AK Microeconomics – Chapter 3
CHAPTER THREE
Answers to Self-Test Questions
1. a) Both the demand and supply increases so that the effect on price is indeterminate
while quantity traded increases.
b) Both demand and supply decreases so that the effect on price is indeterminate
while quantity traded decreases.
c) Supply increases while demand decreases so that price decreases while the effect
on the quantity traded is indeterminate.
d) Demand increases and supply decreases so that price increases while the effect on
quantity traded is indeterminate.
2. Surplus. This will lead to both the price and the quantity traded being lower.
3. a) A shortage of 12.
An effective price ceiling must be imposed below the equilibrium price. The
present equilibrium price is $1.10, and the equilibrium quantity traded is 48. The
price ceiling therefore will be at a price of $0.90. At this lower price there will be
a shortage of 12 (the quantity demanded is 44 and the quantity supplied is 56)..
b) $1.20 per litre.
The quantity supplied at $0.90 will be 44 thousand litres. The maximum illegal
market price at which this quantity could be sold is $1.20 per litre. (Trace a line up
from a quantity off 44 to where it meets the demand curve.)
4. No effect.
A price ceiling set above the equilibrium price will leave the equilibrium price
unchanged.
5. a) $17.5 million. (5 million times $3.5)
Total sales revenue at equilibrium will be the price of $3.50 times the quantity of 5
million kilos, which equals $17.5 million.
b) The quantity demanded at $4 will be 4 million, and farmers will produce 6 million
bushels. The government must purchase the difference of 2 million bushels.
c) $8 million.
The government must pay $4 times 2 million, or $8 million, to purchase the
surplus.
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AK Microeconomics – Chapter 3
6. A price ceiling of $4 would have no effect since the market price is lower than that.
(To be effective a price ceiling must be lower than the market price.)
7. a) An increase in supply would have no effect on the price if the demand curve were
horizontal.
b) An increase in supply would have no effect on the quantity traded if the demand
curve were vertical.
Answers to Study Guide Questions
1. True
2. True
3. False:
4. False:
5. False:
6. True
7. True
8. False:
9. False:
10. False:
Price will increase.
An increase in demand or a decrease in supply.
It must be set above the equilibrium price.
Price floors cause surpluses and price ceilings cause shortages.
It will cause a decrease in price.
There are limits to the demand for any product.
11. a
12 b
13. a
14. a
15. b
16.
17.
18.
19.
20.
c
a
c
c
b
21.
22.
23.
24.
25.
b
d
b
c
c
26.
27.
28.
29.
30.
d
a
a
a
b
31.
32.
33.
34.
35.
e
c
a
b
c
36A. Key Problem
a) Price = $6; quantity traded = 7 (million) kilos.
This is where the demand and supply curves intersect.
b) $42 million ($6 times 7 million.)
c) $48 million
At a price of $8 per kilo, the quantity demanded will drop to 6. The total amount
now paid by buyers is equal to 6 million kilos times $8.
d) Surplus: 3 million kilos; $24 million
This surplus is the responsibility of the government to buy. (At $8, the quantity
demanded is 6 and the quantity supplied is 9.)
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AK Microeconomics – Chapter 3
e) D2 is shown in the following figure:
Figure 3.18 (completed)
The price remains at $8. The quantity now traded increases to 7.5 million kilos. Total
spending is $60 million.
f) The new surplus is 1.5 million kilos and the dollar amount is $12 million.
g) The new supply curve (S2) is shown on Figure 3.16. The new price is $9 and the new
quantity traded is 7 million kilos. The new total spending is $63 million. Since this is
equilibrium, there is zero surplus and the dollar amount of the surplus is zero.
37A. a) D2 and S2 are shown on the following figure:
Figure 3.19 (completed)
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AK Microeconomics – Chapter 3
b) New equilibrium price: $1.50;
equilibrium quantity: 450
38A. Price: $3; quantity: 60
The new demand and supply would look as follows:
Price ($)
1
2
3
4
5
6
7
8
39A.
a)
b)
c)
d)
Equilibrium price
Equilibrium price
Equilibrium price
Equilibrium price
40A.
a)
b)
c)
d)
price 
price ?
price ?
price 
Quantity
Demanded 2
80
70
60
50
40
30
20
10
 

?

