Answers to Review Questions
1,The equilibrium price of a good is determined by the intersection of its supply and demand curves,We can know everything about a good’s cost of production (that,is we can know its supply exactly) yet still not know where the demand curve will intersect the supply curve.
2,A change in demand means a shift of the entire demand curve,whereas a change in the quantity demanded means a movement along the demand curve in response to a change in price.
3,If the price of gasoline were prevented by regulations from rising to its equilibrium level,we would expect to see symptoms of excess demand for gasoline,such as lines of cars waiting at the pumps to buy gas.
4,Under the horizontal interpretation,we begin with a price for the good and then go over to the demand curve to read the quantity demanded at that price on the horizontal axis,Under the vertical interpretation,we start with a quantity produced and then go up to the demand curve to read the marginal buyer’s reservation price for the product on the vertical axis.
5,It is smart for each individual in a crowded theater to stand to get a better view of the stage,yet it is dumb for all to stand since no one sees any better than if all had remained seated.
Answers to Problems
1a,Substitutes
b,Complements
c,Probably substitutes for most people,but complements for some others who like to eat ice cream and chocolate together.
d,Substitutes.
2,The supply curve would shift:
a,Right,The discovery is a technological improvement,The improved technique would enable more crops to be produced with the same inputs.
b,Right,Fertilizer is an input,Lower input prices shift the supply curve to the right.
c,Right,The new tax breaks make farming relatively more profitable than before,Thus those who were employed in a job that was just a little better than being a farmer would switch to farming.
d,Left,Tornadoes destroy corn.
3a,Demand shifts right,income has risen and vacations are a normal good.
b,Demand shifts right,preferences have shifted from hamburger to pizza and other substitutes.
c,Demand shifts right,the price of a substitute has risen.
d,Demand is unaffected; there will be a movement along the curve—i.e.,quantity demanded will fall.
4,The demand for binoculars might increase,leading to an increase in the quantity of binoculars supplied,but no change in the supply of binoculars should occur,The UFO sighting does nothing to change the factors that govern the supply of binoculars.
5,An increase in the cost of an input used in orange production will shift the supply curve of oranges to the left,resulting in an increase in the equilibrium price and a decline in the equilibrium quantity of oranges.
6,An increase in the birth rate will increase the population of potential buyers of land,and hence shift the demand curve for land to the right,resulting in an increase in the equilibrium price of land.
7,The discovery will shift the demand curve for fish to the right,increasing both the equilibrium price and the equilibrium quantity of fish.
8,An increase in the price of chickenfeed shifts the supply curve of chickens to the left,resulting in an increase in the equilibrium price of chickens,which are a substitute for beef,This shifts the demand curve for beef to the right,increasing both the equilibrium price and the equilibrium quantity of beef.
9,Compared with the rest of the year,there are more people who want to stay in hotel rooms near campus during parents’ weekend and graduation weekend,Thus the demand curve shifts to the right during these weekends,This implies a higher equilibrium price for hotel rooms (and,of course,a higher equilibrium quantity of rooms rented).
10,Automobile insurance and automobiles are complements,An increase in automobile insurance rates will thus shift the demand curve for automobiles to the left,Some people who would have bought new automobiles with the lower insurance rates will choose not to,maybe choosing a used car,public transportation or perhaps just getting some more miles from their current vehicle.
11,The mad cow disease announcement is likely to cause many consumers to forsake beef for substitute sources of protein—and hence produce a rightward shift in the demand for chicken,The discovery of the new chicken breed will cause a rightward shift in the supply curve of chicken,The two developments together will increase the equilibrium quantity of chicken sold in the United States,but we cannot determine the net effect on equilibrium price from the information given.
12,The population increase causes a rightward shift in the demand curve for potatoes,and the development of the higher yielding variety causes a rightward shift in the supply curve for potatoes,The equilibrium quantity of potatoes goes up,but the equilibrium price may go either down or up.
13,The discovery of the cold-fighting property causes a rightward shift in the demand curve for apples,and the fungus causes a leftward shift in the supply curve,The equilibrium price of apples will rise,but the equilibrium quantity may go either down or up.
14,Since butter and corn are complements,an increase in the price of butter will cause the demand curve for corn to shift leftward,The fertilizer price decrease causes the supply curve for corn to shift rightward,The equilibrium price of corn falls,but the equilibrium quantity may go either down or up.
15,Since both the demand and supply curves for tofu have shifted outward,the equilibrium quantity of tofu sold is higher than before,The equilibrium price may be either higher (left panel) or lower (right panel).
exercises
Refer to the graph provided to answer the following questions.
Price
supply
7
5
3
demand
100 175 220 Quantity
What are the equilibrium price and quantity in this market?
What is the effect of a price ceiling of $3 placed on this market?
What is the effect of a price ceiling of $7 placed on this market?
If price in this market is $7,explain the adjustment process that will bring the market back to equilibrium.
Refer to the graph of the housing market provided to answer the following questions.
Monthly Rent supply
1000
800
600
demand
30 50 70 Quantity
(thousands of apartments per month)
What are the equilibrium rent and quantity of housing in this market if it is unregulated?
If rent in this market is controlled at $600,what quantity of housing will be demanded?
If rent in this market is controlled at $600,what quantity of housing will be supplied?
If rent in this market is controlled at $1,000,what quantity of housing will be demanded?
If rent in this market is controlled at $1,000,what quantity of housing will be supplied?
