Name:__ANSWER KEY_____
Unit 2A Review Problems
1. Predict the direction of change for either supply or demand in the following situations:
a. Several new companies enter the home computer industry
 Shift to right, Increase in supply of home computers
b. Consumers suddenly decide large cars are unfashionable.
 Shift to left, Decrease in demand for large cars
c. The US Surgeon General issues a report stating that tomatoes prevent colds.
 Shift to right, Increase in demand for tomatoes
d. Frost threatens to damage the coffee crop, and consumers expect the price to rise sharply in
the future.
 Shift to right, Increase in demand for coffee
e. The price of tea falls. What is the effect on the coffee market?
 Shift to left, Decrease in demand for coffee
f. The price of sugar rises. What is the effect on the coffee market?
 Shift to left, Decrease in demand for coffee
g. Tobacco lobbyists convince Congress to remove the tax paid by sellers on each carton of
cigarettes sold.
 Shift to right, Increase in supply of cigarettes
h. A new type of robot is invented that will pick peaches.
 Shift to right, Increase in supply of peaches
i. Nintendo anticipates that the future prices of its games will fall much lower than the current
price.
 Shift to right, Increase in supply of Nintendo games
2. Explain why the market price may not be the same as the equilibrium price? Any time a market is in
disequilibrium market price and equilibrium price will be different. The economic conditions
where this occurs is: 1. Market > Equilibrium and there is a surplus 2. Market < Equilibrium
and there is a shortage.
3. For each of the following pairs of products, state which are complements, which are substitutes, and
which are unrelated.
a. Pepsi and Coke Substitutes
b. Oscar Mayer hot dogs and Wonder hot dog buns Complements
c. Jiffy peanut butter and Smucker’s strawberry jam Complements
d. Hewlett-Packard printers and Texas Instruments hand calculators Unrelated
4. The world price of coffee fell during the early 2000s, but in 2005, the price increased.
a. Draw a supply and demand graph to show the equilibrium in the world coffee market in 2000.
 You should have the following in your model:
 Price on vertical axis
 Quantity on horizontal axis
 Downward sloping demand curve
 Upward sloping supply curve
 Price equilibrium
 Quantity equilibrium
b. During the early 2000s, countries such as Vietnam started to produce coffee and coffee shops
such as Starbucks started to spring up across Europe and Asia. Illustrate how these events
have changed the demand for and supply of coffee.
 You should have the following added to your original model
 Increase in Supply
 Increase in Demand
 Equilibrium Quantity increases
 Equilibrium Price indeterminate
c. Why do you think the price of coffee fell in the early 2000s and then rose?
 Increase in supply will cause equilibrium quantity to increase and equilibrium
price to decrease
 Increase in demand will cause equilibrium price and quantity to increase
5. Which of the following pairs of goods has the higher price elasticity of demand?
a. Oranges or Sunkist oranges Sunkist Oranges (Broad versus Narrow)
b. Cars or Salt Cars (Luxury versus necessity, Budgetary difference)
c. Foreign travel in the short run or foreign travel in the long run Foreign travel in the long run
(Time horizon)
d. Root beer or water Root Bear (Substitutes, Necessity versus Luxury)
6. Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand. Suppose that
technological advance doubles the supply of both products (that is, the quantity supplied at each price
is twice what it was.)
a. What happens to the equilibrium price and quantity in each market?
 Equilibrium Price will decrease and Equilibrium quantity will increase in both
markets.
b. Which product experiences a larger change in price?
 Drug Market
c. Which product experiences a larger change in quantity?
 Computer Market
d. What happens to total consumer spending on each product? Because demand is inelastic in
the market for drugs, the % increase in quantity will be lower than the % decrease in
price; thus, total consumer spending will decline. Because demand is elastic in the
market for computers, the % increase in quantity will greater than the % decrease in
price, so total consumer spending will increase.
7. In Pioneer Ville, the price elasticity of demand for bus rides is 0.5, the income elasticity of demand
for bus rides is -0.1, and the cross elasticity of demand for bus rides with respect to gasoline is 0.2.
a. Is the demand for bus rides elastic or inelastic with respect to the price of a bus ride? Why?
 Less than one, inelastic
b. Would an increase in bus fares increase the bus company’s total revenue? Explain your
answer.
 Increase, Price effect greater than quantity effect
c. Describe the relationship between bus rides and gasoline. Explain.
 Positive number indicates a substitute relationship
d. If the price of gasoline increases by 10 percent with no change in the price of a bus ride, how
will the number of bus rides change?
 Using the given information and formulas, the % of bus rides will increase by
2%.
e. If incomes in Pioneer Ville increase by 5 percent with no change in the price of a bus ride,
how will the number of bus rides change?
 Using the given information and formulas, the % of bus rides will decrease by
0.5%
f. In Pioneer Ville, is a bus ride a normal good or inferior good? Why?
 Negative, Inferior Good
g. In Pioneer Ville, are bus rides and gasoline substitutes or complements? Why?
 Positive, Substitute Good
8. The table below shows the demand and supply schedule for on-campus housing.
Rent (dollars per month)
500
550
600
650
700
750
Quantity Demanded (rooms)
2,500
2,250
2,000
1,750
1,500
1,250
Quantity Supplied (rooms)
2,000
2,000
2,000
2,000
2,000
2,000
a. What are the equilibrium rent and number of rooms?
 Equilibrium Price is 600, Equilibrium Quantity is 2,000
b. If the college puts a rent ceiling on rooms of $650 a month, what is the rent and how many
rooms are rented?
 Price of $650 would be non-binding, Equilibrium Price is 600, Quantity
Demanded is 2,000
c. If the college puts a rent ceiling on rooms of $550 a month, what is the rent and how many
rooms are rented?
 Equilibrium Price is 550, Quantity Supplied is 2,000
d. If the college strictly enforces the rent ceiling of $550 a month, is the on-campus housing
market efficient? Explain why or why not.
 It is not efficient and is in disequilibrium. Quantity Demanded is greater than
Quantity Supplied leading to a shortage situation.
e. If a black market develops, how high could the black market rent be? Explain.
 The black market rent could be as high as the willingness of the consumer. (i.e.
750)
f. If a black market develops, is the housing market fair? Explain your answer.
 Answers will vary