Which one of the following statements about supply and demand is true?
Answer(s): C
Choice "c" is correct. If quantity demanded for a product goes up, this drives price up. Additionally, if supply decreases, this will also drive prices up. Therefore, it is a certainty that price will be driven up, given an increase in demand and a decrease in supply.Choice "a" is incorrect. Increased supply will reduce (not increase) prices, assuming demand remains constant. Choice "b" is incorrect. Increased demand will increase price, and increased supply will reduce price.The net impact on price cannot be determined without more facts.Choice "d" is incorrect. Increased demand will increase (not reduce) price, assuming supply remains constant.
The local video store's business increased by 12 percent after the movie theater raised its prices from $6.50 to $7.00. This is an example of:
Answer(s): A
Choice "a" is correct. For substitute goods, as the price of one good goes up, the demand for another, substitute good increases as consumers desire the lower-priced substitute good.Choice "b" is incorrect. Superior goods. Just as the demand for inferior goods declines with an increase in the income level of a consumer, superior goods will experience a spurt in demand as prices are raised.Choice "c" is incorrect. The demands for mutually "complementary goods" fluctuate together (e.g., more cereal purchases are accompanied by an increase in the demand for milk).Choice "d" is incorrect. Independent goods have unrelated demand functions (e.g., bread and vacuum cleaners).
An increase in the price of crude oil will have what affect on the equilibrium price and quantity of gasoline?
Answer(s): B
Choice "b" is correct. Crude oil is an input to the production of gasoline. When the price of an input increases, supply shifts left, causing equilibrium price to rise and equilibrium quantity to fall.Choice "a" is incorrect, since price will rise and quantity will fall. Choice "c" is incorrect, since price will rise.Choice "d" is incorrect, since quantity will fall.
When the supply of and demand for a good both increase:
Choice "c" is correct. When the supply of and demand for a good both increase, equilibrium quantity increases. However, the impact on price is indeterminate. If demand and supply increase by the same amount, price will remain unchanged (as illustrated above). However, if demand increases by more than supply, price will increase. Conversely, if supply increases by more than demand, price will decrease.Choices "a" and "b" are incorrect, since the impact on price is indeterminate. Choice "d" is incorrect, since equilibrium quantity will increase.
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