Question

1. Which of the following is a reason the demand for gasoline might increase?

a. The price of new and used cars falls by 20%.

b. Incomes fall and gasoline is a normal good.

c.The price of sodas increase.

d.The cost of car insurance increases by 50%.

e. All of the above can cause an increase in the demand for gasoline.

2. If both demand and supply decrease, price

a. will always increase

b. will always decrease

c. might increase or decrease

d. will definitely fall to zero and all the businesses in this industry will go bankrupt

3. Which of the following changes in the electricity market

will definitely cause an increase in the equilibrium price of electricity?

a. A decrease in demand and an increase in supply

b. An increase in both demand and supply

c. A decrease in both demand and supply

d. An increase in demand and a decrease in supply

Answer 1

Question 1

Gasoline and car are complementary goods.

In case of complementary goods, an increase in price of one good leads to decrease in demand for its complement and vice-versa.

So, if the price of car decreases then demand for gasoline will increase.

Thus,

The price of new and used cars fall by 20% is a reason the demand for gasoline might increase.

Hence, the correct answer is the option (a).

Question 2

When both demand and supply decreases then there is decrease in quantity.

However, impact on price depends on the magnitude of change in demand and supply respectively.

If decrease in demand is greater than the decrease in supply then price falls.

On the other hand, if decrease in demand is less than the decrease in supply then price rises.

Thus, if both demand and supply decrease, price might increase or decrease.

Hence, the correct answer is the option (c).

Question 3

In a market, change in demand and supply impacts the equilibrium price and equilibrium quantity.

If demand for a good increases while its supply decreases then, in that case, there is definite increase in price.

So,

An increase in demand and a decrease in supply will definitely cause an increase in the equilibrium price of electricity.

Hence, the correct answer is the option (d).