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Solutions to Problems
Chapter 4
The increase in the supply will create a surplus of tapes at the current price. The surplus will put pressure on the
price to fall. The price will fall until the surplus is eliminated. The equilibrium price of the tape will be lower and the
equilibrium quantity will be greater than initially.
1a. The price of a tape will rise, and the quantity of tapes sold will increase.
CDs and tapes are substitutes. If the price of a CD rises, people will buy more tapes and fewer CDs. The demand for
tapes will increase. The increase in the demand for tapes will result in a shortage of tapes at their current price. The
shortage of tapes will put pressure on the price of a tape to rise. The price will rise until the shortage is eliminated. The
equilibrium price of the tape will be higher and the equilibrium quantity will be larger than initially.
The price of tapes will rise, and more tapes will be sold.
b.
The price of a tape will fall, and fewer tapes will be sold.
Walkmans and tapes are complements. If the price of a Walkman rises, fewer Walkmans will be bought. The
demand for tapes will decrease. The decrease in the demand for tapes will result in a surplus of tapes at the current
price. The surplus of tapes will put pressure on the price of a tape to fall. The price will fall until the surplus is
eliminated. The equilibrium price of the tape will be lower and the equilibrium quantity will be smaller than initially.
The price of a tape will fall, and people will buy fewer tapes.
c.
The price of a tape will fall and fewer tapes will be sold.
The increase in the supply of CD players will lower the price of a CD player. With CD players cheaper than
they were, more people will buy CD players. The demand for CDs will increase, and the demand for tapes will
decrease. The price of a tape will fall, and people will buy fewer tapes.
d.
The price of a tape will rise, and the quantity sold will increase.
An increase in consumers' income will increase the demand for tapes. As a result, the price of a tape will rise
and the quantity bought will increase. This assumes that tapes are a normal good. It could be argued that as
consumer incomes increase they will switch to the superior but more expensive technology, the CD player. In
this case the tape would be seen as an inferior good.
e.
The price of a tape will rise, and the quantity sold will decrease.
If the workers who make tapes get a pay rise, the cost of making a tape increases and the supply of tapes decreases.
The decrease in supply will create a shortage of tapes. The shortage will put pressure on the price of a tape to rise.
The price will rise until the shortage is eliminated. The equilibrium price of a tape will be higher and the equilibrium
quantity will be smaller than before.
The price will rise, and people will buy fewer tapes.
f. The quantity sold will decrease, but the price might rise, fall, or stay the same.
Walkmans and tapes are complements. If the price of a Walkman rises, fewer Walkmans will be bought and so
the demand for tapes will decrease. The price of a tape will fall, and people will buy fewer tapes. If the wages
paid to workers who make tapes rise, the supply of tapes decreases. The quantity of tapes sold will decrease,
and the price of a tape will rise. Taking the two events together, the quantity sold will decrease, but the price
might rise, fall, or stay the same.
3(i) b) and c) and d)
The demand for petrol will change if the price of a car changes, all speed limits on highways are abolished, or
robot production cuts the cost of producing a car. If the price of a car rises, the quantity of cars bought decrease.
So the demand for petrol decreases.
If all speed limits on highways are abolished, people will drive faster and use more petrol. The demand for
petrol increases.
If robot production plants lower the cost of producing a car, the supply of cars will increase. With no change in
the demand for cars, the price of a car will fall and more cars will be bought. The demand for petrol increases.
(ii) a)
The supply of petrol will change if the price of crude oil changes. If the price of crude oil rises, the cost of
producing petrol will rise. So the supply of petrol decreases.
(iii) a)
If the price of crude oil (a resource used to make petrol) rises, the cost of producing petrol will rise. So the
supply of petrol decreases. The demand for gasoline does not change, so the price of petrol will rise and there is
a movement up the demand curve . The quantity demanded of petrol decreases.
(iv) b) and c) and d)
If the price of a car rises, the quantity of cars bought decrease. So the demand for petrol decreases. The supply
of petrol does not change, so the price of petrol falls and there is a movement down the supply curve of petrol.
The quantity supplied of petrol decreases.
If all speed limits on highways are abolished, people will drive faster and use more petrol. The demand for
petrol increases. The supply of petrol does not change, so the price of petrol rises and there is a movement up
along the supply curve. The quantity supplied of petrol increases.
If robot production plants lower the cost of producing a car, the supply of cars will increase. With no change in
the demand for cars, the price of a car will fall and more cars will be bought. The demand for petrol increases.
The supply of petrol does not change, so the price of petrol rises and the quantity of petrol supplied increases.
5a. The demand curve is the curve that slopes down to the right. The supply curve is the curve that slopes up to the
right.
b. The equilibrium price is $14 a pizza, and the equilibrium quantity is 200 pizzas a day.
Market equilibrium is determined at the intersection of the demand curve and supply curve.
7a. The equilibrium price is 50 cents a pack, and the equilibrium quantity is 120 million packs a week.
The price of a pack adjusts until the quantity demanded equals the quantity supplied. At 50 cents a pack, the
quantity demanded is 120 million packs a week and the quantity supplied is 120 million packs a week.
b.
At 70 cents a pack, there will be a surplus of gum and the price will fall.
At 70 cents a pack, the quantity demanded is 80 million packs a week and the quantity supplied is 160 million
packs a week. There is a surplus of 80 million packs a week. The price will fall until market equilibrium is
restored—50 cents a pack.
9a. The supply curve has shifted leftward.
Price
(cents per
packet)
Demand
Supply
Supply
(D)
(S0)
(S1)
(millions of packets a week)
Price
As the number of gum-producing factories decreases, the supply of gum decreases. There is a new supply
schedule, and the supply curve shifts leftward.
80
70
Market for gum
S1
S0
60
20
180
60
20
50
30
160
80
40
40
40
140
100
60
30
50
120
120
80
20
60
100
140
100
10
70
80
160
120
0
80
60
180
140
D
20 40 60 80 100 120 140 160 180
Quantity (millions of packets per week)
b. There has been a movement along the demand curve.
The supply of gum decreases, and the supply curve shifts leftward. Demand does not change, so the price rises
along the demand curve.
c. The equilibrium price is 60 cents, and the equilibrium quantity is 100 million packs a week.
Supply decreases by 40 millions packs a week. That is, the quantity supplied at each price decreases by 40
million packs. The quantity supplied at 50 cents is now 80 million packs, and there is a shortage of gum. The
price rises to 60 cents a pack, at which the quantity supplied equals the quantity demanded (100 million packs a
week).
11. The new price is 70 cents a pack, and the quantity is 120 million packs a week.
The demand for gum increases, and the demand curve shifts rightward. The quantity demanded at each price
increases by 40 million packs.