If you're seeing this message, it means we're having trouble loading external resources on our website. Show If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked. Cell World and Phones R US are two stores in a small town that sell used cell phones. Cell World sells only high-quality used cell phones. Each phone costs Cell World $90 to buy and repair. Phones R US sells low-quality used cell phones and each phone costs them $70 to buy and repair. Consumers are willing to pay $85 for a low-quality used cell phone and $110 for a high-quality used cell phone. However, consumers don't know which store sells high-quality cell phones and which store sells low-quality cell phones. Therefore, they are willing to pay $95 for an used cell phone. Cell World would like its customers to know that it sells high-quality cell phones. So, to send such a signal, Cell World wants to offer a warranty that covers all necessar repairs for the cell phones. Such a warranty would cost Cell World $5 per year per cell phone (cost of warranty = $5 x years of warranty), while it would cost Phones R US $9 per year per cell phone (cost of warranty = $9 x years of warranty). Consumers will assume that the store offering the longer warranty sells high-quality cell phones. If both stores offer the same warranty, consumers will be willing to pay only $95 per cell phone. A. Without offering a warranty, Cell World would make a profit of ($5, $9, $10, $15, $20, $25) per cell phone, and Phones R US would make a profit of ($5, $9, $10, $15, $20 $25) per cell phone. B. Suppose that Cell World commits itself to a two year warranty (Y = 2). Then Phons R US's best response is to (offer no warranty, offer a one-year warranty, offer a two-year warranty, offer a three-year warranty) so Cell World's profit will be (-$10, $0, $5, $10, $15, $20) per cell phone, and Phones R US's profit will be ($7, $10, $13, $15, $16, $22, $25) per cell phone. C. If Cell World commits itself to a one year warranty (Y = 1), what would maximize Phones R US profit? (offering a one year warranty or offering no warranty) D. Suppose that Cell World offers a warranty and Phones R US does not. It is then discovered that consumers that bought their cell phones at Cell World mistreat their cell phones compared to owners of Phones R US cell phones. This is a problem of (a lemons market, adverse selection, asymmetric information, moral hazard).  1. Consider the cell phone market. Technological improvements have reduced the costs to produce cell phones. Successful advertising campaigns launched by cell phone companies have made more people want to buy cell phones. The equilibrium price of cell phones will ___________. A) increase B) decrease C) stay the same D) be ambiguous Correct Answer: D Explanation:
2. Assume that, at current prices, the cross-price elasticity of the demand for Goods A and B is -0.6. When the price of A increases, with other factors remaining the same,______________. A) the demand curve for B will shift to the right B) the demand curve for B will shift to the left C) the demand curve for B will remain the same D) the supply curve for B will shift to the right Correct Answer: B Hint:
3. The demand for labour is: Qd = 120 – 4P The supply of labour is: Qs = 30 + 2P Now, suppose the government imposes a minimum wage of $20 per hour. This policy represents a _______________. A) non-binding price floor B) binding price ceiling C) non-binding price ceiling D) binding price floor Correct Answer: D Explanation: Set Qd = Qs. When the market clears, P = $15. The minimum wage is set at $20, which is higher than the equilibrium wage. This policy is considered a binding price floor. 4. The demand for phones is: Qd = 80 – 2p The supply of phones is: Qs = 6p + 40 In the above scenario, the quantity of phones sold at market equilibrium is _____ and the price elasticity of the supply at market equilibrium is ______. A) 5, -1/7 B) 70, 3/7 C) 55, 1/7 D) 40, -3/7 Correct Answer: B Explanation: Set Qd = Qs. 80 – 2p = 6p + 40, then solve for p At equilibrium, p = 5. Q = 70 Es = (ΔQs/Δp)*(p/Qs) = 6*(5/70) = 3/7 5. The demand and supply in the market for birthday cakes are given by Qd = 90 – 4P and Qs = 10 + P, respectively, where P is price measured in dollars. What is the equilibrium price for birthday cakes? A) $16 B) $26 C) $36 D) $66 Correct Answer: A Steps: Set Qd = Qs 90 – 4P = 10 + P 90 – 10 = P + 4P 80 = 5P Solve for P. P = $16 6. Over the past few decades, technological improvements in agriculture have led to significantly higher efficiencies in the production of soybean. At the same time, numerous health scientists have advocated for the increased consumption of soy milk. (1) How will these changes affect the demand and supply of soy milk? (2) True or False: Assume the demand curve shifts further to the right than the supply curve. We will observe an unambiguous decrease in the price of soy milk and an unambiguous increase in the quantity of soy milk. Answer: (1) Both the demand and supply curves will shift to the right. (2) False. In this scenario, both the equilibrium price and the quantity of soy milk will increase unambiguously. 7. Which of the following scenarios would NOT cause a shift in the demand curve for iPhones? A) The price for Android phones decreases B) The price for Android phones increases C) The price to manufacture iPhones increases D) A new research study reveals that smartphones may have negative effects on your future health Correct Answer: C Explanation: All of these scenarios cause the demand curve to shift, except for option C. When the price for Android phones decreases, the demand curve for iPhones will shift to the left since they are substitutes. So, if the price for Android phones increases, the demand curve for iPhones will shift to the right. And if a study proves that all smartphones have negative effects on people’s health, fewer people would want an iPhone, causing the demand curve to shift to the left. Nevertheless, if the price to manufacture iPhones increases, the supply curve, rather than the demand curve would shift. Manufacturers would supply fewer phones since it is more costly to do so. 8. The cross-price elasticity of demand for buns and burger patties is -0.8. If the price of buns decreases, what will happen to the demand curve and the equilibrium price for burger patties? A) Demand curve shifts to the left and equilibrium price decreases B) Demand curve remains unchanged and equilibrium price increases C) Demand curve shifts to the right and equilibrium price remains unchanged D) Both the demand curve and equilibrium price do not change E) Demand curve shifts to the right and the equilibrium price increases Correct Answer: E Solution: The cross-price elasticity of demand is negative, which means that the two goods are complements. When the price of one good decreases, the demand curve for the other good shifts to the right. When the demand curve shifts to the right, the equilibrium price increases. 9. A 10% decrease in the price of Good X causes the quantity demanded for X to increase from 100 units to 120 units. How much will the quantity demanded for X fall if the current price increases by 5%? Correct Answer: The quantity demanded for X will decrease by 10%. Solution: Percentage change in Qd = (120 – 100) / 100 = 20% When price decreases by 10% Ed = %change in quantity demanded / %change in price Ed = (+20%) / (-10%) = -2 Ed = -2 If the current price increases by 5% Ed = %change in quantity demanded / %change in price -2 = %change in quantity demanded / (+5%) Hence, %change in quantity demanded = -10% 10. Suppose two customers exist in the market for scissors and their individual demand curves are: Jessica’s demand for scissors: QD = 12 – P Audrey’s demand for scissors: P = 18 – QD The market supply curve is: QS = 4P – 30 Given the above, what is the market equilibrium price of scissors? A) $9 B) $9.5 C) $10 D) $10.5 Correct Answer: C Explanation: Summing up individual demand, the market demand curve is: QD = 12 – P +18 – P QD = 30 – 2P At equilibrium, QD = QS 30 – 2P = 4P – 30 60 = 6p 10 = p Therefore, the equilibrium price is $10 11. In downtown Hamilton, a hotel exists with more than 500 identical rooms. It can accommodate 1,000 people at the same time. Last year, each hotel room price was $150 per night, and on average, 350 rooms were rented out per day. This year, the hotel saw a drop in revenue when the manager made a price change. Now, each room is rented out at $99 per night. As a result, 378 rooms are being rented each day. Calculate the price elasticity of demand. Answer: Ed = % ∆ in Qd / % ∆ in P [(378 – 350) / 350] / [(99 – 150) / 150] = -0.08 / 0.34 or -0.2353 12. Assume the demand for face masks is Qd = 240 – P and the