Answers to Review Questions
- A.After taking the percentage change in supply and dividing it by the percentage change in price, the answer 1.4
is elastic. Anything at or above 1.0 is elastic in demand. - B.Normal goods are consumed more when income rises. Inferior goods are goods that are consumed less as
income rises. The good isn’t a substitute because the demand for another product is not being affected. - E.Cross-elasticity refers to the impact one good’s price has on another good’s demand. If the cross-elasticity
answer is a positive number, the goods are complements. - E.The supply curve for the tomato crop will shift to the left. When supply shifts to the left and the demand curve
stays the same, the price will increase and the quantity will decrease. - D.When a cheaper alternative is discovered for a good, the good’s price will drop because of the substitution effect.
- D. The law of supply states that as prices rise, quantity supply rises. If the price of tacos increases, producers can
afford to make more tacos. - D. If a firm increases its price and discovers that its total revenue (price times quantity sold) increases, the firm’s
demand is inelastic because consumers aren’t buying less of the product. - D. Minimum wage is a price floor because it is set above the equilibrium price for labor. A price floor is designed
to increase an inefficient market price. - B.If the government decided to “cap” rent on housing, a shortage might be created because lower rent prices will
attract more demand. - E.Any future sales affect current demand by prompting consumers to wait for a cheaper price. This “waiting
game” decreases current demand. A future sale on a product will affect a consumer’s expectation of price;
therefore, the consumer will wait to buy the computer until it is cheaper. The demand curve for the computer
will shift to the left now and to the right later. - D. If a close substitute is developed for a product, the price of that product will fall because of an increase in
competition. An increase in competition will force the two producers to become more efficient, and prices
will fall. - D. An increase in the price of grapes will increase the demand for oranges because consumers are likely to
substitute oranges for grapes. Substitution price is a determinant of demand. - C.The law of supply states that as prices rise, quantity supply increases as well. If the price of surfboards rises,
the quantity of surfboards supplied will increase. - B.If supply and demand shifts to the right, the end result will be the return of the price to its original level and an
increase in quantity. To understand this better, draw an increase in supply and demand and locate both price and
quantity. You should be able to see that prices return to their original state while quantity increases. - A.Improvements in technology provide lower production costs for producers, thereby increasing their supply.
Technology is a determinant of supply.
Part I: The Fundamentals