Chapter 4 Exercise Answers
1a.A change in the price of airfares does not change either the demand for or the supply of air travel. (It changes the quantity demanded and the quantity supplied of air travel.)
1b.The rise in the price of jet fuel decreases the supply of air travel because it raises the cost of producing air travel.
1c.The reduction in the number of flights decreases the supply of air travel.
1d.The demand for air travel increases when people expect airfares to increase next summer because people fly now, when airfares are relatively cheaper, rather than next summer.
1e.The cold winter in the Northeast increases the demand for air travel because more people want to fly to Florida.
1f.People flocking to the ski slopes increases the demand for air travel.
1g.Train travel is a substitute for air travel. So a fall in the price of train travel decreases the demand for air travel.
1h.Transporting cargo by air is a substitute in production for transporting people by air. So the rise in the price of air cargo decreases the supply of air travel for people.
2a.The new technology that cuts the time to manufacture a pair of jeans increases the supply of jeans.
2b.The fall in the price of the cloth, a resource used in the production of jeans, increases the supply of jeans.
2c.Jeans going out of fashion reflects a change in people’s preferences that decreases the demand for jeans.
2d.A fall in the price of a pair of jeans does not change either the demand for jeans or the supply of jeans. (It changes the quantity demanded and the quantity supplied of jeans.)
2e.An increase in the wage rate paid garment workers is a rise in the price of a resource used to produce jeans, so the supply of jeans decreases.
2f.As more companies produce jeans, the number of suppliers increases so the supply of jeans increases.
2g.Denim skirts and denim jeans are substitutes in production, so a rise in the price of a denim skirt decreases the supply of jeans.
2h.Jeans are likely a normal good, so an increase in people’s incomes increases the demand for jeans.
3a.The statement is true. Allowing Brazilian oranges into the United States increases the supply of oranges and the supply curve shifts rightward. The equilibrium price of an orange falls and the equilibrium quantity increases. The quantity of oranges demanded increases and there is a movement down along the demand curve.
Oranges are a resource used in the production of orange juice. When the price of an orange falls, it costs less to produce orange juice and the supply of orange juice increases. The quantity of orange juice demanded increases and there is a movement down along the demand curve. The equilibrium price of orange juice falls and the equilibrium quantity increases.
3b.The statement is false. If basketball becomes less popular, the demand for basketball shoes decreases and the demand curve for basketball shoes shifts leftward. The equilibrium price of a pair of basketball shoes falls and the equilibrium quantity decreases. The quantity of shoes supplied decreases and there is a movement down along the supply curve.
3c.The statement is true. More people want to ski in the winter than in the spring and so the demand for skiing in the winter exceeds the demand for skiing in the spring. The demand curve for skiing in winter lies to the right of the demand curve for skiing in spring. In the winter, the demand for skiing increases and the quantity of skiing supplied increases. Because the demand is higher in the winter than in the spring, the price of skiing is higher in the winter than in the spring.
3d.The statement is false. Frozen yogurt and ice cream are substitutes. When the price of frozen yogurt falls, people substitute frozen yogurt for ice cream. The demand for ice cream decreases and the demand curve shifts leftward. The equilibrium quantity of ice cream decreases but the equilibrium price of ice cream falls. There is a change in the quantity of ice cream supplied and a movement down along the supply curve.
4a.Apple juice and orange juice are substitutes for consumers. If the price of apple juice decreases, people substitute apple juice for orange juice. The demand for orange juice decreases and the demand curve for orange juice shifts leftward. The equilibrium price of orange juice falls and the equilibrium quantity of orange juice decreases.
4b.Apple juice and orange juice are substitutes for consumers, so the fall in the price of apple juice decreases the demand for orange juice. The demand curve for orange juice shifts leftward. The increase in the wage rate paid to orange grove workers raises the cost of producing orange juice. The supply of orange juice decreases and the supply curve of orange juice shifts leftward. The net effect of these events decreases the equilibrium quantity but has an undetermined effect on equilibrium price. If supply decreases by more than the demand, the shift in the supply curve is greater than the shift in the demand curve and the equilibrium price rises. If demand decreases more than the supply, the shift in the demand curve is greater than the shift in the supply curve and the equilibrium price falls.
4c.Because orange juice becomes more popular, demand increases and the demand curve for orange juice shifts rightward. The cheaper picking machine lowers the production costs of orange juice, so the supply of orange juice increases and the supply curve of orange juice shifts rightward. The equilibrium quantity increases. But the effect on the equilibrium price is ambiguous. If the change in supply is greater than the change in demand, the shift in the supply curve is greater than the shift in the demand curve and the equilibrium price falls. If the change in demand is greater than the change in supply, the shift in the demand curve is greater than the shift in the supply curve and the equilibrium price rises.
4d.When joggers switch from bottled water to orange juice, the demand for orange juice increases and the demand curve for orange juice shifts rightward. The equilibrium price rises and the equilibrium quantity increases.
