Answers to Text Questions and Problems
Answers to Review Questions
1. The equilibrium price of a good is determined by the intersection of its supply and demand curves.
We can know everything about a good’s cost of production (that is, we can know its supply exactly), yet
still not know where the demand curve will intersect the supply curve.
2. A change in demand means a shift of the entire demand curve, whereas a change in the quantity
demanded means a movement along the demand curve in response to a change in price.
3. If the price of gasoline were prevented by regulations from rising to its equilibrium level, we would
expect to see symptoms of excess demand for gasoline, such as lines of cars waiting at the pumps to buy
gas.
4. The presence of excess demand or supply in an unregulated market implies the existence of
unexploited opportunities for individuals. When there is excess demand, sellers can raise prices and still
sell all they wish to. Similarly, excess supply enables buyers to offer less and still buy as much as they
wish to. In both cases, self-interested persons will exploit these opportunities until they no longer exist.
Answers to Problems
1a. Substitutes
b. Complements
c. Probably substitutes for most people, but complements for some others who like to eat ice cream and
chocolate together
d. Substitutes
2a. Supply shifts right. The discovery is a technological improvement; the improved technique would
enable more crops to be produced with the same inputs.
b. Supply shifts right. Fertilizer is an input; lower input prices shift the supply curve to the right.
c. Supply shifts right. The new tax breaks make farming relatively more profitable than before. Thus
those who were employed in a job that was just a little better than being a farmer would switch to
farming.
d. Supply shifts left. Droughts destroy wheat.
3a.
b.
c.
d.
e.
Demand shifts right. Income has risen and vacations are a normal good.
Demand shifts left. Preferences have shifted from beef to other meats.
Demand shifts right. Population has risen.
Demand shifts right. The price of a substitute has risen.
Demand is unaffected. There will be a movement along the curve—i.e., quantity demanded will fall.
4. The demand for binoculars might increase, leading to an increase in the quantity of binoculars
supplied, but no change in the supply of binoculars should occur. The UFO sighting does nothing to
change the factors that govern the supply of binoculars.
5. An increase in the cost of an input used in orange production will shift the supply curve of oranges
to the left, resulting in an increase in the equilibrium price and a decline in the equilibrium quantity of
oranges.
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6. An increase in the birthrate will increase the population of potential buyers of land, and hence shift
the demand curve for land to the right, resulting in an increase in the equilibrium price of land.
7. The discovery will shift the demand curve for fish to the right, increasing both the equilibrium price
and the equilibrium quantity of fish.
8. An increase in the price of chicken feed shifts the supply curve of chickens to the left, resulting in an
increase in the equilibrium price of chickens, which are a substitute for beef. This shifts the demand curve
for beef to the right, increasing both the equilibrium price and the equilibrium quantity of beef.
9. Compared with the rest of the year, there are more people who want to stay in hotel rooms near
campus during parents’ weekend and graduation weekend. Thus the demand curve shifts to the right
during these weekends. This implies a higher equilibrium price for hotel rooms (and, of course, a higher
equilibrium quantity of rooms rented).
10. Automobile insurance and automobiles are complements. An increase in automobile insurance rates
will thus shift the demand curve for automobiles to the left. Some people who would have bought new
automobiles with the lower insurance rates will choose not to, maybe choosing a used car, public
transportation, or perhaps just getting some more kilometers from their current vehicle.
11. The mad cow disease announcement is likely to cause many consumers to forsake beef for substitute
sources of protein—and hence produce a rightward shift in the demand for chicken. The discovery of the
new chicken breed will cause a rightward shift in the supply curve of chicken. The two developments
together will increase the equilibrium quantity of chicken sold in Canada, but we cannot determine the net
effect on equilibrium price from the information given.
12. The population increase causes a rightward shift in the demand curve for potatoes, and the
development of the higher yielding variety causes a rightward shift in the supply curve for potatoes. The
equilibrium quantity of potatoes goes up, but the equilibrium price may go either down or up.
13. The discovery of the cold-fighting property causes a rightward shift in the demand curve for apples,
and the fungus causes a leftward shift in the supply curve. The equilibrium price of apples rises, but the
equilibrium quantity may go either down or up.
14. Since butter and corn are complements, an increase in the price of butter will cause the demand
curve for corn to shift leftward. The fertilizer price decrease causes the supply curve for corn to shift
rightward. The equilibrium price of corn falls, but the equilibrium quantity may go either down or up.
15. Since both the demand and supply curves for tofu have shifted outward, the equilibrium quantity of
tofu sold is higher than before. The equilibrium price may be either higher (left panel) or lower (right
panel).
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Price
($/kg)
Price
($/kg)
S
S
S'
P'
P
P
P'
S'
D'
D'
D
D
Q
Q'
Millions of
kg per month
Q
Q' Millions of
kg per month
Sample Homework Assignment
1.
Refer to the graph provided to answer the following questions.
Price ($)
Supply
7
5
3
Demand
100
175
220
Quantity
a.
b.
c.
d.
