Inferior Good, Supply Curve, Normal Good, Ingredient Cost – Macroeconomics Final Quiz
The key terms in this Macroeconomics course include Inferior Good, Supply Curve, Normal Good, Demand Curve, Ingredient Cost, Graph, – Principles of Macroeconomics.
You are a producer of tortillas. In the market for tortillas, two events happen simultaneously: there is a decrease in the price of corn used to make your tortillas, and there are headlines that promote the link between eating tortillas and reducing heart attacks.
Which of the following is a consequence?
There is a decrease in the price of tortillas and an increase in the quantity of tortillas.
There is a decrease in the price of tortillas and a decrease in the quantity of tortillas.
We know the quantity will increase, but we don’t know what will happen to the price unless we know the size of the shifts. – correct
There is an increase in the price of tortillas and a decrease in the quantity of tortillas.
Explanation: The cost of making tortillas has decreased due to a cheaper ingredient, so the supply of tortillas will increase. The headlines linking lower rates of heart attacks with consumption of tortillas will increase the demand for tortillas. Both of these changes increase the equilibrium quantity of tortillas. To determine whether price will increase or decrease, we need to know whether the shift in supply or the shift in demand is greater.
There are a number goods that over time, for a variety of reasons, transition from being a normal good to an inferior good or from being an inferior good to a normal good. One such example of a good is the Toyota Camry. In the 1980s, more income for a household usually resulted in more Camrys being purchased. However, today more Toyota Camrys are purchased by households that have experienced a reduction in income.
How could this happen?
The Camry becomes a normal good because the good is now perceived as lower in quality than a Lexus.
Households have already purchased enough Camrys so income has little impact.
The Camry becomes an inferior good because the good is now perceived as lower in quality than a Lexus. – correct
The Camry becomes an inferior good because as consumers receive more purchasing power, they purchase more of the product.
Explanation: A normal good like a Camry can become an inferior good if it is perceived to be a lower quality good. What causes a person with more income to buy less of a product?
Candy makers face high prices for cocoa butter, the special ingredient that gives chocolate its melt-in-the-mouth texture. This event will be shown in
Graph A.
Graph D. – correct
Graph C.
Graph B.
Explanation: Since the cocoa butter is an ingredient in the production of chocolate, the change in the cost of this ingredient will affect the supply curve. Since the cocoa butter is more expensive, it will lower profit margins for firms, and the supply curve will shift. The demand curve does not shift, because ingredient cost does not shift the demand curve.