Supply, Demand, and Market Equilibrium
Practice Problems
Multiple-choice questions.
1. Assume cars and gasoline are complements. When the price of gasoline goes up,
which of the following will happen to the market for cars?
a. The equilibrium price of cars will increase.
b. The equilibrium quantity of cars will decrease.
c. The supply curve for cars will shift to the left.
d. The supply curve for cars will shift to the right.
e. The demand curve for cars will shift to the right.
f. None of the above.
2. Suppliers produce two goods, cheese and butter. Assume that there is no cost to
switch resources from cheese production to butter production and vice versa. Suppose
the demand for butter increases. What do we expect to happen to the equilibrium in
the market for cheese?
a. The price will go up and the quantity will drop.
b. The price will go up and the quantity will rise.
c. The price will go down and the quantity will drop.
d. The price will go down and the quantity will rise.
e. None of the above.
3. If the government announces today that a tax increase of 50 cents per pack of
cigarettes is to take place in two weeks, what would you expect to happen today to the
current market for cigarettes?
a. The demand for cigarettes would increase.
b. The demand for cigarettes would decrease.
c. The price of cigarettes would increase.
d. Both a) and c) are correct.
e. Both b) and c) are correct.
4. If bread is an inferior good, then what will happen in the market for bread as the
consumer income increases?
a. The quantity will increase.
b. The quantity will decrease.
c. The price will fall.
d. Both a) and c) are correct.
e. Both b) and c) are correct.
Short-answer questions.
1. If consumers expect the price of some good to rise next week, then we generally
observe the price of the good rising this week. Explain this fact using a graph.
If the good is storable, and an increase in price is expected, consumers will want to
buy the good today, before the price increases. As a result, the current demand for the
good increases, which results in an increase in the price of the good today. See graph.
2. The drought in the plain states has made grain, and therefore feed, quite expensive.
Many ranchers cannot afford to feed their cattle, and have sold much of their herd for
slaughter.
a. What will be the immediate effect of this event on the equilibrium price and
quantity of beef? Illustrate using a supply and demand diagram.
Slaughtering the cows will result in an increase in the supply of beef to the market,
which will in turn lead to a decrease in the equilibrium price of beef and an increase
in the equilibrium quantity of beef. See graph.
Market for beef
b. Chicken and beef are substitute goods. Illustrate the effect that the slaughter of the
cattle herds will have on the equilibrium price and quantity of chicken.
As the price of beef decreases, consumers will buy more beef and less chicken. The
demand for chicken will decrease, causing a decrease in the equilibrium price and
quantity of chicken. See graph.
Market for chicken
c. As it happens, the slaughter of beef cattle has coincided with a decrease in
consumers' income. Assuming that steak is a normal good while hamburgers are an
inferior good, use a supply-and-demand diagram for either market to illustrate the
combined effect of the two aforementioned events on the equilibrium price and
quantity of hamburgers and steak.
As consumers' income decreases, the demand for normal goods (such as steak)
decreases while the demand for inferior goods (such as hamburgers) increases. Keep
in mind that our conclusion from part a is still valid. A lower price of beef will
increase the supply of all goods in which beef is an input. Therefore in each of the two
markets in question we deal with simultaneous shifts in supply and demand.
Steak: S increases, D decreases.
Hamburgers: S increases, D
increases.
The price of steak will decrease.
We cannot say for sure what will
happen to quantity, since that will
depend on the relative magnitude
of the two shifts.
The equilibrium quantity of
hamburgers sold will increase. We
cannot say for sure what will
happen to the equilibrium price of
a hamburger, since that will
depend on the relative magnitude
of the two shifts.