Chapter Three: Quiz Answers -- Supply and Demand

1. The Supply Curve is upward-sloping because
   As the price increases, suppliers can earn higher levels of profit or justify higher marginal costs to produce more.

2. Part of the reason that many basketball players earns millions of dollars each year while school teachers may earn $30,000 is because
   All of the above.

3. When college students leave town for the summer, the demand for meals at the local restaurants declines. This results in
   a decrease in equilibrium price and quantity. The demand curve shifts to the left because the town population declines, resulting in lower prices and quantity.

4. All the following shift the demand curve for automobiles to the right except
   a brand new automobile dealership opens in town. This factor will increase the supply curve to the right. The other two examples do shift the demand curve to the right.

5. If the cost of computer components falls, then
   the supply curve for computers shifts to the right. Computer components are inputs into the computer. If these prices fall, then producers can make more output at the same price.

6. What happens in the market for airline travel when the price of traveling by rail decreases?
   The demand curve shifts left. Rail and airline travel are substitutes. If the price of a substitute declines, then the demand curve for the substitute product shifts to the left.

7. If a sin tax is placed on sales of alcohol,
   the supply curve shifts to the left. A sin tax is a sales tax, usually imposed at the point of sale. A sales tax is treated like an input cost, so the supply curve shifts left.

8. When a price ceiling is imposed above the equilibrium price,
   the equilibrium outcome prevails. This is a trick question. Remember that a price ceiling is the maximum price allowed in the market. If the price ceiling for, say, apartments is imposed at $1,000 per month but the market price is just $800, then the market outcome prevails. The ceiling is not binding.

9. If the demand curve shifts to the right, then we move up and to the right along our supply curve.
   True. As the price increases due to the shifting demand curve, suppliers respond by increasing the quantity supplied.

10. If the cost of making bicycles falls, the price goes down, causing the demand curve to shift to the right.
    False. The lower price of bicycles resulting from cost reductions does make more people purchase bicycles, but this effect is reflected by a movement along the demand curve.