FIRMS AND HOUSEHOLDSThis will likely increase your demand for airline travel, shifting the curve to the right.Since movie rentals and movie tickets are substitutes, the demand for movie tickets will increase. This will lead to a higher equilibrium price.Chapter 3: Demand, Supply, and Market Equilibrium 3Demand, Supply,and MarketEquilibriumFIRMS AND HOUSEHOLDS1. Define what a firm is and its role in the market.The firm is an organization that transforms resources (inputs) into products (output). Firms are the primary producing units in a market economy.Difficulty: E Type: D2. Explain what an entrepreneur is and its function.An entrepreneur is a person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.Difficulty: E Type: D3. Even though household have wide-ranging preferences, discuss some of the things that all households have in common including their constraints.All households have limited income and all must pay in some way for the things they consume. They are also constrained by the availability of jobs, current wages, their own abilities, and their accumulated and inherited wealth.Difficulty: E Type: C47Test Item File 3: Principles of MacroeconomicsINPUT MARKETS AND OUTPUT MARKETS: THE CIRCULAR FLOW4. List and describe three different input markets.The labor market is where household members sell their labor services in exchange for wages. In capital markets, households supply funds for firms to purchase capital equipment. Land and other real property are exchanged in the land market.Difficulty: E Type: F5. What types of things are sold in input or factor markets? Who are the buyers andsellers in these markets?Resources used to produce goods and services are sold in input markets. These include labor, capital, and land. In input markets, households are the sellers (suppliers) and firms are the buyers (demanders). Difficulty: E Type: FDEMAND IN PRODUCT/OUTPUT MARKETS6. What relationship is shown by a demand curve?The demand curve shows the relationship between price and quantity demanded. Since price and quantity demanded are inversely related, the demand curve is downward sloping.Difficulty: E Type: D7. Explain the difference between a change in demand and a change in quantitydemanded.A change in demand is represented by a shift in the demand curve and can be caused by changes in non-price determinants of demand such as income, preferences, or prices of related goods. A change in quantity demanded is represented by a movement along the demand curve and is caused by a change in the price of the good in question.Difficulty: M Type: D48Chapter 3: Demand, Supply, and Market Equilibrium 8. A video rental store rents old movies for $1.50 per day. On average, 300 movies are rented each day. The store receives several copies of a new smash movie just released in video and decides to rent these movies at $3.50 per day. Now, 400 moviesare rented each day. Thus, though the average rental price of a movie increased, the quantity rented increased. Does this mean that the law of demand does not hold for this market?The two types of movies (old and new release) represent two different markets. Thus, there is a demand for old movies and a demand for new releases. Both of these demand curves would be downward sloping, meaning that the law of demand applies.Difficulty: M Type: C9. Explain the law of demand. What does it imply about the shape of the demand curve?The law of demand describes the inverse relationship between price and quantity demanded. All else equal, as the price of a good rises, the quantity demanded of the good will fall. As the price of a good falls, the quantity demanded rises. This implies that the demand curve will be downward sloping.Difficulty: E Type: D10. What is the difference between a demand schedule and a demand curve?Both show quantity demand at a given price. The only difference is the form of the information. A demand schedule lists the price and quantity information in a table. A demand curve shows the same information using a graph.Difficulty: M Type: D11. List three things that can cause an increase in demand. Be specific.Student responses will vary but may include:(1.) An increase in income (normal good).(2.) A decrease in income (inferior good).(3.) An increase in the price of a substitute good.(4.) A decrease in the price of a complementary good.(5.) A change in preferences (the product is more desirable than before).Difficulty: E Type: C12. Suppose the U.S. economy enters a recession and incomes fall. What will happen to the equilibrium prices and quantities of normal goods? Would your answer be the same if you were discussing inferior goods? Why or why not?49Test Item File 3: Principles of MacroeconomicsIf incomes fall, the demand for normal goods will fall as well. This means that the demand curve will shift to the left, lowering both the equilibrium price and equilibrium quantity. The answer would be opposite if we were discussing inferior goods. A decrease in income raises the demand for inferior goods, leading to a higher equilibrium price and quantity.Difficulty: E Type: A13. List three characteristics of demand curves. Make sure to explain the shape of the curve and the meaning of the vertical and horizontal intercepts.First, they are downward sloping. Second, they intersect the vertical axis because there will be a price above which quantity demanded will be zero. Last, they intersect the horizontal axis. Even at a price of zero, quantity demanded will be limited for a given period of time.Difficulty: E Type: C14. Explain the law of diminishing marginal utility. How does it relate to the shape of the demand curve?The law of diminishing marginal utility states that each additional unit of a goodconsumed provides less and less additional satisfaction. Therefore, the amount that a person will be willing to pay for a product will fall as more of the product is consumed. This is one reason why demand curves slope downward.Difficulty: E Type: D15. When the price of good X rises, the demand for good Y falls. Explain what this relationship implies about the two goods.Goods X and Y must be complements. When the price of good X rises, the quantity of good X demanded will fall. If the demand for Y also falls, the two goods must be used together.Difficulty: E Type: C16. In what ways can expectations change your demand for a product