Name___ 3-1-2015

Name___ 3-1-2015

Econ 103 Midterm

Q1.) For the following items state whether the item is Inelastic inDemand or Elastic in Demand. In addition, please explain why theitem is either Price Inelastic in Demand or Price Elastic in Demand.(Remember no items is strictly inelastic or strictly elastic.This hint will help you out on some items.) (5points each)

  1. The purchase of gas for heating during the winter in the short run? Inelastic in Demand. People need gas for heating, as it is a basic need.

  1. The purchase of gasoline in the short run? Inelastic in Demand. People need to travel for work, and other everyday purposes.

  1. The purchase of a house? Elastic in Demand. People do need housing, but purchasing is not the only option for shelter. Renting and leasing alternatives are available.

  1. The purchase of a carton of salt? Inelastic in Demand. Salt is essential for cooking.

  1. The purchase of cigarettes? Inelastic in Demand. Smoking is almost like an addiction and addiction does not really care for the price of the product.

  1. A low –income family of five choice to purchase Frosted Flakes cereal from an aisle full of different cereals. Inelastic in Demand. Flakes cereal is the most basic of flakes, and hence food.

Q2.) What does the Law of Demand state? (5 points)

Thelaw of demand states that the demand and price (assuming all otherfactors are constant) run at opposite directions.

Theexample would be buying pizza from the local restaurant. Let ussuppose that the restaurant can only make ten pizzas in a day. On oneparticular day, the restaurant has 20 patrons asking for pizza. Inorder to contain the demand to ten patrons, the price will increaseuntil only 10 people can afford it.

Onthe other hand, suppose there are only 5 patrons are asking forpizza, with 5 more unwilling to pay at the current price. If so, therestaurant reduces the price until all ten can afford the pizza.

Thehigh price of pizza reduces the demand. Low price of pizza, increasesthe demand.

Q3.) What does the Law of Supply state? (5 points)

Thelaw of supply states that demand and supply (assuming all otherfactors are constant) run in the same direction.

Theexample would be the same pizza from a restaurant as above. Thecurrent capacity of the restaurant is 10 pizzas per day.

Ifthe restaurant realizes that there is a demand for 20 pizzas everyday, it will increase the supply to 20 pizzas.

Ifthe restaurant realizes that there is a demand for only 5 pizzasevery day, it will reduce the supply to 5 pizzas.

Q4.) Which of the following is an example of a change in the quantitydemanded? (Hint. For which items is there a direct change in pricethat leads to a change in quantity demanded) (5 points)

  1. An increase in salary leads to increased spending on clothing.

  2. A sale on shoes leads to higher purchases of shoes. – This one.

  3. A rise in the price of peanut butter leads to higher demand for cheese sandwiches

  4. An outbreak of e-coli in chicken leads to higher demand for beef.

Q5.) Markets are more efficient when information is perfect anexample is: (5 points)

  1. Insider information on the release of a new block-buster drug

  2. CARFAX reports that reveal the accident and repair history of a used car. – This one

  3. A fortune-tellers prediction of future interest rate movements

  4. A readily available archive of historical weather reports

Q6.) Please name the type of market they exist for each situation (2points each)

  1. There are only 3 firms and they are price setters – Oligopoly

  1. There are many firms, but they differentiate their products through advertising – Perfect Competition.

  1. The market that existed when Ma Bell operated in the 1970s – Monopoly

  1. Public utilities such as the electric company in your local market – Monopoly

  1. A market where there are many firms and their products can’t be differentiated – Perfect Competition.

Q7.) Please choose the correct answer and explain your answer. Ifthe price of gasoline falls increasing the quantity demanded of SUVs,then gasoline and SUVs are: (10 points)

  1. Substitutes

  2. Complements – this is the answer

  3. Not related

  4. Superior goods

Gasolineand SUV are complements for one cannot exist without the other. Ifpeople do not buy SUVs, they won’t be needing gasoline. Ifgasoline was not there, they would not be buying SUV’s either.

Q8.) Please choose the correct answer and explain your answer. Ifthe price of steak increases, causing the quantity demanded forchicken to increase, then steak and chicken are: (10 points)

  1. Substitutes – this is the answer

  2. Complements

  3. Not related

  4. Superior goods

Steakand Chicken are substitutes for they are both foods of the same group– consumablenon-vegetarian food items.A non-vegetarian dinner can be prepared with either steak or chickenwith little difference.

Q9.) Suppose Jim, Cathy, and Roger have the following demand forcandy? Jim, Cathy and Roger make up the total market of people whowant to buy candy.

Jim

Cathy

Roger

Price

Quantity Demanded

Price

Quantity Demanded

Price

Quantity Demanded

$1.00

14

$1.00

8

$1.00

11

$2.00

12

$2.00

7

$2.00

10

$3.00

10

$3.00

6

$3.00

9

$4.00

8

$4.00

5

$4.00

8

$5.00

6

$5.00

4

$5.00

7

$6.00

4

$6.00

3

$6.00

6

$7.00

2

$7.00

2

$7.00

5

  1. Please construct the market demand curve and draw the demand curve? (10 points)

Price

Total Demand

$1.00

33

$2.00

29

$3.00

25

$4.00

21

$5.00

17

$6.00

13

$7.00

9

Now suppose that Nestle,Smuckers, and Toll House all want to sell candy to Jim, Cathy, andRoger. Below are each individual companies’ supply curve and thetotal market supply curve (in green).

Smuckers

Nestle

Toll House

Price

Quantity Supplied

Price

Quantity Supplied

Price

Quantity Supplied

$1.00

0

$1.00

3

$1.00

0

$2.00

2

$2.00

4

$2.00

3

$3.00

4

$3.00

5

$3.00

6

$4.00

6

$4.00

6

$4.00

9

$5.00

8

$5.00

7

$5.00

12

$6.00

10

$6.00

8

$6.00

15

$7.00

12

$7.00

9

$7.00

18

b.) Please construct the market supply curve and draw the marketsupply curve? (10 points)

Price

Total Supply

$1.00

3

$2.00

9

$3.00

15

$4.00

21

$5.00

27

$6.00

33

$7.00

39

  1. What is the equilibrium price and quantity where everybody buys and sells what they want? How much does Jim, Cathy, and Roger buy? How much do Smuckers, Nestle and Toll House sell? (10 points)

Theequilibrium price is $ 4.00. At that price point, The suppliers willsell a total of 21 units. The buyers will sell a total of 21 units.