10e_Essay_Test_Bank_Ch_4_FINAL

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1、Chapter4:SupplyandDemandEssayQuestions1.Howisthe“LawofDemand”differentfromthe“LawofSupply”?Inwhatwaysaretheysimilartoeachother?Answer:TheLawofDemanddescribesthebehaviorofconsumers(consumerswillbuylessifthepricesarehigher,assumingallotherthingsconstant

2、).ItcanberepresentedbyanegativelyslopedDemandcurve.TheLawofSupplydescribesthebehaviorofproducers(producerswilloffermoreforsaleifthepricesarehigher,assumingallotherthingsconstant).ItcanberepresentedbyapositivelyslopedSupplycurve.TheLawsofSupplyandDeman

3、daresimilartoeachotherinthattheybothrelatequantitytopriceandbothlawsassumethatallotherfactorsremainconstant.2.Useexamplestodemonstratewhytheabilityofconsumersandproducerstosubstituteexplainsthebehaviorthatwecallthe“LawofDemand”andthe“LawofSupply”?Answ

4、er:Thelawofdemandisbasedonanindividual'sabilitytosubstitutetheconsumptionofonegoodforanother.IfthepriceofmusicdownloadsfromtheInternetgoesdownandthepriceofCDsremainsthesame,consumerswillpurchasemoreoftheirmusicovertheInternetandbuyfewerCDs,assumingall

5、otherthingsremainthesame.Thelawofsupplyisbasedonafirm'sabilitytosubstitutetheproductionofonegoodforanother.Ifthepriceofcornrisesandthepriceofwheatremainsthesame,farmerswillplantlesswheatandmorecorn,assumingallotherthingsremainthesame.3.Bob'sBurgerscha

6、rged$3.50foraquarter-poundhamburgerwithallthefixin's,andsold7,500ofthem.Thefollowingyear,althoughBobraisedthepriceto$3.75,salesofhisburgersroseto8,200.Usetheconceptsofashiftinthedemandcurveversusamovementalongthedemandcurvetoexplainwhythisincreaseinsa

7、lesdoesnotrepresentaviolationofthelawofdemand.Answer:Mostlikely,theassumptionofotherthingsconstantwasviolated,notthelawofdemand.Fromoneyeartothenext,anyoneofthefollowingcouldhaveresultedinanincreaseindemandthatwouldhavemorethanoffsetthedecreaseinquant

8、itydemandedcausedbythepriceincrease.Consumerincomesmighthaverisen.Consumertastesforhamburgersmayhaveincreased.Bob'scompetitorsmayhaveraisedtheirpricesevenmorethanBobdid.Finally,Bobmayhavereducedhispricesonhisfriesandcolddrinks(complements).All