What are the equilibrium price and quantity in this market?
What is the state of the market when the price is $3?
What is the state of the market when the price is $7?
If price in this market is $7, explain the adjustment process that will bring the market back to
equilibrium.
2.
Graph the effect on equilibrium price and quantity in the market for oranges for each of the
following changes (graph each one separately).
A chemical routinely sprayed on orange trees is found to cause cancer.
The wages of farm workers increase.
A new orange picking machine is invented. For the same cost, it can pick more oranges, faster, and
with less damage than other machines.
Consumer income falls.
The price of tangerines falls.
a.
b.
c.
d.
e.
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3.
Graph the effect on equilibrium price and quantity in the orange market if both (a) and (b) from
Question 2 occur simultaneously.
Multiple Choice Quiz
1.
a.
b.
c.
d.
e.
Equilibrium
is a concept unique to economics.
occurs where supply exceeds demand.
results when opposing forces fail to cancel each other out.
indicates balance.
refers to a constant state of change.
2.
a.
b.
c.
d.
e.
In the supply and demand model, which of the following is not true of the equilibrium?
All buyers and sellers are satisfied with their respective quantities, given the market price.
Supply and demand intersect.
Quantity supplied equals quantity demanded.
The price has no tendency to change.
Buyers and sellers wish to change their behaviour.
3.
a.
b.
c.
d.
e.
A price above equilibrium price will lead to
a surplus.
a shortage.
excess demand.
an increase in price.
an increase in production.
4.
a.
b.
c.
d.
e.
A price below equilibrium price will lead to
a shortage.
a surplus.
excess supply.
a decrease in price.
a decrease in production.
5.
a.
b.
c.
d.
e.
The efficient quantity of a good maximizes
economic surplus.
producer surplus.
consumer surplus.
quantity demanded.
quantity supplied.
6.
It is not possible for individuals to arrange a transaction that creates additional economic surplus
when
price is above equilibrium.
price is below equilibrium.
price is at equilibrium.
there is a shortage.
there is a surplus.
a.
b.
c.
d.
e.
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7.
a.
b.
c.
d.
e.
Which of the following is not true of producing the efficient quantity of a good?
The supply curve reflects all significant costs of producing the good.
The demand curve reflects all significant benefits of consuming the good.
Total economic surplus is maximized.
The marginal benefit of producing another unit of the good is equal to the marginal cost.
The marginal benefit of producing another unit of the good is greater than the marginal cost.
8.
a.
b.
c.
d.
e.
An increase in price will
decrease demand.
decrease quantity demanded.
increase demand.
increase quantity demanded.
not affect quantity demanded.
9.
a.
b.
c.
d.
e.
An increase in the price of a complement will
decrease demand.
decrease quantity demanded.
increase demand.
increase quantity demanded.
not affect quantity demanded.
10.
a.
b.
c.
d.
e.
If an increase in income leads to a decrease in the demand for a good, the good is a(n)
substitute good.
complementary good.
inferior good.
normal good.
superior good.
Problems/Short Answer
1. Refer to the graph of the housing market provided to answer the following questions.
Monthly Rent ($)
Supply
1000
800
600
Demand
30
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50
70
Quantity
(thousands of apartments per month)
5
a.
b.
c.
d.
e.
What are the equilibrium rent and quantity of housing in this market?
If rent in this market is not allowed to rise above $600, what quantity of housing will be demanded?
If rent in this market is not allowed to rise above $600, what quantity of housing will be supplied?
If rent in this market is not allowed to rise above $1000, what quantity of housing will be demanded?
If rent in this market is not allowed to rise above $1000, what quantity of housing will be supplied?
2. What is the effect on the equilibrium price and quantity in the market for doctors’ services as the
average age of the population increases?
Answer Key to Extra Questions in Instructor’s Manual
Sample Homework Assignment
1a. Equilibrium P = $5 and equilibrium Q = 175.
b. A shortage (excess demand) of 120.
c. A surplus (excess supply) of 120.
d. The surplus of 120 signals firms to lower the price, which reduces the quantity supplied and
increases the quantity demanded until the equilibrium price of $5 is reached.
2a. This will cause a decrease in the demand for oranges (preferences).
b. This will cause a decrease in the supply of oranges (cost of inputs).
c. This will cause an increase in the supply of oranges (technology).
d. This will increase or decrease demand, depending on what type of good oranges are. If they are
normal, demand will decrease. If they are inferior, demand will increase (income).
e. This will cause a decrease in the demand for oranges (substitutes).
3. The change in (a) will cause demand to decrease, the change in (b) will cause supply to decrease.
The equilibrium quantity will decrease. Depending on the magnitude of the shifts, price may increase,
decrease, or remain the same.
Multiple Choice
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
d
e
a
a
a
c
e
b
a
c
Problems/Short Answer
1a. P = $800, Q = 50 thousand apartments
b. 70
c. 30
d. 50 (equilibrium)
e. 50 (equilibrium)
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2. The demand for doctors’ services will increase as the population ages, causing a rise in both price and
quantity.
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