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Economics 111.3 Winter 14 January 27th, 2014 Lecture 8 Ch. 3 and Ch. 6 Question 1 The market for coffee is initially in equilibrium; cream is a complement of coffee. The price of cream falls. Simultaneously, there is an increase in the wages of farm workers who harvest coffee beans. The equilibrium quantity of coffee A) decreases. B) increases or decreases depending on the slope of the supply and demand curves. C) increases. D) increases, decreases, or remains the same depending on the relative shifts of the supply and demand curves. Question 2 A technological improvement lowers the cost of producing coffee. At the same time, preferences for coffee decrease. The equilibrium quantity of coffee A) increases or decreases depending on whether the price of coffee falls or rises. B) increases. C) increases, decreases, or remains the same depending on the relative shifts of the demand and supply curves. D) decreases. E) remains the same. Question 6 The demand curve is P = 800 25QD. The supply curve is P = 500 + 25QS. At market equilibrium, the equilibrium quantity is ________ and the equilibrium price is ________. A) 25; 0.17 B) 0.17; 25 C) 1,300; zero D) 650; 6.0 E) 6.0; 650 Question 9 If a producer can use its factors of production to produce either good A or good B, then a rise in the price of A A) increases the supply of B. B) decreases the supply of A. C) increases the supply of A. D) decreases the supply of B. E) both C and D. Question 16 The graph in Figure 2.1.5 shows Sunland's PPF for food and sunscreen. Sunland faces ________ opportunity cost of food and ________ opportunity of sunscreen, which can be seen by the shape of the PPF. A) a decreasing; a decreasing B) a decreasing; an increasing C) an increasing; an increasing D) a constant; a constant E) an increasing; a decreasing Question 19 A movement along the production possibilities frontier will result from A) technological change. B) change in the stock of capital. C) change in the labour force. D) all of the above. E) none of the above. A Growing Economy : Shifts in the Production Possibility Curve 1. 2. 3. 4. Capital accumulation, including all new investment in land, physical equipment, and human resources through improvements in health, education, and job skills Growth in population Increases in the natural resource base. Technological progress Question 22 If A and B are substitutes in production and the price of A falls, the supply of B A) increases and the price of B rises. B) increases and the price of B falls. C) decreases and the price of B rises. D) does not change. E) decreases and the price of B falls. Government Interventions Ch. 6 (up to p. 138) Buyers look to government for ways to hold prices down. Sellers look to government for ways to hold prices up. Price Ceilings • A price ceiling is a governmentimposed limit on how high a price can be charged. Shortage P S P b/m P* Black Market Price P̂ Excess Demand D Q̂ Q A Regulated Housing Market Rent control is a price ceiling on rents set by government. Rent ceilings set above competitive equilibrium price have no effect. Rent ceilings set below competitive equilibrium price prevent the price from regulating the quantities supplied and demanded. D P S P0 S D Q D P S P0 Pc S SHORTAGE Qs Q0 Qd D Q Rent Controls • The following are the general consequences of rent control: – – – – A huge shortage of living quarters. New housing construction stopped. Existing housing is allowed to deteriorate. For many, the only way to get living quarters is to offer a huge bribe to the landlord. – Many families have to double up with other family members. When Rent Controls Work • If a temporary increase in the demand for housing is expected, rent controls may be effective. • This would create a temporary shortage of housing, but it would prevent high prices and a windfall to landlords.