Unit 2

1) Using demand and supply curves,
show the effect of each of the following on the market for cigarettes:

a. A cure for lung cancer is found. As the cancer rate drops because of the cure,
the demand for cigarettes will increase shifting the demand curve to the right.

b. The price of
cigars increases. Through substitution,
cigarette prices remaining constant will decrease demand or remain the same in
cigars and increase the demand of cigarettes. In the graph a will represent
cigarettes and be will represent cigars.

c. Wages increase substantially in states that grow
tobacco. A wage increase will raise the
consumer’s propensity to spend and increase demand and likely raise the price
and supply.

d. A fertilizer that increases the
yield per acre of tobacco is discovered.
More crops will increase the supply of cigarettes creating a surplus
reducing demand and lowering the price.

e. There is a sharp increase in the
price of matches, lighters, and lighter fluid.
Because these things complement cigarettes, tobacco demand will
decrease.

f. More states pass laws
restricting smoking in restaurants and public places. Less smoking areas will
cause cigarette demand to decrease.

2) For each of the following pair
of goods, determine whether the goods are substitutes, complements, or
unrelated

a. Peanut butter and jelly
complement each other

b. Public transportation is a
substitute for private transportation or vice versa

c. Coke and Pepsi are substitutes

d. Alarm clocks and automobiles are
unrelated

e. Golf clubs and golf balls
complement each other

3) List five things that are held
constant along a market demand curve, and identify the change in each that
would shift that demand curve to the right—that is, that would increase demand.

4) Why is a firm willing and able
to increase the quantity supplied as the product price increases?

5) “If a price is not an
equilibrium price, there is a tendency for it to move to its equilibrium
level. Regardless of whether the price
is too high or too low to begin with, the adjustment process will increase the
quantity of the good purchased.”
Explain, using a demand and supply diagram.

6) Assume the market for corn is
depicted as in the table that appears below

a. Complete the table below.

b. What market pressure occurs when
quantity demanded exceeds quantity supplied?
Explain.

c. What market pressure occurs when quantity supplied exceeds
quantity demanded? Explain.

d. What is equilibrium price?

e. What could change the equilibrium price?

f. At each price in the first column of the below table (or above on this
paper), how much is sold?

7) Determine whether each of the following statements is true, false, or
uncertain. Then briefly explain each
answer

a. In equilibrium, all sellers can find buyers.

b. In equilibrium, there is no pressure on the market to
produce or consume more than is being sold.

c. At prices above equilibrium, the quantity exchanged exceeds
the quantity demanded.

d. At prices below equilibrium, the quantity exchanged is equal
to the quantity supplied

8)What are
the effects on the equilibrium price and quantity of the steel if the wages of
steelworkers rise and, simultaneously, the price of aluminum rises?

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