1,The equilibrium price of a good is determined by the intersection of its supply and demand curves,We can know everything about a good’s cost of production (that,is we can know its supply exactly) yet still not know where the demand curve will intersect the supply curve.
2,A change in demand means a shift of the entire demand curve,whereas a change in the quantity demanded means a movement along the demand curve in response to a change in price.
3,If the price of gasoline were prevented by regulations from rising to its equilibrium level,we would expect to see symptoms of excess demand for gasoline,such as lines of cars waiting at the pumps to buy gas.
4,Under the horizontal interpretation,we begin with a price for the good and then go over to the demand curve to read the quantity demanded at that price on the horizontal axis,Under the vertical interpretation,we start with a quantity produced and then go up to the demand curve to read the marginal buyer’s reservation price for the product on the vertical axis.
5,It is smart for each individual in a crowded theater to stand to get a better view of the stage,yet it is dumb for all to stand since no one sees any better than if all had remained seated.
Answers to Problems
1a,Substitutes
b,Complements
c,Probably substitutes for most people,but complements for some others who like to eat ice cream and chocolate together.
d,Substitutes.
2,The supply curve would shift:
a,Right,The discovery is a technological improvement,The improved technique would enable more crops to be produced with the same inputs.
b,Right,Fertilizer is an input,Lower input prices shift the supply curve to the right.
c,Right,The new tax breaks make farming relatively more profitable than before,Thus those who were employed in a job that was just a little better than being a farmer would switch to farming.
d,Left,Tornadoes destroy corn.
3a,Demand shifts right,income has risen and vacations are a normal good.
b,Demand shifts right,preferences have shifted from hamburger to pizza and other substitutes.
c,Demand shifts right,the price of a substitute has risen.
d,Demand is unaffected; there will be a movement along the curve—i.e.,quantity demanded will fall.
4,The demand for binoculars might increase,leading to an increase in the quantity of binoculars supplied,but no change in the supply of binoculars should occur,The UFO sighting does nothing to change the factors that govern the supply of binoculars.
5,An increase in the cost of an input used in orange production will shift the supply curve of oranges to the left,resulting in an increase in the equilibrium price and a decline in the equilibrium quantity of oranges.
6,An increase in the birth rate will increase the population of potential buyers of land,and hence shift the demand curve for land to the right,resulting in an increase in the equilibrium price of land.
7,The discovery will shift the demand curve for fish to the right,increasing both the equilibrium price and the equilibrium quantity of fish.
8,An increase in the price of chickenfeed shifts the supply curve of chickens to the left,resulting in an increase in the equilibrium price of chickens,which are a substitute for beef,This shifts the demand curve for beef to the right,increasing both the equilibrium price and the equilibrium quantity of beef.
9,Compared with the rest of the year,there are more people who want to stay in hotel rooms near campus during parents’ weekend and graduation weekend,Thus the demand curve shifts to the right during these weekends,This implies a higher equilibrium price for hotel rooms (and,of course,a higher equilibrium quantity of rooms rented).
10,Automobile insurance and automobiles are complements,An increase in automobile insurance rates will thus shift the demand curve for automobiles to the left,Some people who would have bought new automobiles with the lower insurance rates will choose not to,maybe choosing a used car,public transportation or perhaps just getting some more miles from their current vehicle.
11,The mad cow disease announcement is likely to cause many consumers to forsake beef for substitute sources of protein—and hence produce a rightward shift in the demand for chicken,The discovery of the new chicken breed will cause a rightward shift in the supply curve of chicken,The two developments together will increase the equilibrium quantity of chicken sold in the United States,but we cannot determine the net effect on equilibrium price from the information given.
12,The population increase causes a rightward shift in the demand curve for potatoes,and the development of the higher yielding variety causes a rightward shift in the supply curve for potatoes,The equilibrium quantity of potatoes goes up,but the equilibrium price may go either down or up.
13,The discovery of the cold-fighting property causes a rightward shift in the demand curve for apples,and the fungus causes a leftward shift in the supply curve,The equilibrium price of apples will rise,but the equilibrium quantity may go either down or up.
14,Since butter and corn are complements,an increase in the price of butter will cause the demand curve for corn to shift leftward,The fertilizer price decrease causes the supply curve for corn to shift rightward,The equilibrium price of corn falls,but the equilibrium quantity may go either down or up.
15,Since both the demand and supply curves for tofu have shifted outward,the equilibrium quantity of tofu sold is higher than before,The equilibrium price may be either higher (left panel) or lower (right panel).
exercises
Refer to the graph provided to answer the following questions.
Price
supply
7
5
3
demand
100 175 220 Quantity
What are the equilibrium price and quantity in this market?
What is the effect of a price ceiling of $3 placed on this market?
What is the effect of a price ceiling of $7 placed on this market?
If price in this market is $7,explain the adjustment process that will bring the market back to equilibrium.
Refer to the graph of the housing market provided to answer the following questions.
Monthly Rent supply
1000
800
600
demand
30 50 70 Quantity
(thousands of apartments per month)
What are the equilibrium rent and quantity of housing in this market if it is unregulated?
If rent in this market is controlled at $600,what quantity of housing will be demanded?
If rent in this market is controlled at $600,what quantity of housing will be supplied?
If rent in this market is controlled at $1,000,what quantity of housing will be demanded?
If rent in this market is controlled at $1,000,what quantity of housing will be supplied?
