Week 2 Answers for Lecture and Tutorial Questions

Lecture Questions

Q1
Draw two separate graphs for the following situations: (a) Decrease in quantity demanded (b)
Decrease in demand

Ans

Q2
For each of the following pairs of products, state which are complements, which are substitutes and
which are unrelated.
a. Pepsi and Coke
b. Hot dog sausages and soft bread rolls
c. Vegemite and strawberry jam
d. New and used cars
e. Houses and washing machines

Ans
a. Substitutes
b. Complements
c. Substitutes
d. Substitutes
e. Complements

Q3
Predict what will happen to either supply or demand in the following situations.
a) As a result of the improving economy, several overseas companies decide to enter the
supermarket business in Australia.
b) Consumers suddenly decide that tattoos are unfashionable.
 c) Tobacco companies and retail lobbyists persuade the government to remove the excise tax
paid by sellers on each pocket of cigarettes sold.

Ans
(a) Supply increases (larger number of suppliers).
(b) Demand decreases (negative change in taste/preferences).
(c) Supply increases (positive change in tax).

Q4
Using supply and demand analysis, explain and illustrate graphically the effect of the following
situations.
(a) a baby boom markedly increase the number of 0-5 years olds.
(b) There is a fall in the prices of resources used in the production of houses.

Ans
(a) Demand increases (It creates more demand). So, equilibrium price & quantity will increase.
Graph

(b) Supply increases (fall in input prices will increase the supply). So, equilibrium price will decrease &
equilibrium quantity will increase.
Graph

Q5
At equilibrium in the following figure, what area(s) represent consumers’ surplus? producers’ surplus?
Ans
Consumers’ surplus = A + B + C + D + E
Producers’ surplus = F + G + H + I + J
Q6
Market researchers have studied the market for rice. Their estimates for the supply of and demand
for rice per month are as follows.

(a) Using the following data, graph the demand for rice and the supply of rice. Identify the equilibrium
point as E and use dotted lines to connect E to the equilibrium price on the price axis and the
equilibrium quantity on the quantity axis.

Price per kilo Quantity demanded (millions of Quantity supplied (millions of kilos)
kilos)
$2.50 100 500

2.00 200 400

1.50 300 300

1.00 400 200

0.50 500 100

(b). Suppose the government enacts a rice support price of $2 per kilo. Indicate this action on your
graph and the explain the effect on the rice market. Why would the government establish such a
support price.
(c ) Now assume the government decides to set a price ceiling of $1 per kilo. Show and explain how
this legally imposed price affects your graph of the rice market. What objective could the government
be trying to achieve by establishing such a price ceiling?

Ans
(a)

(b)
With a support price of $2 per kilo, there will be an excess supply of rice.
Quantity supplied (400) exceeds quantity demanded(200). So excess supply of 400 – 200 = 200 units
Reason: the government wants to encourage producers to supply more rice

(C)
With a price ceiling at $1 per kilo, there will be a shortage of rice.
Quantity demanded (400) exceeds quantity supplied(200). So excess demand is 400 – 200 = 200 units
Reason: government establishes a price ceiling to help low-income earners to purchase necessities
like rice
Tutorial Questions

T1
Draw a supply and demand graph showing an equilibrium price of $50 and an equilibrium quantity of
200 units. Explain what would happen if the selling price was $75, and illustrate this on the graph.
Explain what would happen if the selling price was $25, and illustrate this on the graph. Be sure to
label each axis and curve on the graph.

Ans

T2
Using supply and demand analysis, explain and illustrate graphically the effect of the following
situations.
(a) The income of consumers of 50cc motor scooters increase.
(b) Jewellery manufactures are deciding what style of rings to produce and learn that, contrary to
expectations, the price of pave rings has risen relative to the price of single stone rings.
Ans
(a) Demand decreases (50cc motor scooter is a inferior product). So, equilibrium price & quantity will
decrease.
Graph

(b) The supply of pave rings will increase. So, equilibrium price will decrease & equilibrium quantity
will increase.
Graph

T3
Use the areas labelled in the market represented in the following Figure to answer the following
questions.

a. What area(s) are consumer surplus at the market equilibrium price?

b. What area(s) are producer surplus at the market equilibrium price?
c. Compared to the equilibrium, what area(s) do consumers lose if price is P2?
d. Compared to the equilibrium, what area(s) do producers lose if the price is P2?
e. Compared to the equilibrium, what area(s) do producers gain if the price is P2?
f. Compared to the equilibrium, total surplus decreases by what area(s) if the price is P2?

