Econ 200(01). Principles of Microeconomics.

Winter 2012

HW1 (Demand - Answer Key).

1. The law of demand states that the quantity demanded of a good is inversely related to the price of that good, other things constant. Therefore, as the price of a good goes: A) up, the quantity demanded also goes up. B) up, the quantity demanded goes down. C) down, the quantity demanded goes down. D) down, the quantity demanded stays the same. Answer: B. The law of demand states that more of a good will be demanded the lower its price, other things constant, and less of a good will be demanded the higher its price, other things constant. 2. The law of demand states that consumers buy more of a good when its price declines: A) because their income increases at the same time. B) only if their income increases at the same time. C) even if other demand determinants change at the same time. D) provided all else remains constant. Answer: D. The law of demand states that more of a good will be demanded the lower its price, other things constant, and less of a good will be demanded the higher its price, other things constant. 3. According to the law of demand, an increase in the price of baseball trading cards causes: A) people to buy fewer trading cards. B) people to buy more trading cards. C) the scarcity of baseball trading cards to increase. D) baseball trading cards to grow in abundance. Answer: A. The law of demand is the inverse relationship between price and quantity demanded, as illustrated by the correct response. 4. Which of the following situations best demonstrates the law of demand? A) Moviegoers react to an increase in the price of a theater ticket by seeing fewer movies per year. B) Moviegoers see fewer movies per year due to an overall decrease in the quality of newly released motion pictures. C) A drought causes a decrease in the availability of pumpkins, resulting in fewer jack-olanterns displayed on Halloween. D) An increase in the number of people writing Economics textbooks results in a decrease in average textbook prices. Answer: A. The correct answer focuses on the relationship between price and quantity demanded so it is the best demonstration of the law of demand.

Econ 200(01). Principles of Microeconomics.

Winter 2012

5. The distinction between demand and the quantity demanded is best made by saying that: A) demand is represented graphically by a curve and quantity demanded as a point on that curve. B) the quantity demanded is represented graphically by a curve and demand as a point on that curve. C) the quantity demanded is in a direct relation with prices, whereas demand is in an inverse relation. D) the quantity demanded is in an inverse relation with prices, whereas demand is in a direct relation. Answer: A. Demand refers to a schedule of quantities that will be bought per unit of time at various prices. It refers to the entire demand curve. Quantity demanded refers to a specific amount that will be demanded per unit of time at a specific price. It refers to a point on a demand curve. 6. USA Today noted that the destruction caused by three 2004 hurricanes, combined with the already high real-estate prices, were making people reconsider retiring to Florida. The cost of homeownership was increasing partly because past hurricanes had roughly doubled insurance premiums statewide. Construction costs could rise due to stricter building codes. Some people, however, did not expect the influx of retirees to change because the baby boom generation was approaching retirement age and Florida had long attracted many retirees. Which of the following factors is tending to move the demand curve for Florida housing to the right? A) The aging of the baby boomers, increasing the number of people who are retiring. B) The increase in the cost of insurance. C) The already high real-estate prices. D) The current high construction costs. Answer: A. An increase in the number of buyers moves the demand curve right. Source: USA Today, "Storms dash dreams of Florida Home," September 2004.

Econ 200(01). Principles of Microeconomics. Use the following to answer questions 7-8:

Winter 2012

Price

(I)

Quantity

Price

(II)

Quantity

Price

(III)

Quantity

Price

(IV)

Quantity

7. Refer to the graph above. The curve that best demonstrates the law of demand is: A) I. B) II. C) III. D) IV. Answer: D. The law of demand states that price and quantity demanded are inversely related. An inverse relationship is shown graphically by a curve with a negative slope (downward sloping). 8. Refer to the graph above. If the quantity demanded by consumers is the same for every price, then the demand curve would look like: A) I. B) II. C) III. D) IV. Answer: B. This describes a vertical or perfectly inelastic demand curve.

Econ 200(01). Principles of Microeconomics.

Winter 2012

9. The explanation for the law of demand involves: A) suppliers' ability to substitute inputs. B) consumers' ability to substitute different goods. C) the government's ability to set prices. D) the market's ability to equate supply and demand. Answer: B. The explanation for the law of demand, as stated in the text, involves demanders' ability to substitute some other good for the good whose price has risen. 10. If the price of movies on video rises while the price of movies on DVD remains the same, the law of demand predicts that consumers will: A) substitute movies on video for movies on DVD (less videos, more DVDs). B) substitute movies on DVD for movies on video (more videos, less DVDs). C) buy only movies on video. D) buy only movies on DVD. Answer: A. The law of demand is based on the principle that consumers will substitute away from products that have become relatively more expensive; this does not mean that they will necessarily stop buying more expensive products. 11. Which of the following would likely result in an increase in the demand for beef? A) A decrease in the supply of beef. B) An increase in family incomes. C) An increase in the price of feed grains. D) A decrease in the price of pork. Answer: B. A decrease in the supply of beef would result in a movement along a demand curve as the market price of beef rose. An increase in family incomes would increase the demand for beef. An increase in the price of feed grains would shift the supply curve for beef to the left, resulting in higher market price for beef and a movement along the demand curve for beef. A decrease in the price of pork would decrease the demand for beef. Use the following to answer questions 12-14:

Price per unit

Price per unit

D C

Quantity per unit of time

Quantity per unit of time

Econ 200(01). Principles of Microeconomics.

Winter 2012

12. Refer to the graph above. Assume the graph reflects demand in the egg market. Which arrow best captures the impact of increased consumer concern about cholesterol on the egg market? A) A B) B C) C D) D Answer: C. Consumer concern about cholesterol is a shift factor of demand which shifts the demand curve to the left as consumers want fewer eggs at each price level. 13. Assume the graph above reflects demand in the automobile market. Which arrow best captures the impact of increased consumer income on the automobile market? A) A B) B C) C D) D Answer: D. Income is a shift factor of demand. An increase in income increases the number of automobiles demanded at each price. Therefore demand has shifted to the right. 14. Refer to the graph above. Assume the graph reflects demand in the automobile market. Which arrow best captures the impact of increased gasoline prices on the automobile market? A) A B) B C) C D) D Answer: C. Price of a related good is a shift factor of demand. An increase in gasoline prices will increase the cost of running a car. Demand for cars will shift in as the number of automobiles demanded at each price declines. True/False. EXPAIN: 15. A change in the price of carrots will cause a movement along the demand for carrots curve and a shift in the demand for substitute vegetables. Answer: True. This statement correctly illustrates the distinction between a movement along and a shift (You still have to provide an answer with economic reasoning). 16. If the price of chicken rises and the price of beef does not rise, consumers will respond by substituting beef for chicken. Answer: True. If the price of chicken has risen but the price of beef has not, the quantity of chicken demanded will fall as demanders substitute chicken for beef.