Answers to Review Quiz
Supply & Demand
Use the Supply and Demand Graphs below to answer the following questions.
The graphs are ordered
A B C D
E F G H
1. The impact on the market for homes in Texas, a major producer of oil, of a large increase in the price of oil?
An increase in the price of oil will increase income in Texas because it is a large producer of oil. This increase in income will increase demand for housing in Texas (outward shift). B
2. The impact on the market for automobiles of a substantial wage increase won by the UAW (union representing the auto workers) this fall in their negotiations with GM.
An increase in the wage of workers will increase the cost of production. This will affect the suppliers who will now need to charge higher prices for their cars. We would describe this as a decrease in supply which will shift the supply curve inward. F
3. The impact on the market for gasoline of increased auto travel in the US and the government's decision to sell some of the oil it has stored in its strategic petroleum reserve.
An increase in auto travel will increase demand (outward shift in demand curve) for gasoline while the government's decision to bring some of its reserves to the market will increase the supply of oil (outward shift in supply curve). H
4. The impact on the market for illegal drugs of the president's new war on drugs which includes expanding prison capacity, aiding the governments of South America in their fight against the drug cartels, and tougher enforcement of drug laws in the US.
The war on drugs is essentially an attempt to decrease the supply of drugs to the US. The result is an inward shift in supply which will increase the price of drugs. C
5. An alternative solution to the drug problem is the increased education on the negative impact drugs have on one's health. What will be the combined impact of these two approaches on the market for drugs.
An increase in education of the dangers of drugs will decrease demand for drugs (inward shift in demand). If we combine this with the decrease in supply (inward shift in the supply), we have diagram E
6. The impact on the market for American produced cars of the decision to impose voluntary quotas on the Japanese export of cars to the US designed to protect American workers and companies from competition.
A decrease in Japanese cars will increase their price and because US and Japanese cars are substitutes, demand for US cars will increase. B
7. The impact on the market for automobiles of the decision on the part of the monetary authorities in this country to lower interest rates.
A decrease in interest rates will make cars seem cheaper as buyers will have smaller monthly payments. This will increase demand (outward shift in demand curve). B
9. The impact on the price of Apple stock of the announcement of a greater than expected loss in the current quarter.
People will not want to buy as much stock and the demand will decline - an inward shift in the demand curve. F
10. The impact on the market for CD's of the introduction of DAT (digital audio tapes) which are said to give the same sound quality on tapes as is currently available only on CD's
People will not want to buy as many CDs with the arrival of the substitute and the demand will drop - an inward shift in the demand curve. F
11. The impact on the labor market of the increasing labor force participation rates of women.
Labor force participation is the percentage of the population that is in the labor force. Increasing labor force participation rates means more workers are looking for work which means an increase in the supply of workers. G
12. The impact on the market for NCS computers of news of a technological breakthrough that will allow them to produce faster machines at a lower per unit cost of production.
The improvement in technology means more output from the same inputs. This means a decrease in the costs of production which we would show as an outward shift in the supply curve. G
13. The impact on the market for homes of the decision on the part of the monetary authorities in this country to raise interest rates.
This is the opposite of the earlier question regarding the market for automobiles. An increase in interest rates will make homes seem more expensive because of larger mortgage payments. This will decrease demand which we show by an inward shift in the demand curve. F
14. The impact on the automobile market of higher labor productivity due to improvements in labor-management relationships and a robust, booming economy.
There are two separate 'shocks' to the market. The first is the improvement of technology which means more output from the same inputs which means an increase in supply. The robust economy, meanwhile, means that consumers will have more income which will translate into more demand. Both curves shift outward. H
15. The president has declared war on drugs. His program is designed to reduce the supply of drugs by expanding prison capacity, aiding the governments of South America in their fight against the drug cartels, and tougher enforcement of drug laws in the US. If in fact the demand for drugs in the US is unresponsive to price changes, as many experts suggest, then the reduction in supply is likely to result in:
Letter B is the correct answer. If demand is not very responsive then the demand curve is steep. If you now shift the supply curve back you will see a big increase in price and a small decrease in demand. People will pay what they need to for the product - what you would expect with a product such as drugs.
