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UTK Notes


BR5A: Bridge: Market Equilibrium

Question 1

Many Super Bowl football tickets are resold online for several times their face value. As game day approaches, unsold tickets will likely

A. rise in price to target desperate last-minute buyers.
B. fall in price because demand falls as game day nears.
C. fall in price to avoid letting the ticket go unsold.
D. rise in price to make up for unsold tickets.

Hint Consider whether unsold Super Bowl tickets have any value for sellers after game day.
Answer C. fall in price to avoid letting the ticket go unsold. The value of a Super Bowl ticket falls to zero after game day. Since selling the ticket, even at a lower price, would be better than not selling it at all, as game day approaches, sellers will likely offer lower prices.

Question 2

If the price of beef rises significantly, what will happen in the market for fast-food hamburgers assuming nothing else happens in the market?

A. Supply increases, pushing prices lower.
B. Supply decreases, pushing prices lower.
C. Supply decreases, pushing prices higher.
D. Supply increases, pushing prices higher.

Hint Beef is used to make hamburgers. What happens to marginal cost if the price of an input increases?
Answer C. Supply decreases, pushing prices higher. Beef is used to make traditional hamburgers. If the price of beef increases, then the marginal cost of making a burger increases regardless of how many burgers you make. Therefore, the supply curve decreases. Assuming the market is competitive, the new equilibrium price will be higher than the old equilibrium price.

Question 3

If the price of foam blanks used in surfboard production falls, what will happen in the market for surfboards?

A. The supply of surfboards will rise, putting downward pressure on price.
B. The supply of surfboards will fall, putting upward pressure on price.
C. The demand for surfboards will rise, putting upward pressure on price.
D. There will be no change in the market for surfboards.

Hint Consider whether the change described impacts one of the determinants of supply or one of the determinants of demand.
Answer A. The supply of surfboards will rise, putting downward pressure on price. One of the determinants of supply is input costs. If input prices fall, costs of production fall, and the quantity supplied of a product at each price will rise. Thus, the supply curve for surfboards will shift to the right. Given a downward-sloping demand curve, price will fall.

Question 4

Since nearly all smartphones have built-in cameras, what will happen to the market for traditional cameras?

A. Demand for traditional cameras will rise, pushing prices higher.
B. Demand for traditional cameras will fall, pushing prices higher.
C. Demand for traditional cameras will rise, pushing prices lower.
D. Demand for traditional cameras will fall, pushing prices lower.

Hint The built-in cameras on smartphones and traditional cameras are substitute goods.
Answer D. Demand for traditional cameras will fall, pushing prices lower. Fewer individuals will see the need to purchase traditional cameras, since they have access to cameras via their smartphones. This can be represented by leftward shift of the demand curve, resulting in a lower equilibrium price.

Question 5

Suppose the following two events occur at the same time: the Chicago Cubs win the World Series, and the workers who make Cubs merchandise overseas go on strike. Holding everything else constant, we would expect the price of Cubs’ merchandise next season to _____ and the quantity of merchandise sold to _______.

A. increase or decrease; increase
B. increase; decrease
C. increase; increase or decrease
D. decrease; decrease

Hint Winning the World Series may change individuals' preferences and striking workers will limit the ability of producers to bring the Cubs' merchandise to market. Depict both of these shocks within the supply and demand framework on a piece of paper, and vary the magnitude of each shock. For example, if demand increases and supply increases, draw a scenario where the increase in demand is large relative to the increase in supply. Then draw a scenario where the increase in demand is small relative to the increase in supply. What predictions can you make about price and quantity?
Answer C. increase; increase or decrease Demand will increase and supply will decrease given the two market shocks. This will cause an unequivocal increase in the price of merchandise, but the direction of the effect on the quantity of merchandise sold is contingent on the magnitude of the decrease in supply relative to the decrease in demand. If the increase in demand is large relative to the decrease in supply, then the quantity of merchandise sold will increase. If the increase in demand is small relative to the decrease in supply, the quantity of merchandise sold will fall.