Using a supply and demand graph, show what happens to the equilibrium price and quantity for the following goods if, holding all else constant, income increases:

11.    Using a supply and demand graph, show what happens to the equilibrium price and quantity for the following goods if, holding all else constant, income increases:
a. a normal good
b. an inferior good

ANS:   




DIF:    Medium    REF:    Supply, Demand, and Equilibrium    TOP:    II.B.3.
MSC:    Understanding           
NOT:    A normal good’s demand increases when incomes increase; an inferior good’s demand decreases when incomes increase.

    12.    Using a supply and demand model, show what happens to the equilibrium price and equilibrium quantity in the market for cigarettes when the government imposes a tax on their production.

ANS:   


DIF:    Medium    REF:    Supply, Demand, and Equilibrium    TOP:    III.B.1.
MSC:    Applying   
NOT:    A tax on a good or service that is levied on the producer causes a decrease in supply. This means that the supply curve shifts to the left. This shift causes the equilibrium price of cigarettes to increase and the equilibrium quantity in the market to decrease.

    13.    Draw a graph showing a:
a. positive change in demand.
b. negative (or adverse) change in supply.
c. positive change in quantity supplied.
d. negative (or adverse) change in quantity demanded.

ANS:   








DIF:    Medium    REF:    Supply, Demand, and Equilibrium    TOP:    IV.
MSC:    Understanding       

    14.    Please use the accompanying graph to answer the questions.



a. What is the equilibrium price and equilibrium quantity?
b. At the price of $5, is there a shortage or a surplus? What is the amount of this shortage or surplus?
c. At the price of $15, is there a shortage or a surplus? What is the amount of this shortage or surplus?

ANS:   
a. The equilibrium price and equilibrium quantity are $15 and 12 units, respectively.
b. At the price of $5, there is a shortage. The shortage is equal to 8 units.
c. At the price of $15, there is a surplus. The surplus is equal to 8 units.

DIF:    Easy    REF:    Supply, Demand, and Equilibrium    TOP:    IV.
MSC:    Analyzing   
NOT:    a. The equilibrium price and quantity are where the supply and demand curves meet.
b. At $5, the quantity supplied is 8 and the quantity demanded is 16, thus making the shortage 16 – 8 = 8.
c. At $15, the quantity supplied is 16 and the quantity demanded is 8, thus making the surplus 16 – 8 = 8.

    15.    Answer the following questions about a market that is perfectly competitive:
a. If the price is above the equilibrium price, would there be a shortage or a surplus?
b. What will happen if the price is below the equilibrium price?
c. During a shortage, how does the market respond until it once again reaches equilibrium?

ANS:   
a. If the price is above the equilibrium price, there would be a surplus because, at prices above the equilibrium price, there is more quantity supplied than demanded.
b. If the price is below the equilibrium price, there would be a shortage because, at prices below the equilibrium price, there is more quantity demanded than supplied.
c. A shortage in the market means that more quantity is demanded than is being supplied. This causes upward pressure on price because there are consumers who are willing to pay a higher price. To meet this demand, additional firms that are willing to supply the good at a higher price will enter the market. This cycle will continue until the equilibrium price is reached.

DIF:    Medium    REF:    Supply, Demand, and Equilibrium    TOP:    IV.A.
MSC:    Understanding       

    16.    Please use the following supply and demand schedules to answer the questions below:

a. At what prices will we see a shortage?
b. At what prices will we see a surplus?
c. What is the equilibrium price and quantity for this market?

ANS:   
a. At all prices below $10, we will see a shortage.
b. At all prices above $10, we will see a surplus.
c. The equilibrium price and quantity is $10 and 10 units, respectively.

DIF:    Medium    REF:    Supply, Demand, and Equilibrium    TOP:    IV.A.
MSC:    Analyzing   
NOT:    A shortage is when quantity demanded is greater than quantity supplied, and a surplus is when quantity demanded is less than quantity supplied. The market is at equilibrium when quantity demanded is equal to quantity supplied.

    17.    At the farmer’s market in Irvine, California, the price of avocados is set at $3 each. At that price, 120 avocados are supplied but only 100 are purchased. Represent this on a supply and demand graph and answer the following questions:
a. Is there a shortage or surplus of avocados? How much is the shortage or surplus?
b. Without any government intervention, what will happen to the price and quantity of avocados?
c. Represent part b on a graph.

ANS:   

a. There is a surplus of 10 avocados.
b. If the market is left to itself, there will be downward pressure on the price. Those who are not selling their avocados will have to lower the price in order to sell them. As a result, all other producers will have to lower their price as well. Those who are not willing to produce the avocados at a price lower than $3 will leave the market, thus bringing down the quantity. The equilibrium price and equilibrium quantity will be somewhere below $3 and between 100 and 120 avocados.
 

DIF:    Medium    REF:    Supply, Demand, and Equilibrium     TOP:    IV.A.
MSC:    Analyzing

    18.    Use the accompanying graph to answer the following questions.
 
a. What is the equilibrium price and equilibrium quantity in this market?
b. Draw an increase in demand and explain what happens to the equilibrium price and equilibrium quantity.
c. This is a special type of supply curve that we call an inelastic supply curve. What special property does it have?

