Econ 200, Spring 2012
Suggested Answers to Exercise Set 3
1. Running shoes:
P
The decrease in demand for running
shoes could be caused by:
P
D2
D1
(Other reasons are possible.)
Q
Q2
Q1
a. Under the assumption that running shoes is a normal good (please look up the definition of
a normal good if you do not remember), a decrease in consumers’ incomes.
b. An increase in the price of running shorts (since running shoes and running shorts are
complement goods)
c. A decrease in the price of bicycles. (since running and cycling are alternative sports
running shoes and bicycles are substitute goods)
2.
The market demand for corn (in millions of bushels)
Price Qd
Q'd (for part b)
Q'd (for part c)
$6.00 220
___ 240
200
$5.50 240
___ 260
220
$5.00 260
___ 280
240
$4.50 280
___ 300
260
$4.00 300
___ 320
280
$3.50 320
___ 340
300
$3.00 340
___360
320
b. If incomes rise and corn is a normal good, the demand schedule for corn will shift right in
the graph. This can be achieved, for example, by increasing the quantity demanded numbers
in the table by 20 units for each price.
c. If corn is an ‘inferior good, and incomes rise, then the demand schedule for corn will shift
left in the graph. This can be achieved, for example, by decreasing the quantity demanded
numbers in the table by 20 units for each price.
d. A change in the price of a substitute can alter the demand for a good, because, for
example, if the substitute good becomes cheaper, the consumers will increase their
consumption of that substitute good and will demand a lower quantity of the original good.
3. Which of the following would be least likely to increase the demand for beer?
a. A new FDA study concludes that beer cures colds and skin disorders.
This will increase the demand for beer.
b. A price war results in beer selling for $0.05/bottle.
This will increase the quantity demanded but will not change demand.
c. Bars beginning giving away spicy snacks to their customers.
This is a decrease in the price of a complement good, demand for beer will increase.
d. The price of a substitute, hard liquor, (example: vodka, gin etc) rises.
This is an increase in the price of a substitute good, demand for beer will increase.
e. There is an increase in the drinking-age population .
If there are more consumers their total demand (which is called the market demand) will
increase.
4. If a new technological breakthrough in genetic engineering makes it possible to grow
twice as much corn per acre as had been possible in the past, the most likely result will be:
a. a decrease (shift to the left) in the supply of corn, due to the increased costs associated with
the new technology.
This is false: A technological progress will cause an increase in supply not a decrease.
b. an increase (shift to the right) in the supply of corn, due to the reduced cost of production.
This is a likely outcome: A technological progress will cause an increase in supply not a
decrease.
c. an increase in the demand for corn, due to the greatly reduced price.
NO. If price of corn decreases for whatever reason, quantity demanded will increase, demand
will not change.
d. an increase in quantity supplied, due to the increased willingness to sell corn.
The increase in corn supply (the shift to the right) will cause a reduction in the price of corn
but quantity supplied will be more likely to be larger than it was before.
e. a shift from corn production to wheat production, using all of the extra land not needed for
corn production.
If new technology causes a decline in corn price, then since corn and wheat are substitutes
demand for wheat will decrease. Hence there is not much reason to expect that more land will
be allocated to wheat production.
5. An inferior good is one for which demand:
a. rises as income rises. This is false since this is the definition of the normal good.
b. falls as income rises. This is true since this is the definition of the inferior good.
c. is unrelated to income. NO
d. is low because of the low quality of the good. LOW demand HIGH demand are not well
defined terms. Note that we define normal and inferior goods by how demand changes when
income changes.
e. is high because the good must be replaced often.
6. Assume that the demand function for (tons of) oranges is QD = 28 4P, and the supply
function is QS = 18 + P, where P is price (in 100,000 TL per kilo).
a. Compute quantity demanded if the price is 400,000 TL per kilo (i.e. P = 4).
Set P = 4 in the demand equation: quantity demanded is 12 units.
b. Compute the quantity supplied if the price is 400,000 TL per kilo (i.e. P = 4).
Set P = 4 in the supply equation: quantity supplied is 22 units.
c. Since quantity supplied exceeds quantity demanded, there is excess supply. It is 10 units.
7.
Individual
demand
Individual
supply
Market demand
Price
Quantity
demanded
1
2
3
4
5
4
3
2
4 x 5 = 20
4 x 4 = 16
4 x 3 = 12
4x2=8
Market supply
Price
Quantity
supplied
1
2
3
4
0
2
4
6
3x0=0
3x2=6
3 x 4 = 12
3 x 6 = 18
The equilibrium price is 3 at which the quantity demanded is equal to the quantity supplied
(QD = QS = 12). Each firm will produce 4 units. Each consumer will consume 3 units.
8. (a) Potatoes:
P
(b) Automobiles:
P
S
S
P1*
P0*
P0*
P1*
D0
D1
Q0* Q1*
Increase in demand
D1
Q
D0
Q1* Q0*
Decrease in demand
(c) Grapefruits:
P
Q
(d) Personal Computers:
P
S1
S0
S1
P1*
S0
P0*
P0*
P1*
D
D
Q1* Q0*
Decrease in supply
9.
Q
Q0* Q1*
Increase in supply
Q
(1). A scientific report is issued saying that fish contains mercury. As a result, for every price
quantity demanded falls and demand shifts to the left. Equilibrium price and equilibrium
quantity falls.
(2). The price of diesel fuel falls significantly. Diesel fuel is an input for fish production. The
fall in input prices shifts the supply curve to the right. As a result equilibrium price falls and
equilibrium quantity increases
fresh seafood market
fresh seafood market
P
P
D’ D
S
S S’
D
Q
Q
Both (1) and (2) lower the equilibrium price. Therefore when both of these events occur,
equilibrium price is going to go down. (1) decreases equilibrium quantity and (2) increases it.
The effect of both of the events on the equilibrium quantity is therefore ambiguous. It
depends on the relative magnitudes of the changes in demand in (1) and supply in (2). Below
are the three possible cases graphed.
(a) Change in supply is bigger than the change in demand. Therefore Qe< Q’e.
(b) Change in supply is equal to the change in demand. Therefore Qe=Q’e.
(c) Change in demand is bigger than the change in supply. Therefore Q’e< Qe.
(a)
fresh seafood market
P
D’ D
(b)
fresh seafood market
S S’
Qe< Q’e
Q
P
D’ D
Qe= Q’e
(c)
fresh seafood market
S S’
Q
P
D’
D
Q’e< Qe
S
S’
Q
10. Flour is an input in bagel production. When price of flour goes down, bagel supply curve
shifts to the right. This causes equilibrium quantity to rise. But equilibrium price goes down.
Therefore a fall in the price of flour cannot be responsible for the new equilibrium in the
bagel market.
The fall in the price of milk first affects the cream cheese market. Cream cheese supply shifts
to the right. Equilibrium price of cream cheese falls and equilibrium quantity increases. Since
cream cheese and bagel are complements this increases demand for bagels. Bagel demand
curve shifts up and both equilibrium price and quantity of bagels rise. Therefore the fall in the
price of milk may be responsible for the observed change in the bagel market.