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Chapter 2 - Review

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18 views

Chapter 2 - Review

Uploaded by

An Thanh
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Enclose your student card or identity card at each

page of your hand-writing answer and upload the


picture of your answer on MS Team no later than
23h59, October 30th, 2024.

CHAPTER 2 - REVIEW

I. Choose ONE correct answer

1. Assume that A’s supply is constant, A and B are substitute goods. The
decrease in B’s price will lead to:
a. a rightward shift in A’s demand curve
b. a rightward shift in B’s demand curve
c. a leftward shift in B’s demand curve
d. None
2. The Engel curve describes the relationship between:
a. Price and quantity demanded
b. Income and quantity demanded
c. Price and quantity supplied
d. Taste and quantity demanded
3. The increase in A’s inputs cost will cause:
a. Supply curve shifts to the left
b. Supply curve shifts to the right
c. Both supply and demand curves shift to the right
d. None
4. Given a downward-sloping demand curve and an upward-sloping
supply curve for a product, an increase in incomes will:
a. increase equilibrium price and quantity if the product is a
normal goods
b. decrease equilibrium price and quantity if the product is a
normal goods
c. have no effects on equilibrium price and quantity
d. reduce quantity demanded, but not shift the demand curve
5. Supply function excludes which of the following determinants?
a. Inputs price
b. Technology
c. Price of related goods and services
d. Expectation
6. The law of demand shows the inverse relationship between:
a. Expectation and quantity demanded
b. Price and income
c. Income and quantity demanded
d. Price and quantity demanded
7. The government sets up price floor in order to:
a. Protect producer/supplier
b. Protect consumer/ buyer
c. Promote free international trade
d. none
8. Supply curve for iPhone 16 shifts because of:
a. The change in buyer's taste in iPhone 16
b. The change in the price of Samsung Galaxy
c. The change in buyer's income
d. All a, b, c
e. None
9. The relationship between income and quantity demanded is:
a. Positive
b. Inverse
c. Both a and b
d. None
10. What happens to equilibrium price and quantity in coffee market if
the wage for coffee worker declines and price of tea declines as well:
a. Price decrease and impact on quantity is ambiguous
b. Price increase and impact on quantity is ambiguous
c. Quantity decrease and impact on price is ambiguous
d. Quantity increase and impact on price is ambiguous

II. Answer true or false with short explanation and use


diagram if necessary

1. Inferior good is the one with low quality F


2. A and B are complement goods. The increase in A’s price causes the
decline in B’s price. T (PA rises => QdA falls => QdB falls => B’s
price declines)
3. Expectation of higher price in stock market would make quantity
traded higher F (because higher price in stock market => Qd rises
because many consumers want to buy stocks to make more profit.
However, Qs falls because some sellers may hold onto their stocks,
expecting to get higher price later)

4. The market price is decided by the interaction between demand and


supply F
The market price is also controlled by the government
5. Surplus or shortage would make the actual quantity traded in the
market smaller than the original equilibrium quantity. T (Because
when surplus happens, Qd < Qs => the actual quantity traded can only
be maximum at Qd => less than the original equilibrium quantity.
When shortage happens, Qs < Qd => the actual quantity traded can
only be maximum at Qs => less than the original equilibrium
quantity)

III. Exercises
1. Statistics about A in the market are as follows:

P ($/kg) 7 8 9 10 11 12
Q (kg) 11 13 15 17 19 21
Q (kg) 20 19 18 17 16 15

P = aQ + b
7 = 11a + b
8 = 13a + b

a. Build demand and supply functions.


We have an equation:
11a + b = 7
13a + b = 8
=> a = 1/2, b = 3/2
Because a is positive => Qs is the second row in the table
=> Supply function:
P = 1/2 Qs + 3/2
Qs = 2P – 3
We have the second equation:
20c + d = 7
19c + d = 8
=> c = -1, d = 27
Because c is negative => Qd is the third row in the table
=> Demand function:
P = -Qd + 27
Qd = -P + 27

b. Compute equilibrium price and quantity. Compute E DP at this


equilibrium point.
Qs = Qd  2P – 3 = -P + 27  P = 10 => Pe = 10
Substitute Pe = 10, we have Qs = Qd = 17
c. Compute the actual quantity in the market at the price of P 1 = 8.5$ and
P2=11.5 $
+) P1 = 8.5
=> Qs = 14
=> Qd = 18.5
=> Qd > Qs => The actual quantity traded is 14. Shortage is 18.5 – 14 =
4.5

+) P2 = 11.5
=> Qs =20
=> Qd = 15.5
=> Qs > Qd => The actual quantity traded is 15.5. Surplus is 20 -15.5 =
4.5

d. The government imposes a tax of 1$/ unit on producer. Compute new


equilibrium price and quantity.
Ps tax = Ps + tax = 1/2 Qs + 3/2 + 1 = ½ Qs + 5/2 => Qs = 2P - 5
We have:
Qs = Qd  2P - 5 = -P + 27  P = 32/3
Substitute P = 23/3 => Qs = Qd = 49/3

2. B’s demand and supply curves are as follows:


P = 3Q – 12
P = 18 – 2Q
(P: $/kg, Q: kg)
a. Compute equilibrium price and quantity
P=6
Qs = Qd = 6 kg
b. The government sets up the price ceiling at 4$/kg and supplies the
shortage. Compute the actual price and quantity in the market.
*Supply:
At P = 4, we have:
4 = 3Qs – 12  Qs = 16/3kg
*Demand:
At P = 4, we have:
4 = 18 – 2Qd  Qd = 7kg
Because the price ceiling is below Pe (4<6) => shortage
=> The actual price will be 4, Q = 16/3 kg due to the shortage. But if
the government supplies the shortage, the actual quantity will be 7kg

c. Suppose that the government wants the price and quantity to be equal
to the result in question (b) but by subsidizing producer rather than
setting up price ceiling. Compute the subsidy level per kg. In this
case, who will get more benefit, supplier or consumer?

P = 3Qs – 12
Qs = 7kg => P = 9 => The producer need 9/kg to be willing to supply
7kg
The subsidy level per kg is the difference between the producer’s willing
price and the price ceiling: 9 – 4 = 5/kg
=> The suppliers may get more benefit since they get the financial
support from the government

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