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Solutions to Even-Numbered, End-of-Chapter Questions, Problems, and Exercises
Chapter 3 Supply and Demand
Review Questions
2.Demand shows the number of units of a good demanded at each possible price, holding constant all other variables that affect demand, while quantity demanded describes the number of units demanded at one particular price.
4.A substitute is a good that can be used in place of another good, and that fulfills more or less the same purpose. Complements are the opposite of substitutes-they are goods that are generally consumed together.
a. Substitutes
b. Complements
c. Substitutes
d. Neither—although you might find some examples (in baking, for instance) where they act as complements
e. Substitutes
6.a. Normal
b. Inferior
c. Normal
d. Normal—however a (weak) case could be made for inferiority; e.g., as income increases, one parent is more likely to stay home.
e. Inferior
f. Probably Inferior—futons are a cheap alternative to a mattress and box spring.
g. Inferior
h. Normal
8.A price above equilibrium will be driven down as sellers compete with each other to sell more units than buyers want to buy. Similarly, a price below equilibrium will be driven up as buyers compete with each other to buy more units than sellers want to sell.
10.a and b.
Key Step #1: There are two markets: crude oil is traded in the first market and natural gas is traded in the second market. The analysis assumes that these are competitive markets.
Key Step #2: The markets for oil and natural gas were initially assumed to be in equilibrium. As in any competitive markets, the equilibrium price occurs where quantity supplied and quantity demanded are equal.
Key Step #3: Oil prices rise in this analysis. When oil prices rose, demand for natural gas increased, driving up the price of natural gas and thwarting the East Coast colleges' ability to control their heating costs.
Problems and Exercises
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:
4.a.
- $1400 is the equilibrium price, and 19,000 is the equilibrium quantity.
- At a rent of $1000, there is excess demand of 11,000 apartments. This excess demand will drive the price up.
- 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).
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.
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.
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.)
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.
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.
Challenge Questions
2.As people move to Manhattan the demand for rental housing in Manhattan increases, leading to higher rents in Manhattan. People who can no longer afford Manhattan rents move to other neighborhoods in the New York area (housing in other neighborhoods being a substitute for housing in Manhattan). This shifts the demand curve for rental housing in these other neighborhoods to the right, driving up rents in these areas and making their residents worse off.
Economic Applications Exercises
2. a. Slave redemption programs, such as the one identified in the debate, serve to increase the demand for slaves.
b.Answers may vary.