Introduction to Microeconomics

4. Which of the following will lead to an increase in the demand for ibuprofen (i.e., a rightward shift in the demand for ibuprofen)? Answer: b. A decrease in the price of boxing gloves, which are a complement for ibuprofen. When two goods are complements, an increase in the price of one of the goods will lead to a decrease in the demand for the other one. Also, when two goods are complements, a decrease in the price of one of the goods will lead to an increase in the demand for the other one. One of the choices for this question was “A decrease in the price of ibuprofen.” If the price of ibuprofen decreases, we move downward and to the right along the existing demand curve, but we do not shift to a different demand curve. 5. Assume that peanut butter and jelly are complements. The price of peanut butter decreases. As a result of the increase in the price of peanut butter, what will happen in the market for jelly? Answer: a. The demand for jelly will increase (i.e., the demand curve for jelly will shift to the right). When two goods are complements, an increase in the price of one of the goods will lead to a decrease in the demand for the other one. Also, when two goods are complements, a decrease in the price of one of the goods will lead to an increase in the demand for the other one. 6. Assume that diamond earrings are a normal good. There is an increase in consumer incomes. As a result of the increase in incomes, what will happen in the market for diamond earrings? Answer: c. Demand will increase (i.e., the demand curve will shift to the right). When we construct a demand curve, we allow the price of the good to vary, while holding constant all other possible influences on buyers. One of those possible influences is buyers’ incomes. For a normal good, an increase in incomes will lead to a rightward shift in the demand curve. Also, for a normal good, a decrease in incomes will lead to a leftward shift in the demand curve. 7. Silk is an important input in the production of silk neckties. There is an increase in the price of silk. As a result of the increase in the price of silk, what happens in the market for silk neckties? Answer: b. Supply will decrease (i.e., the supply curve will shift to the left). When we construct a supply curve, we allow the price to vary, while holding constant every other possible influence on sellers. Thus if the price changes, we move along the existing supply curve. In order to shift to a new demand curve, it is necessary for something else to change. The supply shifters are the influences on sellers that are held constant when we construct a particular supply curve. These include the prices of inputs, the technology of production, and the number of sellers. If the price of an input increases, the supply curve will shift to the left. 2

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