Exam 3: Demand, Supply, and Market Equilibrium

Using graphs, explain the effect of an increase in the price of cheese on the supply of cheese and the supply of pizza.

John's income has just increased by $10,000 per year. If Ramen noodles is an inferior good in John's opinion, what will happen to his demand for Ramen noodles? Show your answer using a graph.

Below are the supply curves for cucumbers for two firms: Firm X and Firm Y. Assume that Firm X and Firm Y are the only two sellers in the market for cucumbers. Draw the market supply curve.

List and describe three different input markets.

What is the difference between a demand schedule and a demand curve?

Define the following: market equilibrium, surplus, and shortage.

A free good is a good whose existence requires no opportunity cost to produce. How is this different from a good that is offered for a price of zero?

There is a practice in the stock market known as "short selling" whereby an individual will borrow stock from someone, turn around and sell it and then buy it back when it's price has fallen in order to return the stock back to the lender. What expectation does this short seller have about the price of this company's stock? How can he expect to make money at this practice? What could go wrong that might cost him money?

List three characteristics of demand curves. Make sure to explain the shape of the curve and the meaning of the vertical and horizontal intercepts.

Assume that you are currently making $15,000 a year as a sales clerk in a department store. At the end of your senior year in college in May you get a job offer from a large accounting firm that won't start until late August of that same year but which pays $45,000 per year. What would you expect might happen to your demand for an automobile and new clothes immediately and why?

Most goods and service that we enjoy are bought and sold in the market. However, leisure is something that we value but we do not buy it explicitly. What is the price of leisure? Explain what would happen to the amount of leisure that we would enjoy if the wage rate went up. Make sure to use the substitution and income effect to explain your answer and postulate whether leisure is a normal or inferior good. Why is the ultimate net effect not determinable by appealing to logic alone?

A video rental store rents old movies for $1.50 per day. On average, 300 movies are rented each day. The store receives several copies of a new smash movie just released in video and decides to rent these movies at $3.50 per day. Now, 400 movies are rented each day. Thus, though the average rental price of a movie increased, the quantity rented increased. Does this mean that the law of demand does not hold for this market?

Suppose a long lost relative died and left you a trust fund worth $1 million that you will receive ten years from now. What effect, if any, will this have on your demand for airline travel? (Assume that airline travel is a normal good.)

Explain how the input and output markets are connected.

You are a major stockholder of a large corporation. You have news from a credible source that the company's earnings report is going to indicate record losses. If you and other major stockholders receive the same news, what is your likely behavioral response and what impact will that have on the price of the company's stock?

Assume that there is a shortage of lobster and that for whatever reason prices have not risen to choke off the excess demand. Instead, the government has exhorted people to voluntary refrain from lobster consumption to "maintain a balance between supply and demand." Assume that the temporary public service announcements are "effective" and the public reduces its consumption of lobster. Explain using supply and demand analysis what should happen to the equilibrium quantity of lobster and its equilibrium price. Why would this plan not have much of an impact on the lobster market in the long run?

What relationship is shown by a supply curve?

Explain the difference between a change in demand and a change in quantity demanded.

Newspaper machines and soda vending machines operate very differently. The newspaper machine is a mechanical box. You place your four quarters in the machine and you open the door and low and behold there is a stack of newspapers at your disposal. Most people take one and close the door for the next patron to purchase his own copy. But notice that soda vending machines don't operate the same way. They are also mechanical but when the four quarters are inserted and a selection is made only one can of soda is available for the consumer to purchase. Explain in terms of marginal utility why these two machines are designed so differently?

Explain how the market demand curve can be derived. Does the law of demand apply to the market demand curve?