Answers to the questions in Quiz 4:

Question 1. Write down the demand function. Use (+) and (‒) to explain the relationships
in each function.

The demand function describes the behavior of households (buyers or consumers) in

demanding for a product:

QD = f(P, Y, PR, T, BEY, BEP, N, …)

P (–) the law of demand

Y (+) for normal goods; (–) for inferior goods
PR (+) when the two goods are substitute; (–) when the two goods are complementary
T (+)
BEY (+) for normal goods; (–) for inferior goods
BEP (+)
N (+)

Question 2. Write down the supply function. Use (+) and (‒) to explain the relationships
in each function.

The supply function describes the behavior of suppliers (producers or sellers) in

supplying a product:

QS = f(P, PI, Te, SEP, M, …)

P (+) the law of supply
PI (–)
Te (+)
SEP (–)
M (+)

Question 3. In Figure (a, below), show the effect of an increase in buyers’ income on the
demand for an inferior good. Label all the axes and curves.

When buyers’ income increases, then demand for an inferior good declines.

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Question 4. In Figure (b, below), show the effect of a decline in the buyers’ expected price
on demand. Label all the axes and curves.

Demand today decreases when buyers expect the price to decline in the near future.

Question 5. In Figure (c, below), show the effect of a decline in input prices on supply.
Label all the axes and curves.

When input prices decline, then supply increases.

Question 6. In Figure (d, below), show the effect of an increase in the sellers’ expected
price on supply. Label all the axes and curves.

Supply today decreases when sellers expect the price to increase in the near future.

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Question 7. In Figure (e, below), show how buyers respond to a decline in price. In Figure
(f), show how sellers respond to an increase in price. Label all the axes and curves.

When price declines, then quantity demanded increases (the law of demand).

Question 8. In Figure (f, below), show how sellers respond to an increase in price. Label
all the axes and curves.

When price increases, then quantity supplied increases (the law of supply).

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Question 9. In Figure (g, below), show the situation in which quantity supplied is greater
than quantity demanded. Explain how the price responds in a competitive market. Label all
the axes and curves.

There exists a surplus when QS > QD. In this case, the price is too high. As a result, the
price tends to decrease, and the market moves toward the equilibrium point.

10. (d). Equilibrium quantity increases, but the effect on equilibrium price is unclear.