ANS:   
a. The equilibrium price and quantity in this market is $23 and 100 units, respectively.
b. An increase in demand is represented by a shift of the demand curve to the right:
 
When the demand curve shifts to the right in this market, the equilibrium price increases but the quantity stays fixed at 100 units.
c. The special property is that it is completely vertical, so the quantity in the market is fixed. This means that no matter what the price is, the equilibrium quantity in the market stays at 100.

DIF:    Difficult    REF:    Supply, Demand, and Equilibrium    TOP:    IV.A.
MSC:    Analyzing

    19.    You are given the following supply and demand equations:
QD = 100 – 2P            QS = 10 + P
a. What will be the quantity demanded at a price of $40?
b. What will be the quantity supplied at the price of $30?
c. What is the equilibrium price and equilibrium quantity?

ANS:   
a. The quantity demanded at the price of $40 would be 20.
b. The quantity supplied at the price of $30 would be 40.
c. The equilibrium price and equilibrium quantity is $30 and 40, respectively. This is determined by setting QD  = QS, solving for P, and then plugging P back into either QD or QS to determine the equilibrium quantity.

DIF:    Difficult    REF:    Supply, Demand, and Equilibrium    TOP:    IV.A.
MSC:    Analyzing   
NOT:    To find the quantity demanded or supplied, plug in the price to the corresponding equation. To find the equilibrium, set the equations equal to each other and solve for P; then plug that P back into either equation to find your quantity.

    20.    You are given the following equations where P is price and Q is quantity:
Equation 1: P = 300 – 10Q Equation 2: P = 5Q
a. Which equation represents the demand curve? Why?
b. What is the equilibrium price and equilibrium quantity?
c. At a price of $150, is there a shortage, surplus, or neither? If there is a shortage or surplus, what is the amount of that shortage or surplus?

ANS:   
a. Equation 1 represents the demand curve. The slope of this equation is negative, representing a negative relationship between price and quantity. By the law of demand and holding all else constant, as price increases, the quantity demanded decreases, showing a negative relationship.
b. The equilibrium price and equilibrium quantity would be $100 and 20 units, respectively.
c. At the price of $150, we would experience a surplus of 15 units because, at a price of $150, we see quantity demanded at 15 and quantity supplied at 30.

DIF:    Difficult    REF:    Supply, Demand, and Equilibrium    TOP:    IV.A.
MSC:    Evaluating

    21.    In 1985, International Data Corp. (IDC) estimated that 3.7 million desktop computers had been sold at an average price of $1,054. In 2000, the number sold in the United States had risen to 132 million, with the average price decreasing to $700. The change in individuals’ tastes and preferences has increased their demand for computers. Explain how the price of computers dropped over the 15-year period from 1985 to 2000.

ANS:   
We know that individual tastes and preferences changed over the 15-year period, so we know that the demand curve shifted to the right. This initial shift causes an increase in equilibrium price and an increase in the equilibrium quantity in the market. The data provided to us in the question shows a decrease in equilibrium price. To see a decrease in equilibrium price, we must see a shift in the supply curve to the right that outweighs the shift in demand. This shift in supply is partly due to an increase in the number of firms in the market, but it is mostly due to the technological increase in efficiency of production. These two shifts (with the supply shift outweighing the demand shift) caused the equilibrium price to decrease and the equilibrium quantity to increase.

DIF:    Difficult    REF:    Changes in Both Demand and Supply   
TOP:    IV.D.5.    MSC:    Understanding       

    22.    During the hot summer months, more people want lemonade because it is refreshing. Accordingly, more lemonade stands pop up during the summer months. What happens to the equilibrium price and equilibrium quantity in the lemonade market during the summer? Provide a short explanation and create a supply and demand model to illustrate your points.

ANS:   
 

Because more people want lemonade in the summer, the demand shifts to the right; because more people are supplying lemonade, the supply curve shifts to the right as well. This increases the equilibrium quantity of lemonade in the market, but its equilibrium price is indeterminate.

DIF:    Difficult    REF:    Changes in Both Demand and Supply   
TOP:    IV.D.5.    MSC:    Analyzing

    23.    There is a competitive market for dog treats in Earltown. What would happen to the equilibrium price and quantity of dog treats if a study showing that treats improve your dog’s behavior is published at the same time that two of the main dog-treat distributors shut down? Use a supply and demand graph in your analysis.

ANS:   
 

As shown in the accompanying diagram, the demand curve shifts to the right when the pet owners find out that giving their dogs a treat will make them better behaved. Two of the main dogtreat distributors shutting down leads to a decrease in supply, shifting supply to the left. The result in this market is an increase in equilibrium price, but the change in equilibrium quantity is indeterminate. The only way to know the change in equilibrium quantity is if we know the magnitude of the shifts.

DIF:    Difficult    REF:    Changes in Both Demand and Supply   
TOP:    IV.D.7.    MSC:    Analyzing

    24.    Macroeconomists often say, “The reason we have inflation is that everyone expects inflation.” Using the supply and demand model, show what happens to price when both consumers and producers expect the price of a particular good to increase in the future.

ANS:   
 

DIF:    Difficult    REF:    Changes in Both Demand and Supply   
TOP:    IV.D.7.    MSC:    Analyzing   
NOT:    When consumers expect the price of a product to increase in the future, they demand more of the good now. This shifts the demand curve to the right. If producers expect the price of a product to increase, they decrease supply, shifting the demand curve to the left. The result is a higher equilibrium price, with the equilibrium quantity being indeterminate.