Pepperdine University

FINC 655

Chapter 8

Multiple Choice Questions

1)Changes in prices of a good causes

1. 1. movement along the demand curve [yes but this is not the only effect]
   2. movement along the supply curve [yes but this is not the only effect]
   3. no movement along either curve [changes in prices will result in movement along one or more of these curves
   4. Both a and b [it causes movement along both curves]

2. If the market for a certain product experiences an increase in supply and a decrease in demand, which of the following results is expected to occur?
   1. Both the equilibrium price and the equilibrium quantity could rise or fall. [increase in supply and decrease in demand both lead to a fall in price ]
   2. The equilibrium price would rise, and the equilibrium quantity could rise or fall. [increase in supply and decrease in demand both lead to a fall in price]
   3. The equilibrium price would fall, and the equilibrium quantity could rise or fall. [increase in supply and decrease in demand both lead to lower price; net quantity change is unknown because the increase in supply would lead to higher quantity while the decrease in demand would lead to lower quantity]
   4. The equilibrium price would fall, and the equilibrium quantity would fall. [net quantity change is unknown because the increase in supply would lead to higher quantity while the decrease in demand would lead to lower quantity]

3. When demand for a product falls, which of the following events would you NOT necessarily expect to occur?
   1. A decrease in the quantity of the product supplied. [equilibrium quantity will fall with a decrease in demand]
   2. A decrease in its price. [equilibrium price will fall with a decrease in demand]
   3. A decrease in the supply of the product. [while a decrease in demand will be associated with a decrease in the quantity supplied at equilibrium, it will not cause a shift in the supply curve]
   4. A leftward shift of the demand curve. [falling demand means the demand curve shifts leftward]

4. Suppose a recent and widely circulated medical article has reported new benefits of cycling for exercise. Simultaneously, the price of the parts needed to make bikes falls. If the change in supply is greater than the change in demand, the price will               and the quantity will  .

1. 1. rise, rise [demand will increase because of the article while supply will also increase because of lower costs; if the supply shift (leading to lower prices) is greater than the change in demand (leading to higher prices), the net effect should not be a rise in both price and quantity]
   2. rise, fall [demand will increase because of the article while supply also increases because of lower costs; if the supply shift (leading to lower prices) is greater than

the change in demand (leading to higher prices), the net effect should not be a fall in quantity.]

1. 3. fall, rise [demand will increase because of the article while supply will also increase because of lower costs; if the supply shift (leading to lower prices) is greater than the change in demand (leading to higher prices), the net effect should be a fall in price while both shifts lead to a rise in quantity]
   4. fall, fall [demand will increase because of the article while supply will also increase because of lower costs; if the supply shift (leading to lower prices) is greater than the change in demand (leading to higher prices), the net effect should be a fall in price while both shifts lead to a rise in quantity]

5. Suppose there are nine sellers and nine buyers in a competitive market, each willing to buy or sell one unit of a good, with values {$10, $9, $8, $7, $6, $5, $4, $3, $2}. Assuming no transactions costs, what is the equilibrium price in this market?
   1. $5 [at a price of $5, four suppliers are willing to sell but six buyers are willing to buy]
   2. $6 [at a price of $6, five suppliers are willing to sell and five buyers are willing to buy]
   3. $7 [at a price of $7, six suppliers are willing to sell but four buyers are willing to buy]
   4. $8 [at a price of $8, seven suppliers are willing to sell but three buyers are willing to buy]

6. If the government imposes a price floor at $9 (i.e., price must be $9 or higher) in the above market, how many goods will be traded?
   1. Five [at a price of $9, eight suppliers are willing to sell but only two buyers have values of $9 or more]
   2. Four [at a price of $9, eight suppliers are willing to sell but only two buyers have values of $9 or more]
   3. Three [at a price of $9, eight suppliers are willing to sell but only two buyers have values of $9 or more]
   4. Two [at a price of $9, eight suppliers are willing to sell but only two buyers are willing to buy]

7. Say the average price of a new home in Lampard City is $160,000. The local government has just passed new licensing requirements for housing contractors. Based on possible shifts in demand or supply and assuming that the licensing changes do not affect the quality of new houses, which of the following is a reasonable prediction for the average price of a new home in the future?
   1. $140,000 [the new licensing requirements lead to a reduction in supply, which will NOT lead to a lower equilibrium price]
   2. $150,000 [the new licensing requirements lead to a reduction in supply, which will NOT lead to a lower equilibrium price]
   3. $160,000 [the new licensing requirements lead to a reduction in supply, which will affect the equilibrium price]
   4. $170,000 [the new licensing requirements lead to a reduction in supply, which will lead to a higher equilibrium price]