16. An alternative solution to the drug problem is the legalization of drugs. The experts suggest that this will result in a substantial downward shift in the supply curve of drugs as more firms enter to supply the newly legal product. Others suggest that the legalization will result in an increase in the demand curve. If both of these views are correct then we can expect:
When both supply and demand shift we cannot predict both the price and quantity effects. In this case an increase in demand is pushing price and consumption up while an increase in supply is pushing price down and consumption up. The result is that we cannot predict price, but consumption can be expected to rise.
Use the following graphs to answer the next few questions.
17. The impact on the market for eggs of a new study questioning the link that had been reported earlier between the consumption of eggs and high cholesterol levels.
The demand for eggs would rise if people now thought eggs were not harmful to them. The correct answer is letter C.
18. The impact on the market for steel of a substantial wage increase won by the steel workers' union this fall in their negotiations.
Supply would decrease as the cost of production rises. This is the same question as number 2. The correct answer is letter E.
19. The impact on the market for stock in Sears of the recent announcement of record corporate profits.
To understand this question you need to understand a little about the demand for stock. People tend to buy stock if they expect its price to rise which can be expected to happen when the firm is making a lot of profit. The demand for Sears stock would rise if the company reported record profits. The correct answer is letter C.
20. The impact on the labor market of projected increases in the rate of immigration into the US.
If there are more people coming into this country then it means there are more people looking for work. This is represented by an outward shift in the supply curve. The correct answer is letter D.
21. Impact on the market for beef of a new medical study which weakens the link between cholesterol and beef consumption.
If people thought beef was good for them, they consume more of it. Therefore, if a new study found that beef was not harmful to your health, then demand would increase. The correct answer is letter C.
22. The impact of the introduction of Windows on the market for Macintosh computers.
With the introduction of the windows operating system, people would have an alternative to the Mac's operating system. Therefore, the demand would decrease for Mac's as new substitutes became available. The correct answer is letter B.
23. Impact of rising inner city crime rates on employment of private security guards.
Higher crime rates means hiring more security guards. The impact would be greater demand represented by an outward shift of the demand curve. The correct answer is letter C.
24. If marijuana were to be legalized, many believe that there would be both an increase in supply and demand. If that were in fact the case, which of the following could you predict with perfect certainty?
When both supply and demand shift we cannot predict both the price and quantity effects. In this case an increase in demand is pushing price and consumption up while an increase in supply is pushing price down and consumption up. The result is that we cannot predict price, but consumption can be expected to rise. The correct answer is letter C.
25. The U.S. government banned cigarette advertising on radio and television, but allowed it in newspapers and magazines after January 1971. You would expect to find that, after the ban took effect,
As a result of the ban you could expect that there would be increased demand for space in magazines. With more industries in the market for limited advertising space in magazines you can expect the price of advertising to rise for all industries. The correct answer is letter C.
26. The Jailhouse Inn in Newport, RI charges $150 per room in the summer season and $75 during the winter months. If the number of rooms and operating costs are constant year round, these price changes indicate:
More demand in the summer. Therefore, there would be an outward shift of the demand curve. The correct answer is letter A.
27. In 1989 peanut production in the US was centered in the Southeast with Georgia the nation's largest producer of peanuts. That year there was a serious drought in the Southeast. How would we describe this using the Supply-Demand model?
The drought would affect suppliers and it would reduce supply - an inward shift in the curve.
28. On Cape Cod there has been an erosion of the bluffs which is beginning to encroach on the yards of some of the beach side homes and is turning away buyers. It may be reflected on a graph of supply and demand for this property by:
The concern over the future of the land would likely reduce demand for real estate along the coast as people realized the risks associated with this property.
29. Which of the following would cause an inward shift in the demand curve for CD players.
DATs and CDs are substitutes and when the price of DATs falls, this will decrease demand for CDs.