1. Do you agree or disagree with the following statements? Explain.
a. The price of one good increases, causing the demand for another good to fall. The goods are complements.
b. Simultaneous rightward shifts in the supply curve and the demand curve leave price unchanged but increase the quantity exchanged.
c. When buyers expect the price of housing to fall in the near future, this will have no effect on today's demand for housing.
d. It is unlikely, but it is possible, for all goods to be inferior goods.
e. Improvements in technology cause the supply curve to shift down and to the right.
2. The following statements contain common errors. Identify and explain them.
a. New firms entering the market increase market supply.
b. This causes prices to fall.
c. The falling prices in turn cause firms to supply less than before.
d. This reduction in supply causes the prices to rise back up to their original level.
3. Consider the market for fajitas. Suppose the market demand is given by the equation Qd = 200 - 40P and the market supply for fajitas is given by the equation Qs = -120 + 40P, where Qd = quantity demanded, Qs = quantity supplied, and P = price of fajitas.
a. What is the equilibrium price of fajitas? The equilibrium quantity?
b. If the actual price were not at equilibrium, but at $3.50, what would be quantity demanded? What would be quantity supplied? Would there be a shortage or a surplus?
c. If the new advertising campaign for fajitas caused more people to want fajitas, what would happen to the equilibrium price and quantity? (Only indicate the direction of the changes. No numerical answer is necessary.)
Using the active graph Market Equilibrium to answer questions 4 and 5:
4. Move the green line to mark the starting equilibrium point. What is the equilibrium price and quantity sold? Now suppose that the technology for picking apples improves so more apples can be picked in less time. Which graph changes? Move that graph in the direction you think it should change. Move the green price dot to the new equilibrium. What has happened to equilibrium price? What has happened to the equilibrium quantity of apples?
5. Using the same active graph, answer the following questions. Write down the current equilibrium price and quantity. Suppose that consumers decide that eating apples are a health risk because of a pesticide that is used in growing them. Which graph changes? Move that graph in the direction you think it should change. Move the green price dot to the new equilibrium. What has happened to equilibrium price? What has happened to the equilibrium quantity of apples?