Question 1: How would each of the following affect the market supply curve of corn?
a.
b.
c.
d.
A new and improved crop rotation technique is discovered.
The price of fertilizer used to grow corn falls.
The government offers new tax breaks to farmers for growing corn.
Bad weather destroys a significant proportion of the crop in cornfields.
Question 2: How would the following affect the demand curve in the indicated markets?
a. Buyers in the market for pizza read a study linking cheese consumption to heart
disease.
b. Buyers in the market for air-conditioners learn that the price of electricity has
decreased.
c. Buyers in the market for petrol-powered cars learn that the price of electric cars has
increased.
d. Buyers in the market for electric cars learn of an increase in the price of electric cars.
Question 3: Suppose that when milk sells for HK$25 per litre, the quantity demanded of
37,500 litres per day and the quantity supplied is 42,250 litres per day. Will the equilibrium
price of milk be greater than, less than, or equal to HK$25 per litre? Explain.
Question 4: How will an increase in the birth rate affect the equilibrium price of land?
Question 5: Predict what will happen to the equilibrium price and quantity of oranges if the
following events take place.
a. A reliable scientific study finds that a daily glass of orange juice significantly
reduces the risk of heart disease.
b. The price of grapefruit falls drastically.
c. The wage paid to orange pickers rises.
d. Exceptionally good weather provides a much greater than expected harvest.
Solutions
Question 1:
a. The supply curve would shift to the right. The discovery is a technological
improvement, so the improved technique would allow a farmer to use the same inputs
to produce more corn.
b. The supply curve would shift to the right. Fertilizer is an input into the production of
corn, so this is an example of a decrease in an input price. A decrease in input prices
shifts the supply curve to the right.
c. The supply curve would shift to the right. New tax breaks make growing corn
relatively more profitable than before, thereby attracting more farmers to grow corn
instead of other crops.
d. Since the bad weather destroy corn fields, the supply curve would shift to the left.
Question 2:
a. The demand curve would shift to the left. Buyer preference will probably change
because most people want to avoid foods that cause heart disease, so buyers will
purchase fewer pizzas.
b. Since electric cars and electricity are compliments, a decrease in the price of electricity
will increase the demand for electric cars. The demand curve for electric cars will shift
to the right.
c. The demand curve for petrol-powered cars would shift to the right. Since petrolpowered cars and electric cars are substitutes, an increase in the price of electric cars
would result in an increased demand for petrol-powered cars.
d. The demand curve for electric cars would remain unchanged. An increase in the price
of electric cars decreases the quantity demanded of electric cars, which causes
movement along the demand curve.
Question 3:
At a price of HK$25 per gallon, there is an excess supply in the market since the quantity
supplied of 42,250 litres is greater than the quantity demanded of 37,500 litres. This excess
supply will exert a downward pressure on prices, leading the equilibrium price to fall below
$25 per litre.
Question 4:
An increase in the birth rate will increase the population of potential buyers of land. This
will shift the market demand curve for land to the right and increase the equilibrium price of
land.
Question 5:
a. The scientific finding will shift the demand curve for oranges to the right. As a result,
both the equilibrium price and the equilibrium quantity of oranges will increase.
b. Since grapefruit can be assumed to be a substitute for oranges for most consumers, a
drastic decrease in the price of grapefruit will make some of the current orange
consumers buy grapefruit instead. This will shift the demand curve of oranges to the
left. As a result, both the equilibrium price and equilibrium quantity of oranges will
decrease.
c. Since labour is an input to orange production, an increase in the wage is an increase in
the cost of an input. This will shift the supply curve of oranges to the left. As a
result, the equilibrium price of oranges will increase and the equilibrium quantity will
decrease. (Note that an increase in wages does not automatically mean an increase in
the productivity of the workers, which would have affected supply in the opposite
direction.)
d. A better than expected harvest means that supply will be greater, shown graphically
as a shift of the supply curve to the right. As result, the equilibrium price of oranges
will decrease and the equilibrium quantity of oranges will increase.