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1.
Demand and supply analysis is particularly important if

a. the success of your firm is closely linked to the profitability of your primary industry
b. the success of your firm is independent of the profitability of your primary industry
c. the success of your firm is unlikely
d. demand and supply analysis is unimportant
ANSWER: a
TOPICS: Section 1: Which Industry or Market
2. If movie theatres decided to increase the price for the movie tickets, holding other factors constant, what would happen
to the demand for popcorn in the theatres?
a. the demand for popcorn would shift to the left because popcorn and movies are substitute goods.
b. the demand for popcorn would shift to the left because popcorn and movies are complementary goods.
c. the demand for popcorn would shift to the right because popcorn and movies are substitute goods.
d. the demand for popcorn would shift to the right because popcorn and movies are complementary
goods.
ANSWER: b
TOPICS: Section 2: Shifts in Demand
3. Changes in the price of a product can cause

a. A movement along the demand curve
b. A shift of the demand curve
c. A shift of the supply curve
d. All of the above
ANSWER: a
4. After the housing bubble burst, consumer confidence plummeted and housing sales dropped to all-time lows. This
caused the demand curve for normal goods to shift
a. inwards
b. outwards
c. stay constant
d. none of the
above
ANSWER: a
5. The change in any factor other than ________ would shift the demand curve
a. Weather
b. interest rate
c. Price
d. all of the above
ANSWER: c
6. An increase in the price of a substitute shifts the demand curve to the _______
a. right
b. left
c. it does not change the demand curve
d. none of the above
ANSWER: a
7. An increase in the price of a complement shifts the demand curve to the
a. right
b. left
ANSWER: b
8. A decrease in the price of a substitute shifts the demand curve to the _______
a. right
b. left
ANSWER: b
9. A decrease in the price of a complement shifts the demand curve to the
a. right
b. left
ANSWER: a
10. An increase in demand could arise from which of the following factors
a. an increase in income
b. a decrease in the price of a complement
c. an increase in the price of a substitute
d. all of the above
ANSWER: d
11. An increase in demand could arise from which of the following factors
a. an increase in income
b. a decrease in the price of a substitute
c. an increase in the price of a complement
d. all of the above
ANSWER: a
12. Assuming that beer is a normal good, what will happen to the demand for beer near college towns if student income
increased?
a. Demand will fall because students love these beers
b. Demand will fall
c. Demand will rise
d. Supply would rise
ANSWER: c
13. A recent medical study shows that peanuts are one of the leading causes of high cholesterol. This would cause the
demand for peanuts to
a. Shift to the left
b. Shift to the right
c. go down the demand curve
d. not change
ANSWER: a
14. The change in quantity demanded derived from a change in price is

