Question

1. During a recession (downturn) in the economy firm lay off workers and the unemployment rate rises. During these times we can expect the demand for normal goods to ____ and the demand of inferior goods to ____.

a.) decrease : increase

b.) decrease : decrease

c.) increase : increase

d.) increase : decrease

2. You observe the price of a good rises and the quantity sold decreases. This is the result of

a.) a decrease in demand

b.) an increase in demand

c.) a decrease in supply

d.) an increase in supply

3. Assume apples and oranges are substitutes for consumers. A winter freeze destroys half of the orange crop. In the market for apples, we can expect

a.) a decrease in supply of apples

b.) an increase in the demand for apples

c.) a decrease in the demand for apples

d.) an increase in the supply of apples

4. Which of the following would cause an increase in the equilibrium price of a good?

a.) a new study claims consumption of this good is bad for your health

b.) the cost of a key input used to produce this good has fallen

c.) fewer firms are producing this good

d.) technological advance has increased labor productivity.

Answer 1

1. a) decrease, increase

When income rises, demand for normal goods rise and vice versa. When income decrease, demand for inferior goods rise and vice versa.

2. a) a decrease in demand

When the price of a good rises, the consumer start looking for substitute goods and thus the demand for that particular good decrease and demand for substitute good would increase.

3. b) an increase in demand for apples

Because apples and oranges are substitutes, when supply of oranges is less, demand of already available product- apples would rise.

4. d) technological advance has increased labor productivity

Technological advances increase the market demand for products, which shifts the curve to the right, increasing the equilibrium price of the good.