supply of face masks is Qs = 7P. At P = $25, which of the following statements is true? A) There is a surplus of 40 masks B) There is a shortage of 40 masks C) There is a shortage of 5 masks D) There is a surplus of 5 masks Correct Answer: B Explanation: At P = 25, Qd = 240 – 25 = 215 Qs = 7*25 = 175 Qd – Qs = 40 There is a shortage of 40 masks 13. The market for keto bread clears when P = $10 and Q = 500. Assume the government enforces a price control, mandating that the bread must be sold at a maximum of $5 per loaf. This type of price control is _________, and it will cause a ______ in the market. A) Price floor, shortage B) Price floor, surplus C) Price ceiling, shortage D) Price ceiling, surplus Correct Answer: C Explanation: When P is lower than the equilibrium level, Qd > Qs, and a shortage will emerge. 14. Which of the following will cause a shift to the left in the supply curve of apple juice? A) An increase in the price of apples B) A decrease in the price of apple juice C) An increase in the price of orange juice D) An improvement in the production technology of apple juice Correct Answer: A Explanation/Steps: The production costs of apple juice increase when the price of apples increases, which causes the supply curve of apple juice to shift to the left. 15. Suppose that at equilibrium, the price elasticity of demand for wheat is -1.5 and the price elasticity of supply is 0.5. If the government imposes a price ceiling that is 12% below the equilibrium price, this price constraint will lead to: A) A shortage equal to 24% of the equilibrium quantity B) A surplus equal to 24% of the equilibrium quantity C) A shortage equal to 2.4% of the equilibrium quantity D) A surplus equal to 2.4% of the equilibrium quantity Correct Answer: A Explanation/Steps: When the price of wheat decreases by 12%, the quantity of wheat demanded will increase by -1.5*(-12%) = 18%, and the quantity of wheat supplied will decrease by 0.5*12% = 6%. Qd – Qs = (18% + 6%) Qe; i.e., 24% of the equilibrium quantity. 16. True or False: When the price of Product A increases by 1%, the quantity of A demanded will decrease by 5%. Therefore, we can infer that the demand for product A is elastic at the current price. Correct Answer: True Explanation/Steps: Ed = (-5%) / (+1%) = -5 17. When the demand curve shifts to the right and the supply curve shifts to the left, what will happen to the equilibrium price and quantity? Correct Answer: With supply decreasing and demand increasing, the equilibrium price will increase. The impact on the equilibrium quantity will be ambiguous. 18. Assume the price elasticity of the supply for steak is 0.4. If the price of steak increases by 7%, what is the expected change in the quantity of steak supplied in the market? A) -2.8% B) +2.8% C) -28.0% D) +28.0% Correct Answer: B Explanation/Steps: Es = (%Δ in Qs) / (%Δ in P) %Δ in Qs = 0.4 * 7% = 2.8% 19. Milk and bread are complements. An increase in the price of milk will cause ______________. A) the demand for milk to shift to the right B) the demand for bread to shift to the left C) the quantity of milk demanded to increase D) the quantity of bread demanded to increase Correct Answer: B What causes a rightward shift in the supply curve?A change in the number of sellers in an industry changes the quantity available at each price and thus changes supply. An increase in the number of sellers supplying a good or service shifts the supply curve to the right; a reduction in the number of sellers shifts the supply curve to the left.
Which of the following would cause the current supply curve of Iphone to shift rightward?Explanation: A reduction in production costs will cause a rightward shift of the supply curve.
Which of the following shifts the supply curve rightward?An increase in the change in supply shifts the supply curve to the right, while a decrease in the change in supply shifts the supply curve left. Essentially, there is an increase or decrease in the quantity supplied that is paired with a higher or lower supply price.
Which of the following would cause a supply shift to the right?Answer and Explanation: The correct answer is b. An improvement in technology.
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Which of the following would cause a rightward shift the supply curve for cell phone services?
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