PROBLEM SET 2
PROBLEMS FOR DEMAND AND SUPPLY (CHAPTER 3)
Welch and Welch: (a) pp. 83-84, “Test Your Understanding.” (NOTE: In addition
to filling in the chart, DRAW A GRAPH for each case)
(b) pp. 93-94, #3,4,5.
ADDITIONAL PROBLEMS:
1. Fill in a chart like that in “Test Your Understanding” (on pp. 86-87) and draw graphs
for the following cases:
a. The state of West Virginia removes the excise tax on cigarettes.
b. The televising of the cycling events at the Olympics increases the popularity of
bicycling. What happens in the market for bicycling equipment?
c. The price of bread decreases. What effect will this have on the market for butter, a
complementary good?
d. Henry Ford perfects the more efficient assembly line technique for producing
automobiles.
e. The price of McDonald’s hamburgers increases. What will happen in the market for
a substitute, Burger King hamburgers?
f. What is the effect on the market for grain of a drought that destroys part of the grain
crop?
g. What is the effect on the market for beef of a drought that destroys part of the grain
crop (NOTE: grain is used to feed beef cattle)?
2.
For each of the following indicate whether the change in equilibrium price and
quantity is an increase, a decrease or indeterminate. Draw a diagram to illustrate.
a.
Consider the market for beef in the U.S. Suppose that more people begin
eating beef as the high-protein Atkins Diet becomes popular at the same time as more
and more cattle ranches are going out of business.
b.
Consider the market for corn in West Virginia in August. People buy
more corn for picnics and other summertime events and corn grown in West Virginia is
harvested and supplements that which comes from other parts of the country.
2
SELECTED ANSWERS
Welch and Welch, p. 93: #3
A change in quantity demanded involves a movement along a given demand curve and
occurs when the price of the product changes. A change in demand involves a shift in
the entire demand curve and occurs when one of the non-price factors changes. The
difference between a change in quantity supplied and a change in supply is comparable.
Welch and Welch, p. 93: #4
Graphic Change**
Change in
Equilibrium Price
Change in
Equilibrium
Quantity
a.
Supply curve shifts left
Increase
Decrease
b.
Demand curve shifts right
Increase
Increase
c.
Demand curve shifts right
Increase
Increase
d.
Supply curve shifts left
Increase
Decrease
e.
Supply curve shifts right
Decrease
Increase
f.
Demand curve shifts left
Decrease
Decrease
**Draw each graphic change, clearly labeling the new curve, and the changes in
equilibrium price and quantity.
Welch and Welch, pp. 94: #5
a. equilibrium price = $6.25; equilibrium quantity = 80.
b. shortage of 90
c. surplus of 40
d. surplus of 90
e. The actual price would be the equilibrium price of $6.25 since it is below the ceiling.
In this case, the price ceiling is non-binding.
3
ANSWERS TO ADDITIONAL PROBLEMS:
1.
Result Graphic Change**
Change in
Change in
(next
Equilibrium Price
Equilibrium
page)
Quantity
a.
c
Supply curve shifts right
decrease
increase
b.
a
Demand curve shifts right
increase
increase
c.
a
Demand curve shifts right
increase
increase
d.
c
Supply curve shifts right
decrease
increase
e.
a
Demand curve shifts right
increase
increase
f.
d
Supply curve shifts left
increase
decrease
g.
d
Supply curve shifts left
increase
decrease
**Draw each graphic change, clearly labeling the new curve, and the changes in
equilibrium price and quantity.
4
a.
P
S
D’
D
Q
b.
P
S
D’
D
Q
c.
P
S
S’
D
Q
d.
P
S’
S
D
Q
2.
Graphic shift in
demand
a. Increase/shift right
b. Increase/shift right
Graphic shift in
supply
Decrease/shift left
Increase/shift right
Change in
equilibrium price
Increase
Indeterminate
Change in
equilibrium quantity
Indeterminate
Increase