CHAPER 3 PRACTICE QUESTIONS ANSWER KEY
PROBLEMS AND EXERCISES
1.
Demand increased from D1 to D2. Equilibrium price and quantity increased
from P1, Q1 to P2, Q2.
2. 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 with certainty 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:
3. a. Coffee supply declines from S1 to S2. Equilibrium price increases from P1
to P2; equilibrium quantity declines from Q1 to Q2.
Price
S2
S1
P2
P1
D1
Q2
Q1
Quantity
b. Since the price of a substitute has fallen, demand for coffee should fall.
Demand decreases from D1 to D2. Equilibrium price and quantity decline
from P1, Q1 to P2, Q2.
Price
S1
P1
P2
D1
D2
Q2
Quantity
Q1
c. An increase in wages for 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.
Price
S2
S1
P2
P1
D1
Q2
Q1
Quantity
d. This announcement would undoubtedly cause a decrease in demand, from
D1 to D2, resulting in a lower equilibrium price and quantity.
Price
S1
P1
P2
D1
D2
Q2
Q1
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.
Price
S2
S1
P2
P1
D2
D1
Quantity
4.
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).
5.
a.
The equilibrium price is $25, and the equilibrium quantity is 1500 alarm
clocks.
As shown in part a, the demand curve is likely to shift leftward, for
example from D1 to D2. The equilibrium price and the equilibrium quantity
would both fall.
The demand curve and the supply curve would shift leftward. The
equilibrium quantity traded would fall, but the effect on equilibrium
quantity would depend on the relative sizes of the shifts.
6.
a.
b. The equilibrium price is $200, and the equilibrium quantity is 450
scooters.
c. As shown in part a, the supply curve will 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.
7. a. See graph.
b. Equilibrium price = $1.40; Equilibrium quantity = 140
c. Since cars and gasoline are complements, a rise in car prices will lead to a
decline in demand for gas, as illustrated:
Price
S1
$1.40
P2
D1
D2
Q2
140
Quantity
8. a. Since denim is a major input into the production of jeans, an increase in
the price of denim would lead to a leftward shift of the supply curve, which
would result in a higher equilibrium price, and a lower equilibrium quantity.
Price
S2
S1
P2
P1
D1
Q2
Q1
Quantity
b. An increase in immigration would increase the supply of labor, especially
the low-skilled, low-wage labor often employed in the garment industry.
Wages in that industry could be expected to decline, leading to a rightward
shift in the supply curve for jeans, among other clothes. Equilibrium
quantity increases, equilibrium price falls. (Note: since new immigrants
will also likely buy blue jeans, the demand for jeans would also increase.
This effect is not shown.)
Price
S1
S2
P1
P2
D1
Q1
Q2
Quantity
c. Assuming jeans are a normal good (this seems a plausible assumption
given current fashion), a decline in income would result in a decline in
demand; equilibrium price and quantity both decrease.
Price
S1
P1
P2
D2
Q2
Q1
D1
Quantity
9. a. Supply shifted to the left.
b. Demand shifted to the left.
c. Supply shifted to the right.
d. Demand will decrease (demand curve shifts to the left).
10. The mistake is in the assumption that a lower price will lead to a decrease in
supply, which will shift the supply curve leftward. Actually, a lower price will
lead to a decrease in quantity supplied, which is shown by sliding down to the
left along the existing supply curve. This will result in a lower equilibrium
price and a smaller equilibrium quantity traded.
11. a.
The equilibrium price and equilibrium quantity both rise.
The equilibrium price and equilibrium quantity both fall.
The equilibrium price and equilibrium quantity both rise.
The equilibrium price falls and the equilibrium quantity rises.
The equilibrium price rises and the equilibrium quantity falls.