a. the movement along a demand curve
b. the movement along a supply curve
c. a shift in the demand curve
d. a shift in the supply curve
ANSWER: a
15. Recent research suggested that there are large health benefits from consuming cooked tomatoes. Holding other things
constant, this will cause
a. The demand curve for tomatoes to shift to the right
b. The demand curve for tomatoes to shift to the left
c. The supply curve for tomatoes to shift to the right
d. The supply curve for tomatoes to shift to the left
ANSWER: a
16. How does an increase in income affect the market for bus rides (inferior good)?
a. The demand curve for bus rides to shift to the right
b. The demand curve for bus rides to shift to the left
c. The supply curve for bus rides to shift to the right
d. The supply curve for bus rides to shift to the left
ANSWER: b
17. An increase in income causes the demand for inferior goods to_____________ and the price of inferior goods to
____________.
a. Increase; increase
b. Increase; decrease
c. Decrease; increase
d. Decrease, decrease
ANSWER: d
18. An increase in income causes the demand of normal goods to _________ and the price of normal goods to
ANSWER: a
19. How does an increase in income affect the market for iPads (normal good)?
a. The demand curve for iPads shifts to the
right
b. The demand curve for iPads shifts to the left
c. The supply curve for iPads shifts to the right
d. The supply curve for iPads shifts to the left
ANSWER: a
20. You lose your job and as a result your demand for steak falls. This implies that you consider steaks to be a
a. Complementary good
b. Normal good
c. Inferior good
d. Substitute good
ANSWER: b
21. While you were an intern you bought 5 packages of hot dogs a month. After acquiring a full-time job with a
considerably higher salary, you stopped purchasing hot dogs. For you, hot dogs are a
a. Complementary good
b. Normal good
c. Inferior good
d. Substitute good
ANSWER: c
22. The wages for Nike workers increases. At the same time, we see the price for Adidas shoes increase. This would cause
the price for Nike shoes_____________ and the quantity demanded for Nike shoes ____________.
a. Uncertain; decreases
b. Decreases; increases
c. Decreases; uncertain
d. Increases; uncertain
ANSWER: d
23. Firm X both produces automobiles and owns gas stations. If decides to decrease the gas to induce higher sales for the
automobiles, it means that
a. the gas and the automobiles are complements
b. the gas and the automobiles are substitutes
c. the gas and the automobiles are not related in demand
ANSWER: a
24. Peter’s Pizzeria sells both pizzas and wings. It wants to increase the sales of its pizzas. If it decides to increase the
price of the wings, it is assuming that
a. the pizza and the wings are substitutes
b. the pizza and the wings are complements
c. the pizza and the wings are unrelated in demands
d. it cannot increase the sales of its pizzas
ANSWER: a
25. Holding other factors constant, if bad weather destroys the annual crop for carrots, it causes the supply curve for
carrots to
a. Shift to the left, causing the prices of carrots to rise
b. Shift to the left, causing the prices of carrots to fall
c. Stay the same
d. The supply curve does not shift. Only the demand curve shifts.
ANSWER: a
TOPICS: Section 3: Shifts in Supply
26. All these factors would shift the supply curve of tobacco, except
a. Bad weather
b. Change in the price of tobacco
c. Changes in the wages of agricultural workers
d. A tax charged on the production of tobacco
ANSWER: b
27. How does an increase in the price of laptop memory chips affect the market of laptops?
a. The demand curve for laptops shifts to the right
b. The demand curve for laptops shifts to the left
c. The supply curve for laptops shifts to the right
d. The supply curve for laptops shifts to the left
ANSWER: d
28. A supply curve describes

a. the relationship between price and quantity
demanded
b. the relationship between price and quantity supplied
c. the relationship between a group of buyers and sellers
ANSWER: b
29. A supply curve slopes upwards because

a. the higher the price the lower the quantity that the sellers are willing to supply
b. the higher the price the higher the quantity that the sellers are willing to supply
c. the quantity supplied in insensitive to price
d. an increase in price brings the quantity sold down to zero
ANSWER: b
30. Which of the following factors would shift the supply curve for ice cream to the right?
a. a new cooling technology emerges
b. the price per unit increases
c. the number of producers in the market for ice cream increase
d. Both A&C
ANSWER: d
31. Which of the following would shift the supply of Florida Oranges to the left?
a. a hurricane in Florida destroying a major part of the crop
b. an increase in the price of water per unit, a major input, used to irrigate the orange trees
c. one of the orange grooves shuts down
d. all of the above
ANSWER: d
32. A recent medical study reports new benefits of cycling. Simultaneously, the price of the parts needed to make bikes
falls. The demand curve would _________ and the supply curve would__________
a. Shift to the right, shift to the left
b. shift to the left, shift to the right
c. shift to the left, shift to the left
d. shift to the right, shift to the right
ANSWER: d
TOPICS: Section 4: Market Equilibrium
33. Suppose the demand for pens increases and the supply for pens decreases. What effect will it have on the equilibrium
price for pens?
a. It will rise
b. It will fall
c. Uncertain
d. None
ANSWER: a
34. As the income of bus riders increased, the wages of bus drivers increased simultaneously. How does this affect the
market for bus rides (inferior good)?
a. The demand curve will shift to the left; the supply curve will shift to the left
b. The demand curve will shift to the left; the supply curve will shift to the right
c. The demand curve will shift to the right; the supply curve will shift to the left
d. The demand curve will shift to the right; the supply curve will shift to the
right
ANSWER: a
35. People like consuming peanut butter and jelly together. The price of peanuts increases. At the same time, we see the
price for Jelly rise. How does this affect the market for peanut butter?
right
ANSWER: a
36. Suppose there are 11 buyers and 11 sellers, each willing to buy or sell one unit of a good, with values {$14, $13, $12,
$11, $10, $9, $8, $7, $6, $5, $4,}. Assume no transaction costs and a competitive market, what is the equilibrium price in
this market?
a. 7
b. 8
c. 9
d. 10
ANSWER: d
37. In the market for used cars we have 10 sellers, willing to sell at the prices of $1000, $2000, $3000, $4000, $5000,
$6000, $7000, $8000, $9000, $10000. If the equilibrium price in the market is $2500, how many cars would be sold?
a. 1
b. 2
c. 3
d. 4
ANSWER: b
38. In the market for used cars we have 10 sellers, willing to sell at the prices of $1000, $2000, $3000, $4000, $5000,
$6000, $7000, $8000, $9000, $10000. What could the market price be in order to induce five sellers to offer their cars for
sale?
a. $4001
b. $5001
c. $6001
d. $7001
ANSWER: b
39. Which of the following statements is true
a. a market equilibrium price is where quantity demanded equals quantity supplied
b. a market equilibrium price is where the demand is higher than the supply
c. a market equilibrium price is where the supply is higher than the demand
ANSWER: a
40. In a market where the equilibrium price is $7, any price lower than $7 would cause
a. a balanced demand and supply
b. an excess supply
c. an excess demand
ANSWER: c
41. In a market where the equilibrium price is $7, any price higher than $7 would cause
a. a balanced demand and supply
b. an excess supply
c. an excess demand
ANSWER: b
42. Excess demand of a product exerts __________pressure on prices

