CHAPTER 3 SUPPLY AND DEMAND EVEN NUMBER ANSWERS

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CHAPTER 3
SUPPLY AND DEMAND
EVEN NUMBER ANSWERS, SOLUTIONS, AND EXERCISES
ANSWERS TO ONLINE REVIEW QUESTIONS
2. Demand shows the number of units of a good demanded at each possible price, holding constant
all other variables that affect demand, while quantity demanded describes the number of units
demanded at one particular price.
4. A substitute is a good that can be used in place of another good, and that fulfills more or less the
same purpose. Complements are the opposite of substitutes—they are goods that are generally
consumed together.
a. Substitutes
b. Complements
c. Substitutes
d. Neither—although you might find some examples (in baking, for instance) where they act as
complements
e. Substitutes
6. a. Normal
b. Inferior
c. Normal
d. Normal—however a (weak) case could be made for inferiority; e.g., as income in-creases, one
parent is more likely to stay home.
e. Inferior
f. Probably Inferior – futons are a cheap alternative to a mattress and box spring.
g. Inferior
8. A price above equilibrium will be driven down as sellers compete with each other to sell more
units than buyers want to buy. Similarly, a price below equilibrium will be driven up as buyers
compete with each other to buy more units than sellers want to sell.
10. a and b. Key Step #1: There are two markets: crude oil is traded in the first market and natural
gas is traded in the second market. The analysis assumes that these are competitive markets.
Key Step #2: The markets for oil and natural gas were initially assumed to be in equilibrium. As in
any competitive markets, the equilibrium price occurs where quantity supplied and quantity
demanded are equal.
Key Step #3: Oil prices rise in this analysis. When oil prices rose, demand for natural gas increased,
driving up the price of natural gas and thwarting the East Coast colleges’ ability to control their
heating costs.
PROBLEM SET
2. a. The supply and demand curves are S1 and D1, respectively.
b. Equilibrium price = $1.40; Equilibrium quantity = 140
c. Since automobiles and gasoline are complements, a rise in automobile prices will lead to a decline
in demand for gas, as illustrated by the shift from D1 to D2.
4. a.
b. The equilibrium price is $200, and the equilibrium quantity is 450 scooters.
c. As shown in part a, the supply curve would shift leftward, for example from S1 to S2. The
equilibrium price would rise and the equilibrium quantity would fall.
d. The supply curve would shift leftward, while the demand curve would shift rightward. The price
per scooter would increase, but the effect on equilibrium quantity would depend on the relative sizes
of the shifts.
6. a.
b. The equilibrium price is $25, and the equilibrium quantity is 1500 alarm clocks.
c. A result of a decrease in the price of a substitute, the demand curve for alarm clocks will shift
leftward, for example from D1 to D2. The equilibrium price and the equilibrium quantity will both
fall.
d. The demand curve and the supply curve would shift leftward. The equilibrium quantity traded
would fall, but the effect on equilibrium price would depend on the relative sizes of the shifts.
8 a.
b. $1400 is the equilibrium price, and 19,000 is the equilibrium quantity.
c. At a rent of $1000, there is excess demand of 11,000 apartments. This excess demand will drive
the price up.
d. The supply curve will shift leftward from S1 to S2, as shown in part a. The resulting shortage at the
initial equilibrium price will drive the price up and the equilibrium quantity down (to $1800 and
15,000 units in the example shown).
10. a. Coffee supply declines from S1 to S2. Equilibrium price increases from P1 to P2; equilibrium
quantity declines from Q1 to Q2.
b. Since the price of a substitute has fallen, demand for coffee should decrease. Demand decreases
from D1 to D2. Equilibrium price and quantity decline from P1, Q1 to P2, Q2.
c. An increase in wages of coffee workers should result in a decrease in supply. Supply decreases
from S1 to S2; equilibrium price increases from P1 to P2 and quantity declines from Q1 to Q2.
d. This announcement would undoubtedly cause a decrease in demand, from D1 to D2, resulting in a
lower equilibrium price and quantity.
e. If consumers expect higher coffee prices in the future, they would try to stock up on coffee now,
causing an increase in current demand. If producers, too, expect the price to rise, they may withhold
coffee, waiting to sell it at higher prices later. This will cause a decrease in supply. The combined
effect of the shifts in supply and demand is a rise in equilibrium price. The equilibrium quantity,
however, could rise or fall, depending on which shift is greater.
12. The demand curve for beef shifted to the left as consumers switched to other meats. At the same
time, the supply curve for beef also shifted to the left, as farmers destroyed their herds. Since both of
these shifts lead to a lower equilibrium quantity of beef, we know with certainty that equilibrium
quantity will decrease. However, we cannot know whether the price of beef will rise, fall, or stay the
same. The answer depends on the relative sizes of the two shifts. If demand shifts more than supply,
then the price of beef will fall. If supply shifts more than demand, then the price of beef will rise. If
the two shifts exactly offset each other, the price of beef will remain constant.
Graphically, the three alternative outcomes are as follows:
14. False. Slowing down oil production would correspond to a leftward shift of the supply curve.
Assuming demand is unchanged, this leftward shift in supply would lead to a price increase, not
decrease. Therefore, it must be that the situation described – falling oil prices and falling quantity of
oil produced – was caused by a leftward shift (decrease) in demand.
MORE CHALLENGING
16. The key here is to realize that the analyst is observing different equilibrium points, not
necessarily points on the same demand curve. While an upward-sloping demand curve in some
markets is not a total impossibility, another, more likely, explanation is that the demand curve has
shifted rightward each year. In this case, the observed equilibrium points might be tracing out a
more-or-less stable, upward sloping supply curve.
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