Answer Key—Midterm 1 Version A Question | Answer | 1 | D | 2 | D | 3 | A | 4 | A | 5 | D | 6 | D | 7 | A | 8 | B | 9 | D | 10 | C | 11 | B | 12 | A | 13 | A | 14 | B | 15 | A | 16 | C | 17 | C | 18 | B | 19 | C | 20 | B | 21 | D | 22 | B | 23 | C | 24 | D | 25 | B |

26. a. The increase in input prices for diaper suppliers will cause the supply curve to shift inward, which will increase the equilibrium price from P* to P’ and decrease the equilibrium quantity from Q* to Q’, as shown in the diagram below:

b. When firms are near their capacity of producing a good, they would not be able to increase their quantity supplied to the market much in response to an increase in the price of a good in the short run. Thus, we would expect the supply curve to be inelastic at current levels of production—they would not be able to increase their production much to take advantage of higher prices.
27 a. Since hot chocolate is a normal good and income falls, the demand curve for hot chocolate would shift inward, lowering the equilibrium price and equilibrium quantity of hot chocolate sold:

b. People would want more hot chocolate if it cured acne, so the demand curve would shift outward, which would increase equilibrium price and quantity of hot chocolate sold:

c. If suppliers would expect that hot chocolate prices would rise next month, they would cut back on their current production of hot chocolate in order to build up their inventories and sell the hot chocolate at a higher price next month. The immediate effect is to shift the supply curve inward, raising the equilibrium price and reducing the equilibrium quantity of hot chocolate sold.

d. The price that buyers pay is Pb, the price that sellers receive is Ps, and the new equilibrium quantity is Q’ on the diagram