a. Zero
b. No
c. Upward
d. Downward
ANSWER: c
43. Excess supply of a product exerts ___________pressure on prices

a. Zero
b. No
c. Upward
d. Downward
ANSWER: d
44. At the equilibrium price

a. only sellers who value the product more than the equilibrium price would be willing to sell
b. only buyers who value the product less than the equilibrium price would be willing to buy
c. only buyers who value the product more than the equilibrium price would be willing to buy
d. None of the parties would be willing to trade
ANSWER: c
45. Which of the following statements is true

a. in market equilibrium there are unconsummated value-creating transactions
b. in market equilibrium there are unconsummated wealth-destroying transactions
c. in market equilibrium there are no unconsummated wealth-creating transactions
ANSWER: c
46. In the 1990s, many people had rising incomes. At the same time, there was a rise in the cost of lumber. This would
cause the demand for houses to _________ and the supply for houses to_________.
a. Increase, increase
b. Increase, decrease
c. Decrease, increase
ANSWER: b
TOPICS: Section 5: Predicting Industry Changes Using Supply and Demand
47. An increase in income causes, the price for ipads _____________ and the quantity demanded for ipads
____________.
ANSWER: a
TOPICS: Section 5: Predicting Industry Changes Using Supply and Demand
48. A recent medical study reports new benefits of cycling. 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
_________.
a. Rise, rise
b. Rise, fall
c. Fall, rise
d. Fall, fall
ANSWER: c
TOPICS: Section 6: Explaining Industry Changes Using Supply and Demand
49. The wages for Nike workers increases. At the same time, we see the price for Adidas shoes increase. How does this
affect the market for Nike shoes?
right
ANSWER: c
50. Firm X owns both tea and coffee plantations. It sells directly to the public. If the firm wants to increase the sales for
the coffee, assuming that tea and coffee are substitutes, which of these strategies can it employ?
a. Increase the price for the tea
b. Offer free expedited shipping on the coffee
c. Advertise the tea more heavily
d. Both A&B
ANSWER: d
51. Peter’s Pizzeria sells both pizzas and wings. It wants to increase the sales of its pizzas. Assuming that the pizza and
the wings are complements, which of these strategies can it employ?
a. Increase the price of the wings
b. Decrease the price of the wings
c. Increase the quality of the pizza
d. Both B & C
ANSWER: d
52. The law of supply states that, holding other factors constant, as price increases
a. Quantity supplied increases
b. Quantity supplied decreases
c. Quantity demanded increases
d. Quantity demanded decreases
ANSWER: a
TOPICS: Section 7: Prices Convey Valuable Information
53. An increase in the price of laptop memory chips causes the price for laptops _____________ and the quantity supplied
for laptops ____________.
ANSWER: b
54. An increase in the income of bus riders, accompanied by a simultaneous increase in the wages of the bus drivers
causes, the price for bus rides(an inferior good) _____________ and the quantity demanded for bus rides ____________.
a. Decreases; decreases
b. Increase; increases
c. Uncertain, Decreases
d. Uncertain, Increases
ANSWER: c
55. People like consuming peanut butter and jelly together. The price of peanuts increases. At the same time, we see the
price for Jelly rise. This would make the price for peanut butter_____________ and the quantity demanded for peanut
butter ____________.
a. Uncertain; decreases
b. Decreases; increases
c. Decreases; uncertain
d. Increases; uncertain
ANSWER: a
56. An increase in price could occur due to a(n)

