power stations.

l) The price of cars rises.

m) The price of cars falls.

n) The summer temperature is 10 degrees lower than normal, and the winter temperature is 10 degrees higher than normal.

State which of the above events will produce:

1) A movement along the demand curve for the gasoline. (Answer: a,b,j,k)

2) A shift of the demand curve for gasoline to the right. (Answer: c,e,g,f,m)

3) A shift of the demand curve for gasoline to the left. (Answer: d,h)

4) A movement along the supply curve of gasoline. (Answer: a,b,c,d,e,f,g,h,i,l,m)

5) A shift of the supply curve of gasoline to the right (Answer: j)

6) A shift of the supply curve of gasoline to the left. (Answer: k)

7) A movement along the demand curve for cars. (Answer: l,m,f,g)

8) A movement along the supply curve of cars. (Answer: l,m,a,b,e,h,i)

9) A shift of the demand curve for cars to the right. (Answer: b,e)

10) A shift of the demand curve for cars to the left. (Answer: a,h,i)

11) A shift of the supply curve of cars to the right. (Answer: f)

12) A shift of the supply curve of cars to the left. (Answer: g)

13) An increase in the price of gasoline. (Answer: a,c,e,f,g,m,k)

14) A decrease in the quantity of oil bought and sold. (Answer: d,h,i,l,k)

2. The demand and supply schedules for gum are as follows:

|Price |Quantity demanded |Quantity supplied |

|(cents per pack) |(millions of packs per week) |(millions of packs per week) |

|10 |200 |0 |

|20 |180 |30 |

|30 |160 |60 |

|40 |140 |90 |

|50 |120 |120 |

|60 |100 |140 |

|70 |80 |160 |

|80 |60 |180 |

|90 |40 |200 |

a. What is the equilibrium price of gum? (Answer: 50 cents per week)

b. How much gum is bought and sold each week? (Answer: 120 million pack)

Suppose that a huge fire destroys one half of the gum-producing factories. Supply decreases to one half of the amount shown in the above supply schedule.

c. What is the new equilibrium price of gum? (Answer: 70 cents per pack)

d. How much gum is now bought and sold each week? (Answer: 80 million packs)

e. Has there been a shift in or a movement along the supply curve of gum? (Answer: there has been a shift to the left in the supply curve of gum)

f. Has there been a shift in or a movement along the demand curve for gum? (Answer: there has been a movement along the demand curve for gum)

g. As the gum factories destroyed by fire are rebuilt and gradually resume gum production, what will happen to:

i) The price of gum. (Answer: the price of gum will fall as the factories are rebuilt. Once the factories are all restored, the price of gum will stabilize at its old equilibrium price of 50 cents.)

ii) The quantity of gum bought. (Answer: the quantity of gum traded will increase until, once all the factories are back on-line, it will stabilize back at its old equilibrium level of 120 million packs per week.)

iii) The demand curve for gum. (Answer: the demand curve for gum will not change.)

iv) The supply curve of gum. (Answer: the supply curve will shift to the right as the factories are restored.)

3. (True or False) The law of supply indicates that an increase in price will cause an increase in supply which is reflected graphically as a rightward shift of the supply curve. (Answer: False)

4. (Multiple Choice) If the current market price is above the equilibrium price, then:

a) The quantity demanded exceeds the quantity supplied.

b) There will be a shortage.

c) The quantity supplied will exceed the quantity demanded.

d) The price will have to increase to establish equilibrium.

e) Demand will shift to the left.

(Answer: ( c ))

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