5a.As more people buy new cars, which use the new fuel, the demand for gasoline decreases. The demand curve for gasoline shifts leftward, from D0 to D1 in Figure 4.5. The equilibrium price falls from P0 to P1 and the equilibrium quantity decreases from Q0 to Q1.
5b.The supply of used cars increases as people trade in their old cars for new cars. In Figure 4.6 the supply curve shifts rightward from S0 to S1. The equilibrium price falls from P0 to P1 and the equilibrium quantity increases from Q0 to Q1.
6a.The market equilibrium occurs at a price of $5.00 and 140 mouse pads a week. At the price of $5.00, the quantity supplied equals the quantity demanded.
6b.At a price of $7.00, the quantity demanded is 120 mouse pads and the quantity supplied is 160 mouse pads. There is a surplus of 40 mouse pads a week and the price falls. As the falls, the quantity demanded increases, the quantity supplied decreases, and the surplus decreases. The price falls until the surplus disappears. The price falls to $5.00 a mouse pad.
6c.When the price of a computer decreases, the quantity of mouse pads demanded at each price increases by 20 because mouse pads and computers are complements. The table shows the new demand schedule. At the original equilibrium quantity of $5.00 a mouse pad, there is a shortage and the price rises. As the price rises, the quantity demanded decreases, the quantity supplied increases, and the shortage decreases. The price rises until the shortage disappears. The price rises to $6.00 a mouse pad and the quantity increases to 150 mouse pads a week.
6d.The new voice-recognition software affects the demand for mouse pads. The demand for mouse pads decreases because mouse pads and voice recognition software are substitutes. The demand curve for mouse pads shifts leftward, from D0 to D1 in Figure 4.7. Simultaneously the fall in the cost of producing a mouse pad affects the supply. The fall in the cost of producing a mouse pad increases the supply and the supply curve shifts rightward, from S0 to S1 in Figure 4.7. At the initial price of a mouse pad, $5.00 in Figure 4.7, there is a surplus of 60 mouse pads per week. The surplus forces the price lower, so the equilibrium price of a mouse pad falls, to $2.00 in the figure. The effect on the quantity of mouse pads, however, is ambiguous. If the magnitude of the decrease in demand exceeds that of the increase in supply, the quantity of mouse pads decreases. If the magnitude of the increase in supply exceeds that of the decrease in demand, the quantity increases. And, if the magnitudes of the changes are the same, as in Figure 4.7, the quantity of mouse pads does not change.
7.The first statement is false. As more people buy computers, the demand for Internet service will increase because computers and Internet service are complements. The price of Internet service will rise. The second statement is also false. The demand for Internet service increases and the demand curve shifts rightward. There is a movement along the supply curve and a change in the quantity supplied but no change in supply.
8a.From 2004 to March, 2005 the price of oil rose by 32 percent to $56 a barrel. The price is 2004 was $42 a barrel, 32 percent than in March. The very cold winter in the United States and Europe increased the demand for oil. In Figure 4.8, the demand curve for oil shifted rightward from D0 to D1. As a result, the equilibrium price of oil rose, in the figure from $42 per barrel to $56 per barrel. The equilibrium quantity increased, in the figure from 76.7 million barrels a day to 84.5 million barrels a day. (While it is unlikely that the cold weather was the sole reason the price increased from $42 per barrel to $56, as assumed in the figure, the cold weather serves to increase the price.)
8b.If OPEC increased its production in March by a very small amount, the supply curve shifts rightward by a small amount. This shift is illustrated in Figure 4.9, in which the supply curve shifts from S0 to S1. The price falls, but because the change in supply is small, the change in the price is likewise small. In the figure, the price falls from $56 per barrel to $52 per barrel and the quantity increases to 85.5 million barrels per day.
8c.If there are supply disruptions, say from war or similar activities, the supply of oil decreases and the supply curve shifts leftward. The equilibrium price of a barrel of oil rises and the equilibrium quantity decreases. Figure 4.10 shows the situation in the world oil market if disruptions occur. The supply curve shifts leftward from S0 to S1. The price rises in the figure from an initial price of $42 a barrel to $56 a barrel, and the quantity decreases in the figure from an initial quantity of 76.5 million barrels a day to 72.5 million barrels a day.
8d.If oil traders expect the price of a barrel of oil will move to $60 per barrel, the traders increase their current demand for oil in order to beat the price hike. The demand for oil increases and the demand curve shifts rightward. The equilibrium price of oil rises and the equilibrium quantity increases. In Figure 4.8, the initial equilibrium price is $42 a barrel and the initial equilibrium quantity is 76.7 million barrels a day. When the demand curve shifts rightward from D0 to D1, the equilibrium price of oil rises to $56 a barrel and the equilibrium quantity of oil increases to 84.5 million barrels of oil a day. (While it is unlikely that the traders’ beliefs were the sole reason the price increased from $42 per barrel to $56, as assumed in the figure, these expectations serve to increase the price.)