a. Increase in demand and no change in supply
b. Decrease in supply and no change in demand
c. An increase in demand and decrease in supply
d. All of the above
ANSWER: d
57. The information conveyed by changes in market prices is especially important in financial markets because
a. It forces individual investors to reveal their information about the prospects of a
security
b. It assesses business decisions
c. It helps firms forecast the future demand for products
d. All of the above
ANSWER: d
58. Which of the following statements is true?

a. A company can manipulate uncontrollable factors to increase the demand for its product
b. A company can manipulate uncontrollable factors to increase the supply of its product
c. A company cannot manipulate uncontrollable factors to increase the demand for its
product
d. A company cannot manipulate controllable factors to increase the demand for its product
ANSWER: c
TOPICS: Section 8: Market Making
59. Which of these is an example of a controllable factor for a firm that sells pizzas
a. The price of the pizza
b. The delivery rates of the pizza
c. The quality of the wings sold by the street vendor across the street
d. Both A & B
ANSWER: a
60. If a firm can create important complements to its original product, it has
a. Created an uncontrollable factor that can change the demand for its product
b. Created an uncontrollable factor that cannot change the demand for its product
c. Created a controllable factor that can change the demand for its product
d. Created a controllable factor that cannot change the demand for its product
ANSWER: c
$11, $10, $9, $8, $7, $6, $5, $4,}. Assume no transaction costs and a competitive market. If there is a market maker in this
market. What is the profit maximizing bid-ask spread per unit for a market maker?
a. $6 bid; $12 ask
b. $7 bid; $11 ask
c. $8 bid; $10 ask
d. $9 bid; $9 ask
ANSWER: a
$11, $10, $9, $8, $7, $6, $5, $4,}. Assume no transaction costs and a competitive market. At the optimal bid-ask spread,
how many transactions would the market maker undertake in this market
a. two transacttions
b. three transactions
c. four transactions
d. five transactions
ANSWER: b
$11, $10, $9, $8, $7, $6, $5, $4,}. Assume no transaction costs and a competitive market. At the optimal bid, ask spread,
what is the total profit that the market maker makes?
a. $8
b. $12
c. $18
d. $20
ANSWER: c
$11, $10, $9, $8, $7, $6, $5, $4,}. Assume no transaction costs and a competitive market. Now suppose competition
among several market makers forces the spread down to $4. How many goods are traded?
a. Four
b. Five
c. Six
d. Seven
ANSWER: a
65. “Market making”
a. is the action of bringing together high value buyers and low value sellers
b. transfers goods from their low value uses to high value uses, creating wealth
c. can not occur if the transaction costs are too high to prevent value creating
transactions
d. all of the above
ANSWER: d
66. To earn profits, the market maker must

a. bid high, ask low
b. bid low, ask high
c. equalize the bid and ask price
d. not create the market
ANSWER: b
67. A market maker faces the following demand and supply for widgets. Eleven buyers are willing to buy at the following
prices: $15, $14, $13, $12, $11, $10, $9, $8, $7, $6, $5. Eleven sellers are also willing to sell at the same prices. What is
the equilibrium price in the market without the market maker
a. $12
b. $11
c. $10
d. $9
ANSWER: c
prices: $15, $14, $13, $12, $11, $10, $9, $8, $7, $6, $5. Eleven sellers are also willing to sell at the same prices. What is
the equilibrium quantity in the market
a. 5 units
b. 6 units
c. 7 units
d. 8 units
ANSWER: b
prices: $15, $14, $13, $12, $11, $10, $9, $8, $7, $6, $5. Eleven sellers are also willing to sell at the same prices. If the
market maker bought and sold at the equilibrium price, what is his profit
a. $1
b. $2.5
c. $3
d. $0
ANSWER: d
market maker wants to make three transactions, what should he bid (the suppliers)A market maker faces the following
demand and supply for widgets. Eleven buyers are willing to buy at the following prices: $15, $14, $13, $12, $11, $10, $9,
$8, $7, $6, $5. Eleven sellers are also willing to sell at the same prices. If the market maker wants to make three
transactions, what should he bid (the suppliers)
a. $9
b. $8
c. $7
d. $6
ANSWER: c
market maker wants to make three transactions, what should he ask (the buyers)
a. $12
b. $13
c. $14
d. $15
ANSWER: b
market maker makes three transactions, what is his bid-ask spread per unit
a. $4
b. $5
c. $6
d. $7
ANSWER: c
market maker makes three transactions, what is his total profit?
a. $12
b. $15
c. $18
d. $21
ANSWER: c
market maker decides to only make one transaction what is his profit/bid-ask margin
a. $8
b. $10
c. $12
d. $16
ANSWER: b
prices: $15, $14, $13, $12, $11, $10, $9, $8, $7, $6, $5. Eleven sellers are also willing to sell at the same prices. How
many transactions must the market maker make if he wants to maximize his profits?
a. 1
b. 2
c. 3
d. 4
ANSWER: a
market maker is free to choose the number of transactions he can make, what is his maximum profit?
a. $8
b. $10
c. $18
d. $28
ANSWER: c
77. For a wheat farmer, the following factor(s) are uncontrollable

