Chapter 03-Supply and Demand

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CHAPTER 3 SUPPLY AND DEMAND Answers to Review Questions 1. Under the horizontal interpretation, we begin with a price for the good and then use the demand curve to read the quantity demanded at that price on the horizontal axis. Under the vertical interpretation, we start with a quantity produced and use the demand curve to read the marginal buyer’s reservation price for the product on the vertical axis. Learning Objective: 03-01 AACSB: Reflective Thinking Bloom’s: Understand 2. The equilibrium price of a good is determined by the intersection of its supply and demand curves. We can know everything about a good’s cost of production (that is we can know its supply curve exactly) but without the demand curve we will not know the quantity people will want to purchase and therefore we will not know what price must be charged to cover the cost. Learning Objective: 03-02 AACSB: Reflective Thinking Bloom’s: Understand 3. If price control regulation prevented the price of gasoline from rising to its equilibrium level, we would expect to see symptoms of excess demand for gasoline such as lines of cars waiting at the pumps to buy gas. Learning Objective: 03-02 AACSB: Analytic Bloom’s: Apply 4. A change in demand means a shift of the entire demand curve, whereas a change in the quantity demanded means a movement along the demand curve in response to a change in price of that specific good. Learning Objective: 03-03 AACSB: Analytic Bloom’s: Analyze 5. It is smart for each individual at a sporting event to stand up in order to get a better view of the game. However, it is dumb for all to stand up since no one sees any better than if all had remained seated. Learning Objective: 03-04 AACSB: Reflective Thinking Bloom’s: Understand * Answers to Problems 1. a. The supply curve would shift to the right. The

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