8e.Rapid growth in the use of petroleum in China increases the demand for oil. The demand curve shifts rightward and the equilibrium price of oil rises and the equilibrium quantity increases. In Figure 4.8, the initial equilibrium price is $42 a barrel and the initial equilibrium quantity is 76.7 million barrels a day. When the demand curve shifts rightward from D0 to D1, the equilibrium price of oil rises to $56 a barrel and the equilibrium quantity of oil increases to 84.5 million barrels of oil a day. (While it is unlikely that the rapid growth in use of oil in China was the sole reason the price increased from $42 per barrel to $56, as assumed in the figure, this growth did increase the price.).
9a.Figure 4.11 shows equilibrium in the world market for oranges in a normal year. The assumed equilibrium price of a ton of oranges is $2,000 and the assumed equilibrium quantity of oranges is 60 million tons a year.
9b.The smaller harvest of oranges in Florida decreases the supply of wheat and the supply curve shifts leftward. In Figure 4.12, the supply curve of oranges shifts leftward from S0 to S1. The equilibrium price of a ton of oranges rises from $2,000 a ton to $2,100 a ton, and the equilibrium quantity of oranges decreases from 60 million tons to 55 million tons of oranges a year.
9c.The price of a ton of oranges rose and the quantity of oranges bought and sold decreased.
9d.Oranges are an input used to produce frozen orange juice. The higher price of a ton of oranges means that the price of a resource used to produce frozen orange juice rises. The supply of frozen orange juice decreases and the price of a frozen orange juice rises.
10a.Figure 4.13 shows the world coffee market in 2000. The equilibrium price was 60¢ a pound and the equilibrium quantity was 140 million pounds.
10b.The expansion of nations producing coffee increased the supply of coffee and the supply curve shifted rightward. The expansion of coffee shops such as Starbucks increased the demand for coffee and the demand curve shifted rightward.
10c.The price of coffee fell in the early 2000s because the supply of coffee increased more than the demand increased. The price of coffee rose after the early 2000s because during these years the demand for coffee increased by more than the supply.
Critical Thinking
11a.The price of a music download is determined by the demand and supply of music downloads.
11b.Self-interest plays a major role in the market for music downloads. Consumers follow their self interest by trying to acquire downloads as cheaply as possible. The demand for music downloads is the result of consumers following their self interest. Producers, however, follow their self interest and try to sell music downloads as expensively as possible. The supply of music downloads is the result of producers following their self interest.
11c.If recoding companies tried to hike the price of a download to $2.99 a song the number of songs downloaded would decrease. Some consumers would do without music downloads entirely or in part. Other consumers would use less legal music download services. There would be a surplus of songs available for download.
12a.The quotation from the Heart and Stroke Foundation indicates that over the past years consumers became increasingly aware that salmon is a healthy food. So, between 1996 and 2001, the demand for farm-raised salmon increased. The price of farm-raised salmon rose and the quantity of farm-raised salmon increased.
12b.The lifting of the ban allows new salmon farms to be established in British Columbia. As new farms are created, the supply of farm-raised salmon increases. The increase in the supply of farm-raised salmon lowers the equilibrium price of farm-raised salmon and increases the equilibrium quantity of farm-raised salmon.
12c.There are two effects on the market for wild Pacific salmon if disease breaks out in the salmon farms. First, wild Pacific salmon are substitutes for farm-raised salmon. If disease breaks out in salmon farms, the supply of farm-raised salmon decreases and the price of farm-raised salmon rises. The rise in the price of farm-raised salmon increases the demand for wild Pacific salmon. The equilibrium price of wild Pacific salmon rises. But there is the possibility of a second effect: The disease spreads from farm-raised salmon to wild Pacific salmon. If the disease spreads, the supply of wild Pacific salmon decreases and the equilibrium price of wild Pacific salmon rises. If both effects occur, the impact on the quantity is uncertain: The quantity increases if the demand effect is largest and decreases if the supply effect is largest.
Web Exercises
13a.The market for crude oil shows wide price swings. OPEC was formed in 1960. Since World War II, oil-exporting countries have experienced an increasing demand for crude oil. Although OPEC has tried to set production quotas to stabilize prices, these attempts have met with repeated failure.
13b.The price of oil rose the most in 1972-1974, in 1979-1980, and after 2001.
13c.The Yom Kippur War started with an attack by Syria and Egypt on Israel on October 5, 1973. Many western countries, including the United States, supported Israel. Arab exporters of crude oil imposed an embargo on the nations supporting Israel and cut supply.
In 1979 and 1980, events in Iran and Iraq (the Iranian revolution and the Iran-Iraq War) resulted in an increase in the price of crude oil.