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CHAPTER TWO
Answers to Self Test Questions
1.
Suppose that Al buys just one container of milk (the exact number is not important) at any price up to $4.
Above that he buys zero. Bo also buys one container at any price up to $5, and zero above that.
Similarly, Cole buys one container at any price up to $6, and zero above that. Their market demand
curve would start at a price of $6 (above that the quantity demanded would be zero). From $6 to $4, it
would slope downwards. Below $4 it would be a vertical line.
2.
Since price is part of what we mean by demand and supply, a change in price cannot affect either.
However, it will cause a change in both the quantity demanded and the quantity supplied.
3.
A) $3.50 and 48.
B) See Table AK 3
Table AK 3
Price
$2.00
2.25
2.50
2.75
3.00
3.25
3.50
3.75
4.00
Demand
60
58
56
54
52
50
48
46
44
Supply
30
33
36
39
42
45
48
51
54
Surplus/Shortage
-30
-25
-20
-15
-10
-5
0
+5
+10
It is the only price at which there is neither a surplus nor a shortage.
C) There would be a shortage of 20. As a result, the price would rise and the quantity traded would
increase from 36 to 48.
D) There would be a surplus of 10. As a result, the price would fall and the quantity traded would
increase from 44 to 48.
4.
The change from D1 to D2 involves an increase in demand. Such an increase could occur if the price of a
complementary product like beer were to decrease or alternatively if the price of a substitute like nuts
were to increase.
5.
A) Increase in demand; increase in price; increase in the quantity traded.
B) Decrease in demand; decrease in price; decrease in the quantity traded.
C) Increase in demand; increase in price; increase in the quantity traded.
D) Increase in demand; increase in price; increase in the quantity traded.
E) Decrease in demand; decrease in price; decrease in the quantity traded.
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6.
A) $5.00 and 100; see Figure AK 6.
40
80
120
160
200
240
280
Quantity of strawberries
Figure AK 6
B) See Table AK 4.
Table AK 4
Price
$4.00
4.25
4.50
4.75
5.00
5.25
5.50
Supply 2
90
105
120
135
150
165
180
$4.50 and 120.
7.
A) Decrease in supply; increase in price; decrease in quantity traded.
B) Increase in supply; decrease in price; increase in quantity traded.
C) Decrease in supply; increase in price; decrease in quantity traded.
D) Increase in supply; decrease in price; increase in quantity traded.
E) Increase in supply; decrease in price; increase in quantity traded.
F) Decrease in supply; increase in price; decrease in quantity traded.
G) Decrease in supply; increase in price; decrease in quantity traded.
H) Decrease in supply; increase in price; decrease in quantity traded.
8.
A) Decrease in demand; decrease in price; decrease in quantity traded.
B) Increase in supply; decrease in price; increase in quantity traded.
C) Increase in supply; decrease in price; increase in quantity traded.
D) Increase in demand; increase in price; increase in quantity traded.
E) Decrease in demand; decrease in price; decrease in quantity traded.
F) Decrease in supply; increase in price; decrease in quantity traded.
G) Increase in demand; increase in price; increase in quantity traded.
H) Increase in demand; increase in price; increase in quantity traded.
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Answers to Study Guide Questions
Are You Sure?
1.
2.
3.
4.
5.
False: because demand means the quantities that people are willing and able to purchase.
True.
True.
False: it leads to an increase in the quantity supplied.
False: it simply means that the quantity demanded equals the quantity supplied. Many people are either
unable or unwilling to purchase at the equilibrium price.
6. False: surpluses drive prices down; shortages drive prices up.
7. True.
8. True.
9. True.
10. False: the opposite. It causes an increase in the price and a decrease in the quantity traded.
Choose the Best
11. b
12. b
13. a
14. b
15. a
16. a
17. a
18.
19.
20.
21.
22.
23.
24.
c
a
c
a
a
b
d
25.
26.
27.
28.
29.
30.
b
a
c
d
a
c
Problems
31. Equilibrium price: $3; if the price is $4.50, there is a surplus of 45 kilos.
32. e) only.
33. All except b).
34.
a)
b)
c)
d)
e)
f)
D
↑
↑
0
↓
↓
↑
S
0
0
↓
0
0
0
P
↑
↑
↑
↓
↓
↑
Q
↑
↑
↓
↓
↓
↑
Translations
The movement from point a to point b is the result of a decrease in supply. There are a number of possible
causes including: an increase in resource prices; an increase in business taxes; a deterioration in technology
(unlikely); increased pessimism of producers; an increase in the price of productively related products; and a
decrease in the number of suppliers. The effect of the decreased supply is an increase in the price of the
product and a decrease in the quantity traded.
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Key Problem
a) and b) The plotting of the curves is reasonably straightforward, since they are both straight lines. (You
know this from the table because the quantities change by a constant amount for each change in price). This
being so, you don’t really need to plot every single point. In fact just the first point (price $100, quantity
demanded 10) and the last (price $700, quantity demanded 4) will be sufficient. Similarly with the supply
curve. Drawn accurately, this should give an equilibrium price of $400 and an equilibrium quantity of 7 as
shown in Figure AK 7, and marked as e1.
c) A price of $300 is below the equilibrium price of $400. Any price below equilibrium will produce a
shortage because the quantity demanded will exceed the quantity supplied. The amount of the shortage is the
distance between the curves. In this case it is equal to 3 units.
d) A 50% increase in the demand means that the demand curve shifts to the right but is not parallel to D1.
This is because the quantity demanded increases by different amounts for different prices. For instance, at a
price of $100 the quantity increases by 10 to 15 (off our graph); at $200, the quantity increases by 4.5, from 9
to 13.5; at $300, the increase is 4, from 8 to 12 and so on. The new demand curve is plotted above as D2, and
the new equilibrium is where it intersects with S1, at e2. The new equilibrium price is $500 and the new
equilibrium quantity is 9 units.
Figure AK 7
e)
A reduction of the supply by 7 means that the supply curve shifts left and parallel to the old supply curve.
Every point on the old supply curve moves to the left by 7 squares. This is plotted above as S2. The
intersection with the D2 curve is marked as e3 giving a new equilibrium price of $700 and an
equilibrium quantity of 6.
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More of the Same
a)
See Figure AK 8.
Figure AK 8
b) $1.50 and 4 000 kilos per annum.
c)
Surplus of 6 000 kilos.
d) $0.50 and 2 000 kilos per annum.
e)
$1.00 and 1 500 kilos per annum.
APPENDIX TO CHAPTER 2
Answers to Study Guide Questions
1.
P = 6;
Q = 28.
2.
a) P = 15;
b) P = 20;
3.
a) Qd = 44 – 4P.
b) Qs = .8 + 0.5P;
Q = 25.
Q = 30.
P = 8;
Q = 12.
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