Short Response Questions and Answers
1. Evaluate this statement:
“An increase in demand
increases price. The
higher price increases
supply. The higher supply
decreases price, and price
settles down to the original
level.”
The statement is a mixture
of accurate economics
resulting in nonsense. The
first sentence refers to an
increase in demand or to a
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shift in the demand curve
to the right. The second
sentence says that the
higher price will increase
the quantity supplied (a
movement along the supply
curve). The third sentence
refers to an increase in
supply or rightward shift in
the supply curve.
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2. If foreigners demand
more American wheat,
what will happen to the
price and quantity supplied
in the momentary
situation? In the short run?
In the long run? Why?
In the momentary
situation, price would rise
& quantity supplied would
not change. In the short
run, more wheat would
come out of storage, &
price would fall below
momentary equilibrium but
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above the original
equilibrium. In the long
run, farmers would plant
more wheat, & price would
fall more. In a constantcost industry, price would
return to its original level
but quantity would
increase. In an increasingcost industry, price would
not return to its original
level but be higher.
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3. I sit in the back row of the
barber’s union where they are
discussing a proposal to raise
the price of haircuts from $18
to $20. The argument gets
nowhere, and someone
suggests asking me, as an
economist, whether it is a
good idea or not. I reply,
“Many studies have shown
that the demand for haircuts
is elastic.” What are they to
make of this? Why? Be as
brief as possible in making
the major point that the
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barbers ought to see in this
situation.
If the demand for haircuts is
elastic, total revenue would
fall if the price were raised.
7. In a recent year, the price
of wheat fell. For each of the
following, draw a supply and
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demand graph showing a
decrease in prices with the
stated impact on quantity.
A) The quantity of wheat
decreasing
B) The quantity of wheat
increasing
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C) The quantity of wheat
staying the same
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8. The market for many
commodities is seasonal in
nature. Their sales
(equilibrium quantity)
increase dramatically during
certain times of the year.
Christmas cards and fresh
strawberries, at least in the
North, are two examples.
Christmas-card sales increase
during the last three months
of the year and sales of fresh
strawberries in the North
increase during the summer
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months. But the
(equilibrium) price
movement of these two
commodities is quite
different during their peak
sales season: Christmas
cards increase in price during
the last three months of the
year, whereas strawberries
decrease in price during the
summer.
A) Show on the graph
below how there can be an
increase in the equilibrium
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quantity and an increase in
the equilibrium price of
Christmas Cards during the
last three months of the
year and briefly explain
what has happened.
With other things being constant,
there is an increase in the demand
for Christmas cards in the last three
months of the year. This causes a
rightward shift of demand and
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causes the price and quantity sold to
increase.
B) Change the graph for
fresh strawberries in the
North to show how there
can be an increase in the
equilibrium quantity and a
decrease in the equilibrium
price of strawberries in the
summer, and briefly
explain what has
happened.
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Other things being constant, there is
an increase in the supply of fresh
strawberries in the northern areas of
the United States in the warmer
months when the berries are
harvested in the northern areas.
This causes a rightward shift in the
supply curve and causes the price to
fall and the quantity sold to
increase.
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