Ans:
a. A, B, C
b. D, E
c. B, C
d. E
e. B
f. C, E

T4
Based on the information in the table, how many units will be exchanged if the government imposes a
price ceiling of $2?
Price Quantity Demanded Quantity Supplied
$2 100 70
$3 80 80
$4 60 90
$5 40 110

A. 70 units
B. 80 units
C. 60 units
D. 110 units

Ans:
A. The supply and demand schedule shows us that at the price ceiling of $2, the buyers want to
purchase 100 units and the sellers are willing to sell 70 units. Since the quantity supplied is only 70
units, the number of units that would be exchanged at the price ceiling of $2 is 70 units.

T5
A price ceiling (below the equilibrium price) can bring about all but _____.
A. a shortage
B. a surplus
C. the use of nonprice rationing devices
D. tie-in sales

Ans:
A.A price ceiling can bring about a shortage which has the effect of the use of nonprice rationing
devices and tie-in sales.
T6
If a price floor is set above the equilibrium price of a good, the price floor will
A. result in a shortage of the good.
B. push the market for the good to equilibrium.
C. result in a surplus of the good.
D. have no impact on the market for the good.

Ans:
C. A price floor is a government mandated minimum price below which the good cannot be legally
sold. A price floor that is set above the equilibrium price will keep the market from being able to
reach equilibrium. The result of such a price floor will be a surplus of the good because the quantity
demanded will be less than the quantity supplied at the price floor.

MCQ

1. Which of the following must be true if good X is a normal good and income increases?
A. The demand for X will increase, and thus the price and quantity sold and bought will decrease.
B. The demand for X will decrease, and thus the price and quantity sold and bought will decrease.
C. The demand for X will increase, and thus the price and quantity sold and bought may increase.
D. The demand for X will decrease, and thus the price and quantity sold and bought will increase.
E. There will be no effect on the market for good X.
C

2. A decrease in supply means that:

A. demand will increase by the same amount
B. the quantity demanded will increase
C. there is a movement down and to the left along the supply curve
D. the quantity supplied at every price will decrease
E. the supply curve will shift down at every price
D

3. Which of the following could cause the supply of carrots to decrease?

A. Consumers’ incomes decrease.
B. There is a technological advance in carrot production.
C. Fertiliser costs increase.
D. The number of farmers growing carrots increases.
E. The price of carrots decreases.
C

4. If the government introduces a new subsidy to poultry farmers, we can expect:

A. no effect on the supply or demand of poultry
B. the demand for poultry to decrease
C. the demand for poultry to increase
D. the supply of poultry to increase
E. the supply of poultry to decrease
D
5. If the quantity demanded is less than the quantity supplied, then:
A. the price will have to increase to establish equilibrium
B. there will be an excess supply of goods
C. the quantity supplied will be less than the quantity demanded
D. the demand will shift to the right
E. there will be a shortage of goods
B

6. Assume Qs represents the quantity supplied at a given price and Qd represents quantity demanded
at a given price. Which of the following market conditions produces an upward movement of the
price?
A. Qs = 10, Qd = 5
B. Qs = 5, Qd = 5
C. Qs = 5, Qd = 10
D. Qs = 5, Qd = 3
E. Qs = 3, Qd = 5
C

7. According to the graph shown below, total surplus is:

A. $25.
B. $90.
C. $50.
D. $130.
A 0.5 {[(9-6) x 10] + [(6-4) x10]}
0.5 (30 + 20) = 25

8. When a market is in equilibrium,

A. consumer surplus is minimised.
B. producer surplus is minimised.
C. total surplus is maximised.
D. All of these are true.
C

9. Assume a market that has an equilibrium price of $4. If the market price is set at $8, which of the
following is true?
A. Some surplus is transferred from consumers to producers, but total surplus falls.
B. All surplus is transferred from consumers to producers, and total surplus stays the same.
C. Some surplus is transferred from producers to consumers, but total surplus falls.
D. Some surplus is transferred from consumers to producers, causing total surplus to increase.
A

10. Because a price ceiling causes:

A. a shortage, rationing must occur.
B. a surplus, rationing must occur.
C. a shortage, a central planner must distribute the goods fairly.
D. a surplus, a central planner must distribute the goods fairly.
A