## Sunday, May 3, 2009

### CH 4 PRACTICE PROBLEMS

#1 Describe the role of prices in market economies

Prices serve as signals that guide economic decisions and allocate scarce resources

#2 Even though all markets are not perfectly competitive, the study of perfect competition is worthwhile because:

Some degree of competition is present in most markets, not just in perfectly competitive markets.

a) a shift from D to D1 is called? A decrease in demand

b)A shift from D1 to D is called? An increase in demand

c) What would cause a shift in the demand curve? Changes in income, prices of related goods, tastes, expectations, the number of buyers - something other than the price of the good in question.

#4 (click to enlarge image)

a)Equilibrium price and quantity are: P = ? Q = ?

ans: 10 , 4

b) At a price of \$14, here would be a ? of ? units.

ans: surplus , (6-2 )= 4

c)At a price of \$6 there would be a ? of ? units.

ans: shortage , (6-2)=4

Note, in ‘b’ we have an example like with the minimum wage, where we get a surplus of labor and unemployment. In part ‘c’ we have an example of a price ceiling, like price controls that result in a shortage.

#5 Using a graph, demonstrate the difference between a change in ‘demand’ and a change in ‘quantity demanded’.

ans:

The movement from A to B along the demand curve is a change in quantity demanded. ( actually an inrease) A behavioral response to a change in the price of the good in question. A shift from D to D2 is a change in ‘demand’, ( actually an increase) a behavioral response to something other than the price of good in question.

#6 Using graphs, illustrate the difference between a change in ‘supply’ and ‘quantity supplied’

The shift from S1 to S2 is a change in ‘supply.’ A behavioral response to something other than price. The movement along the supply curve from point A to point B is a change in ‘quantity’ supplied, which is a behavioral response to price.

#7 What event would be consistent with the following graph ( movement from point A to B)?

a) An increase in gas taxes will reduce dependence on foreign oil
b) Gasoline and diesel are complements, and the price of gas decreased
c) A gas tax was imposed, resulting in higher price paid for gas and a reduction in consumption ( quantity demanded)
d) A gas tax was imposed, resulting in a higher price paid for gas and an increase in consumption ( quantity demanded)

ans: c