Tutorial Week 2.
The Basics of Demand and Supply
MULTIPLE CHOICE QUESTIONS
1. A supply curve reveals:
A) the quantity of output consumers are willing to purchase at each possible market price.
B) the difference between quantity demanded and quantity supplied at each price.
C) the maximum level of output an industry can produce, regardless of price.
D) the quantity of output that producers are willing to produce and sell at each possible market
price.
2. Sugar can be refined from sugar beets. When the price of those beets falls,
A) the demand curve for sugar would shift right.
B) the demand curve for sugar would shift left.
C) the supply curve for sugar would shift right.
D) the supply curve for sugar would shift left.
3. Plastic and steel are substitutes in the production of body panels for certain
automobiles. If the price of plastic increases, with other things remaining the same, we
would expect:
A) the price of steel to fall.
B) the demand curve for steel to shift to the right.
C) the demand curve for plastic to shift to the right.
D) nothing to happen to steel because it is only a substitute for plastic.
E) the demand curve for steel to shift to the left.
4. The price of good A goes up. As a result, the demand for good B shifts to the left. From
this we can infer that:
A) good A is used to produce good B.
B) good B is used to produce good A.
C) goods A and B are substitutes.
D) goods A and B are complements.
E) none of the above
5. Due to the recent increase in the price of natural gas, the quantity of coal demanded by
electric power generation plants has increased. Based on this information, coal and
natural gas are:
A) complements.
B) substitutes.
C) independent goods.
D) none of the above
6. Assume that the current market price is below the market clearing level. We would
expect:
A) a surplus to accumulate.
B) downward pressure on the current market price.
C) upward pressure on the current market price.
D) no production during the next time period.
7. Elasticity measures:
A) the slope of a demand curve.
B) the inverse of the slope of a demand curve.
C) the percentage change in one variable in response to a one percent increase in another
variable.
D) sensitivity of price to a change in quantity.
8. The cross-price elasticity of demand refers to:
A) a change in the demanded for two goods, following a change in the price of one good.
B) the substitution of one good for another as the prices of two goods change.
C) the value of price elasticity at which supply crosses demand.
D) the percentage change in the quantity demanded of one good resulting from a 1-percent
increase in the price of another good.
9. If two goods are substitutes, the cross-price elasticity of demand must be:
A) negative.
B) positive.
C) zero.
D) infinite.
10. When demand is written as Q = a – bP, and P* and Q* are the equilibrium values for
price and quantity, which of the following is the value of the price elasticity of demand,
ED?
A) –a(P*/Q*)
B) –b(P*/Q*)
C) –a/b
D) –b/a
QUESTIONS FOR DISCUSSION
Question 11. For each of the following scenarios, use a supply and demand diagram to
illustrate the effect of the given shock on the equilibrium price and quantity in the specified
competitive market. Explain whether there is a shift in the demand curve, the supply curve, or
neither.
A) An unexpected temporary heat wave hits Tashkent city. Show the effect in the ice cream
market in the city.
B) The government introduces a tax on diary product which is paid by producers. What is the
effect in the market for dairy products?
C) Germany and Japan are major producers of automobiles. Workers in Japan decide to go on
strike. Show the effect on the market for Japanese automobiles.
D) Show the effect of the situation described in (C) on the market for German automobiles.
E) Suppose the government imposes a price cap on bottled water. Show the effect in the bottled
water market.
EXERCISES
Question 12. The daily demand for hotel rooms in Tashkent is given by the equation
The daily supply of hotel rooms is given by the equation
What is the equilibrium price and quantity of hotel rooms in Tashkent? Show
equilibrium quantity and price on the diagram.
Question 13. Consider a competitive market for which the quantities demanded and supplied
(per year) at various prices are given as follows:
Price Demand Supply
($) (millions) (millions)
60 22 14
80 20 16
100 18 18
120 16 20
A) Calculate the price elasticity of demand when the price is $80 and when the price is $100.
B) Calculate the price elasticity of supply when the price is $80 and when the price is $100.
C) What are the equilibrium price and quantity?
D) Suppose the government sets a price ceiling of $80. Will there be a shortage, and if so,
how large will it be?
Question 14. The U.S. Department of Agriculture is interested in analyzing the domestic
market for corn. The USDA's staff economists estimate the following equations for the
demand and supply curves:
Qd = 1,600 - 125P
Qs = 440 + 165P
Quantities are measured in millions of bushels; prices are measured in dollars per
bushel.
A) Calculate the equilibrium price and quantity that will prevail under a completely free
market.
B) Calculate the price elasticities of supply and demand at the equilibrium values.
Question 15. Suppose the demand curve for a product is given by Q=10-2P+Ps, where P is the
price of the product and Ps is the price of a substitute good. The price of the substitute good is
$2.00.
A) Suppose P=$1.00. What is the price elasticity of demand? What is the cross-price
elasticity of demand?
B) Suppose the price of the good, P, goes to $2.00. Now what is the price elasticity of
demand? What is the cross-price elasticity of demand?
HOMEWORK
Question 16. In 2010, Americans smoked 315 billion cigarettes, or 15.75 billion packs of
cigarettes. The average retail price (including taxes) was about $5.00 per pack. Statistical
studies have shown that the price elasticity of demand is -0.4, and the price elasticity of supply
is 0.5.
➢ Using this information,
A) Derive linear demand and
B) Supply curves for the cigarette market.
