Section 1

Question 1

Demand Curve

Answer 1

Horizontal: for any given price, how much of the good will consumers want to consume?
Vertical: for any given quantity what is the marginal consumers willingness to pay (value) for one more unit?

Question 2

Why does demand slopes downward?

Answer 2

because when price goes up(down), quantity demanded decreases(increases) on two “margins.”

Question 3

Intensive margin

Answer 3

people already in the market decrease(increase) the amount they want
to consume at any given price.

Question 4

Extensive margin:

Answer 4

some people will exit(enter) the market, i.e. stop(start) consuming the good) as the price moves above (below) their reservation price.

Question 5

What are Comparative Statics?

Question 6

comparative statics of normal goods when income goes up

Answer 6

the demand curve shifts up

Question 7

comparative statics of normal goods when income goes down

Answer 7

the demand curve shifts down

Question 8

Normal Good

Question 9

Inferior Goods

Question 10

Comparative statics of Inferior goods when income goes down

Answer 10

the demand curve shifts up

Question 11

Comparative statics of Inferior goods when income goes up

Answer 11

the demand curve shifts down

Question 12

Substitutes

Question 14

Compliments

Question 15

Comparative statics: When, Goods X and Y are substitutes, when price of good X goes up

Answer 15

the demand curve for good Y shifts up

Question 16

Comparative statics:When, Goods X and Y are substitutes, when price of good X goes down

Answer 16

the demand curve for good Y shifts down

Question 17

Comparative statics: Goods X and Y are complements, when the price of good X goes up

Answer 17

the demand curve for good Y shifts down

Question 18

Comparative statics: Preferences

Answer 18

anything that makes the good seem more(less) valuable or desirable or
necessary will shift the demand curve up(down).

anything that makes the good seem less valuable or desirable or necessary will shift the demand curve down.

Question 19

Factors that determine how steep the demand curve will be.

Answer 19

1. Substitution effect:
2. Income effect, two parts:
   Income Effect: –How would demand change for this good if income went up(down) without a price
   change? [Would it increase (normal good) or decrease (inferior good)?]
   Budget share: –How much impact will the price change actually have on consumers’ purchasing
   power? [How big of a share of consumers’ budgets does it represent?]

Question 20

Supply curve and be thought of two ways

Answer 20

1. Horizontal: for any given price, how much will the industry be willing to supply?
   – For flat long-run supply curve at a price equal to the long-run efficient per-unit cost, the industry will supply any quantity demanded. At any other price, in the long run, the quantity supplied by the industry will be zero.
2. Vertical: for any given quantity, what is the per-unit cost of producing one more unit?

Question 21

Slope of supply curve: Short Run

Answer 21

Supply slopes upward because:
a) Short-run is defined as the time horizon within which firms cannot increase their short-run non-variable inputs, so variable inputs operate less efficiently,
i.e. at higher marginal per-unit cost.

b) In the short run, firms cannot enter or exit the industry to increase or decrease
industry output.

Question 22

Slope of supply curve: Long-run

Answer 22

Supply is horizontal if all firms have access to the same inputs and the same
technology

Supply slopes upward if some firms have exclusive access to cheaper or more
effective inputs and/or technology (competitive advantage) , allowing them to
operate at lower per-unit cost.

Question 23

Horizontal Long-run supply curve

Answer 23

Supply is horizontal if all firms have access to the same inputs and the same
technology, because firms enter(exit) the industry in response to short-run
increases(decreases) in price due to the short-run presence of industry-wide
profit(loss), until the price once again goes back down(up) to the point at which
there is no profit(loss) available.

Question 24

Supply sloping upwards

Answer 24

Supply slopes upward if some firms have exclusive access to cheaper or more
effective inputs and/or technology (competitive advantage) , allowing them to
operate at lower per-unit cost. Since firms enter(exit) the industry in the order of
lowest(highest) per-unit cost, the price will be determined by the per-unit cost of
the marginal firm, which will be higher(lower) as the price goes up(down).