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Question 1
a) decrease; quantity demanded
b) to the right; increase
c) increased; decreased
d) quantity demanded
e) The appropriate diagram is shown below.
Question 4
Keep in mind for this question that we must distinguish between variables whose changes
will cause a shift in the demand for chicken and a change in the price of chicken that will
move us along the demand curve for chicken.
a) The finding that eating chicken can improve your health should lead to an increase in the
demand for chicken (and presumably a reduction in the demand for less healthy meats).
This will be shown by a rightward shift in the demand curve for chicken.
b) As the price of beef rises, consumers will substitute away from beef and toward other
meats, including chicken. This will be shown by a rightward shift in the demand for
chicken.
c) If chicken is a normal good — meaning that consumers want more of it when their real
income rises — then the rise in household income leads to an increase in the demand for
chicken. This will be shown by a rightward shift in the demand curve for chicken.
Question 5
a) The demand and supply curves for coffee are shown below. Note that the horizontal axis
has a break in the scale so that we can focus on the range of quantity beyond Q=10.
b) From the table in the question, or by reading off the diagram, we can see the following
pattern of excess demands and supplies. Recall that excess demand at any given price is
equal to quantity demanded minus quantity supplied.
Price
$2.00
2.40
3.10
3.50
3.90
4.30
Excess Demand (+)
or Supply (-)
+18.0
+14.0
+ 8.5
0.0
- 5.0
- 9.0
c) The equilibrium price is the price at which quantiy demanded equals quantity supplied.
In other words, it is the price at which excess demand is exactly zero. From the table or the
diagram we can see that the equilibrium price of coffee is $3.50 per kilogram.
d) If a minimum price for coffee were set equal to $3.90 per kg, there would be an excess
supply of coffee equal to 5 million kg per year. The only way the government(s) could
enforce this minimum price, and prevent the price from falling to the free-market
equilibrium level, would be to purchase the excess supply of 5 million kg annually. (We
will discuss such price-support schemes in detail in Chapter 5.)
Question 9
a) The demand curve is: QD = 100 – 3p. This is a straight-line demand curve with a slope of
–1/3. The horizontal intercept (p=0) is QD=100. The vertical intercept (QD=0) is p=33.33.
The supply curve is: QS = 10 + 2p. This is a straight-line supply curve with a slope of ½.
When p=0, QS = 10. Both curves are plotted below.
b) Equilibrium requires QD = QS. This equality defines the equilibrium price, p*.
c) Imposing QD = QS, we have 100 - 3p = 10 + 2p. Solving for p we get 90 = 5p or p = 18.
This is what we call p*, the market-clearing price.
d) Substituting p* = 18 into the demand function we get Q* = 100 - 3(18) = 46. If we
substitute p* instead into the supply function we get Q* = 10 + 2(18) = 46. (Of course,
since the demand and supply curves intersect at p* = 18, it follows that Q* must be the
same whether we use the demand curve or the supply curve.)
e) Now there is an increase in demand. The new demand function is QD = 180 - 3p.
Equilibrium requires QD = QS which means 180 – 3p = 10 + 2p. The solution for p* is
therefore 5p* = 170 or p* = 34. Substituting p* back into the demand curve we get Q* =
180 - 3(34) or Q* = 78. The law of demand says that an increase in demand leads to a rise
in both the equilibrium price and the equilibrium quantity. Both predictions are correct.
f) Now with the new demand curve in place there is an increase in supply. The new
supply curve is QS = 90 + 2p. Equilibrium requires 180 – 3p = 90 + 2p. This gives p* =
18. Substituting p* back into the demand curve leads to Q* = 180 – 3(18) or Q* = 126.
The law of supply says that an increase in supply leads to a fall in price and a rise in
quantity. Both predictions are correct.