a. Quality of the wheat
b. Weather
c. The speed at which the product reaches its buyers
d. All of the above
ANSWER: b
78. Natural Gas Boom

Technological improvements in hydraulic fracturing, or “Fracking,” have decreased the cost of extracting smaller pockets
of natural gas. What affect does this have on supply and demand as well as on the equilibrium price and quantity?
ANSWER: Lower extraction costs will cause the supply curve to shift to the right. Consumers move down their demand
curves to a lower equilibrium price and higher quantity consumed.
79. Gas and Coal

Utility companies can use a mix of plants different energy sources to produce electricity, mainly these are coal fired plants
but increasingly they relying on gas turbines. Technological improvements in hydraulic fracturing, or “fracking,” have
decreased the cost of extracting smaller pockets of natural gas. What affect does fracking have on supply and demand for
coal?
ANSWER: Fracking lowers the cost of natural gas. The supply of natural gas shifts out which lowers the price of natural
gas. Since natural gas and coal are substitutes, this decreases the demand for coal.
80. Olive Oil
Spain is the world’s number 1 producer of olive oil, mostly in the southern Andalusia region. But very dry weather there
has ravaged olive trees. What affect will the poor weather have on the olive oil market?
ANSWER: Olive trees will not produce as large of a harvest due to the poor weather. This represents supply shift to the
left and a movement up the demand curve. Prices rise and quantity falls.
81. Nutella and Hazelnuts

A key ingredient of Nutella is hazelnuts which are grown mostly around the Black Sea in Turkey. Nutella uses about a
quarter of the world crop. Two things have occurred recently. Nutella is becoming more popular worldwide and a frost
destroyed much of this season’s crop. How do these occurrences affect the market for hazelnuts?
ANSWER: The increased popularity of Nutella shifts the demand curve to the right. The frost has shifted the supply
curve to the left. Both serve to cause increases in hazelnut prices, but we cannot tell if the demand shift
causes quantity to increase more than the frost causes quantity to decrease.
82. Financial Innovation
More and more of the back office tasks for commodity traders and market makers can be easily automated which lowers
the costs of making transactions. What is the effect of these technical changes on the bid-ask spreads between commodity
buyers and sellers at commodity exchanges?
ANSWER: The cost of making a market falls. This means a market maker can complete a transaction at lower cost
making an existing spread more profitable. He can increase the number of transactions he completes by
lowering the spread. Moreover, if he does not lower the spread, traders may seek out a different market
maker offering better terms. Therefore, the bid-ask spread within the market will succumb to price pressure
and shift lower.

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1.

Demand and supply analysis is particularly important if

3. Changes in the price of a product can cause

14. The change in quantity demanded derived from a change in price is

28. A supply curve describes

29. A supply curve slopes upwards because

42. Excess demand of a product exerts __________pressure on prices

43. Excess supply of a product exerts ___________pressure on prices

44. At the equilibrium price

45. Which of the following statements is true

56. An increase in price could occur due to a(n)

58. Which of the following statements is true?

66. To earn profits, the market maker must

77. For a wheat farmer, the following factor(s) are uncontrollable

78. Natural Gas Boom

79. Gas and Coal

81. Nutella and Hazelnuts

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