Economics 11 Name:

Spring 2005 Quiz 3

1. How would a decrease in lumber prices influence the home construction market?

a. The demand for newly constructed homes will increase.

b. The demand for newly constructed homes will decrease.

c. The supply of newly constructed homes will increase.

d. The supply of newly constructed homes will decrease.

e. Both a and c are correct.

Lumber prices affect the supply side of the market. It is now cheaper for producers to build any given quantity of homes, so the supply curve will shift to the right (an increase in supply). This means the price of houses will fall and the quantity supplied and demanded of houses will increase. Note that the demand curve doesn’t change. What does change is the quantity demanded. So the answer is c

2. What is the role of the stock market in our economy?

a. it is a form of legalized gambling but it has a better payoff than playing the lottery.

b. it allows firms to raise capital more cheaply so they can invest at a lower cost.

c. it concentrates ownership of firms into a small group of people.

d. it allows the government to have better control over the economy.

The stock market is not gambling, and it disperses ownership of firms. The correct answer is b.

3. Holding all else constant, a higher price for ski lift tickets would be expected to

a. increase the number of skiers.

b. decrease the supply of ski resorts.

c. decrease the demand for other winter recreational activities.

d. decrease ski sales.

If lift ticket prices rise, the number of skiers will fall. We would expect an increase in demand for other types of recreational activities, since those are substitutes. We would expect ski sales to fall, since skis and lift tickets are compelementary goods.

4. You read in the newspaper the wages of computer software engineers has risen and the number of software engineers has fallen. You can conclude that

a. the demand for software engineers has increased.

b. the demand for software engineers has decreased.

c. the supply of software engineers has increased.

d. the supply of software engineers has decreased.

e. the demand and supply of software engineers have both increased.

If the wages have risen, demand for software engineers may have risen, or supply may have fallen. But if it is demand that has risen, the number of engineers would have to rise, so that couldn’t happen. If the supply fell, then wages would rise and the number of engineers would fall, so that’s the answer (d). If demand and supply both increased, we would have more engineers, but the wage could have risen or fallen.

5. In Banda Aceh the price of beef declined from about $1.35 per kilo before the tsunami to $1.15 after the tsunami. What is the best explanation for this?

a. there was less fish, since they were killed by the tsunami, and people therefore ate beef, a substitute.

b. many foreign aid workers moved into Banda Aceh and foreigners like to eat beef.

c. many cows were swept out to sea by the tsunami.

d. people were afraid that beef was contaminated.

If there was less fish and people switched to beef, a substitute, then the demand for beef would have increased and the price of beef would rise. But the question states that beef prices fell, so a cannot be the answer. If foreigners moved in and increased the demand for beef, that, too, would have increased demand and increased price. If there were fewer cows, the supply of cows would shift to the left, which would raise beef prices, so c can’t be the answer. If people were afraid that beef was contaminated, they would buy less of it, reducing the price. People actually did think that beef was contaminated because people were feeding the beef ground up fish, and people were afraid that the fish had been feeding on human carcasses.