Quantity
Supplied 2
40
50
60
70
80
90
100
110
equilibrium quantity:
equilibrium quantity:
equilibrium quantity:
equilibrium quantity:
quantity
quantity
quantity
quantity
21
?


?
?
?

?
AK Microeconomics – Chapter 3
41A. See the following figure:
Figure 3.20 (completed)
42A. a) See the following figure:
Figure 3.21 (completed)
b) Zero
c) There is not a market for freezers in Antarctica (though there is a demand and
supply for them) because the lowest price that suppliers could make a profit
on freezers is higher than the maximum price that anyone would pay for them.
43A. a) surplus of 80 (Quantity demanded is 40, quantity supplied is 120.)
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AK Microeconomics – Chapter 3
b) shortage of 40 (Quantity supplied is 60, quantity demanded is 100.)
44A. If the demand were to increase and the supply to decrease then definitely the
price would rise, but the effect on the quantity traded would be indeterminate
since it would rise a result of the increase in demand but decrease because of the
decrease of supply.
45A. A price control is a government restriction that sets either a maximum or
minimum price for a product. There are two types of price controls: a price
ceiling imposes a maximum price whereas a price floor imposes a minimum price
on a product.
46A. orange juice:
price up; quantity indeterminate
cigarettes:
price indeterminate; quantity down
beer:
price down; quantity indeterminate
eye glasses:
price indeterminate; quantity up
47A. a) Price: $1.50; quantity: 600
b) surplus of 300. (The price floor would be at $1.70.)
c) shortage of 300. (The price ceiling would be at $1.30.)
48A. a) Price: $0.30; quantity: 360
b) surplus of 160 (Quantity supplied of 440 exceeds the quantity demanded
of 280.)
c) surplus of 192. (The new quantity supplied of 528 exceeds the new
quantity demanded of 336.)
d) surplus of 128. (The new quantity supplied of 352 exceeds the new
quantity demanded of 224.)
49A. a) Price: $0.96; quantity traded: $40 billion
b) shortage of $10 billion. (New quantity demanded of $45 exceeds new
quantity supplied of $35.)
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AK Microeconomics – Chapter 3
50A. A higher minimum wage may well cause some employers to economize on the
use of labour (or where possible, replace labour with capital) so that the quantity
demanded will fall. At the same time a new higher minimum wage may attract
more people to look for jobs. With fewer jobs available and more people
looking, the result will be more unemployment.
51A. An individual demand curve may well be upward-sloping in the case of people
displaying conspicuous consumption (i.e. showing off by demonstrating to others
that price is not a barrier for them). For such people a higher price for things like
expensive clothes, jewelry or perfumes actually makes these products more
attractive for them and so they buy more (but only up to a limit).
As far as the market demand curve is concerned, there is the well-documented
instance of the so-called Giffen goods where, for example, the lower price for
staple products, like rice or potatoes might mean that poor people might buy less
rather than more of them because they can now afford to use the extra money to
purchase meat, fish or vegetables.
52A. a) $1.20 (This is the price that corresponds to a quantity demanded of 200
thousand kilos.)
b) surplus of 200 000 (Quantity demanded is 200 000; quantity supplied is
(approx) 400 000.)
The quota has no shortage or surplus but with a quota, farmers receive less
income than with a price floor.
53A. See the following figure:
Figure 3.25 (completed)
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AK Microeconomics – Chapter 3
54A. a) The demand curve must be steeper than the supply curve.
b) Decrease
c) The surplus will disappear.
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