Download Practice Problems – Review of Supply and Demand

Econ. 410 – Part 1
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Practice Problems Answers – Review of Supply and Demand
These problems cover the very basics of supply and demand and will not be collected. You
should work through the problems before the second class period on Tuesday, January 15
1. Assume that the market for widgets is competitive. Describe the effect on the equilibrium
price and quantity of:
a.
b.
c.
d.
e.
a rightward shift in demand
a leftward shift in demand
a rightward shift in supply
a leftward shift in supply
a rightward shift in demand and supply
f. a leftward shift in demand and supply
g. a leftward shift in demand and a rightward
shift in supply
h. a rightward shift in demand and a leftward
shift in supply
2. Define each of the following terms.
a. Normal good
c. Substitute good
Eq. price and quantity increase.
Eq. price and quantity fall
Eq. price falls. Eq. quantity increases
Eq. price increases. Eq. quantity falls.
Eq. quantity increases. The effect on
the equilibrium price depends upon the
relative magnitudes of the shifts in
demand and supply.
Eq. quantity falls. The effect on the
equilibrium price depends upon the
relative magnitudes of the shifts in
demand and supply.
Eq. price falls. The effect on the
equilibrium quantity depends upon the
relative magnitudes of the shifts in
demand and supply.
Eq. price increases. The effect on the
equilibrium quantity depends upon the
relative magnitudes of the shifts in
demand and supply.
b. Inferior good
d. Complement good
By definition, a normal good is one for which the demand curve shifts to the right when
income increases and shifts to the left when income falls. An inferior good is one for which
the demand curve shifts to the left when income increases and to the right when income falls.
If good Y is a substitute for good X, then an increase in the price of good Y causes the
demand curve for good X to shift to the right and a decrease in the price of good Y causes the
demand curve for good X to shift to the left.
If good Y is a complement for good X, then an increase in the price of good Y causes the
demand curve for X to shift to the left and a decrease in the price of good Y causes the
demand curve for good X to shift to the right.
3. Describe the shift in the demand curve caused by each of the following.
a. An increase in income on the demand curve for an inferior good.
Demand shifts to the left.
b. A decrease in income on the demand curve for an inferior good.
Demand shifts to the right.
c. An increase in the price of a substitute good.
Demand shifts to the right.
d. A decrease in the price of a substitute good.
Demand shifts to the left.
e. An increase in the price of a complementary good.
Demand shifts to the left.
f. A decrease in the price of a complementary good.
Demand shifts to the right.
4. Changes in each of the following may cause shifts in the market demand curve:
P
I
N
T
E
Prices of substitute or complementary goods
Income (average income of the consumers in the market)
Number of consumers
Tastes and preferences of consumers
Expectations of future prices of the good or et cetera (for example, weather)
Suppose that the market for men’s suits is competitive. What is the effect of each of the
following on the demand curve for suits?
a. a reduction in income assuming that suits are a normal good.
Demand shifts to the left.
b. more financial and legal services firms adopting casual dress Fridays
Demand shifts to the left.
5. Changes in each of the following may cause shifts in the market supply curve:
P
I
N
T
E
Prices of alternative products that the firms might produce
Input prices
Number of firms selling the product
Technology
Expectations of future prices of the good or et cetera (for example, weather)
Again, assume that the market for men’s suits is competitive. What is the effect of each of
the following on the supply curve for suits?
a. a reduction in input prices Supply shifts to the right.
b. an increase in the number of firms selling the product Supply shifts to the right.
6. During the Japanese recession of the 1990s, input prices fell and foreign producers were
allowed to enter the market. What is the expected effect on the price of men’s suits?
As described in the Financial Times, the demand curve shifted to the left and the supply
curve shifted to the right. The equilibrium price fell. (The equilibrium quantity also fell.)
7. The chart below provides the demand and supply schedules for widgets in two countries.
a. Identify the equilibrium price and quantity in each country if there is no trade. [Hint:
Identify the price at which quantity demanded in Country A equals the quantity supplied.
Do the same for Country B.]
The equilibrium price in Country A is 8 and in Country B is 3.
b. Identify the equilibrium price if there is trade between the two countries (assuming no
transport costs). Which country exports the good? How much is exported? [Hint: The
total quantity supplied at each price is the quantity supplied in Country A plus the
quantity supplied in Country B. Add another column to the table and enter the total
quantity supplied at each price. Do the same for the total quantity demanded. Identify
the price at which the total quantity demanded equals the total quantity supplied. How
much is produced in Country A at this equilibrium price? How much is demanded in
Country A?]
The chart below shows the total quantity supplied at each price and the total
quantity demanded. The equilibrium price is 4 and the equilibrium quantity for the total
market is 5. The firms in Country A supply 3 units and the consumers in Country a demand
15 units. Country A imports 12 units of the good. The firms in Country B supply 47 units
and the consumers demand 35 units. Country B exports 12 units of the good.
Price
Supply in
Country A
Demand in
Country A
Supply in
Country B
Demand in
Country B
Total
Supply
Total
Demand
0
1
2
3
4
5
6
7
8
9
10
0
0
1
2
3
4
5
6
7
8
9
23
21
19
17
15
13
11
9
7
5
3
0
0
20
40
47
54
61
68
75
82
89
55
50
45
40
35
30
25
20
15
10
5
0
0
21
42
50
58
66
74
82
90
98
78
71
64
57
50
43
36
29
22
15
8