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CHAPTER THREE
Answers to Self Test Questions
1.
A) (D increases and S increases) the effect on price is indeterminate while quantity traded increases;
B) (D increases and S decreases) price increases while the effect on quantity traded is
indeterminate;
C) (D decreases and S decreases) the effect on price is indeterminate while quantity traded decreases
D) (D decreases and S increases) price decreases while the effect on quantity traded is indeterminate;
E) (D decreases and S increases) price decreases while the effect on quantity traded is indeterminate.
2.
The result will be a surplus. This will lead to both the price and the quantity traded being lower.
3.
A) An effective price ceiling must be imposed below the equilibrium price. The present equilibrium
price is $1.10, and the equilibrium quantity traded is 48. The price ceiling therefore will be at a price
of $0.90. At this lower price there will be a shortage of 12.
B) The quantity supplied at $0.90 will be 44 thousand litres. The maximum black market price at which
this quantity could be sold is $1.20 per litre.
4.
A price ceiling set above the equilibrium price will have no effect.
5.
A) Total sales revenue at equilibrium will be the price of $3.50 times the quantity of 5 million kilos,
which equals $17.5 million.
B) The quantity demanded at $4 will be 4 million, and farmers will produce 6 million bushels. The
government must purchase the difference of 2 million bushels.
C) The government must pay $4 times 2 million, or $8 million, to purchase the surplus.
6.
A) An increase in supply would have no effect on the price if the demand curve were horizontal (since
people will be prepared to buy an unlimited amount at the same price).
B) An increase in supply would have no effect on the quantity traded if the demand curve were vertical
(since people are prepared to purchase only a certain quantity irrespective of the price).
7.
A) The price will increase by $1, from $4 to $5.
B) The price will increase by $7, from $7 to $14.
Answers to Study Guide Questions
Are You Sure?
1.
2.
3.
4.
5.
6.
7.
8.
9.
True.
True.
False:
False:
False:
True.
True.
False:
False:
10. False:
Price will increase.
an increase in demand or a decrease in supply. (Or, a surplus is )
it must be set above the equilibrium price.
price floors cause surpluses and price ceilings cause shortages.
it will cause a decrease in price.
(Or, the statement is correct if the
demand curve is horizontal.
there are limits to the demand for any product.
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Choose the Best
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
a
b
a
a
a
b
a
25.
26.
27.
28.
29.
30.
c
c
b
b
d
a
b
Problems
31. See Figure AK 9
Figure AK 9
P = $6, Q = 72.
32. P = $4, Q = 50.
33. a)
b)
c)
d)
P↓
P↑
P?
P↑
Q?
Q?
Q↑
Q?
34. a)
b)
c)
d)
P↓
P?
P?
P↑
Q?
Q↓
Q↑
Q?
12
c
e
c
c
d
a
Translations
Figure AK 10
Key Problem
a)
Equilibrium occurs where the demand and supply curves intersect which is at a price of $6 and a
quantity of 7 (million) kilos.
b) The total amount paid by buyers is equal to 7 million kilos times $6 each, which comes to $42 million.
c)
At a price of $8 per kilo, the quantity demanded will drop to 6. The total amount now paid by buyers is
equal to 6 million kilos times $8 each, which comes to $48 million.
d) At $8, the quantity demanded is 6 and the quantity supplied is 9. The difference between the two is the
amount of the surplus, which is equal to 3 million kilos. The dollar amount of the surplus is 3 million
times the new higher price floor of $8, which comes to $24 million. This surplus is the responsibility of
the government to buy (and indirectly the citizens of Concordia).
e)
The new demand curve (D2) is shown in Figure AK 11 below:
Figure AK 11
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The demand curve shifts to the right by 1.5 million kilos (1 1/2 squares), so that it is parallel to the old
demand curve. It now intersects the supply curve at a price of $7. However, this is below the price floor
and is therefore irrelevant. The price remains at the old level of $8. The quantity now traded at $8,
however, is different since it has now increased to 7.5 million kilos. Total spending by buyers is equal to
$8 times 7.5 million kilos, or $60 million.
f)
At a price of $8, the distance between the supply curve and the new demand curve is reduced to 1.5
million kilos, the amount of the surplus. The dollar amount of this surplus is therefore 12 million.
g) The new supply curve (S2) is shown on Figure AK 11. It intersects demand curve D2, at a new price of
$9. This will be the new market price since, although the rice cannot be sold below $8, it can certainly be
sold at a price above it. At this new higher price, the quantity traded is 7 million kilos, and the total
spending is equal to $9 times 7 million, or $63 million. Since this is equilibrium, there is no surplus and
the dollar amount of the surplus is zero.
More of the Same
a)
P = $3; Q = 10 million.
b) $30 million.
c)
$32 million.
d) Surplus of 6 million; $24 million; the government will have to buy the surplus.
e)
See Figure AK 12
4
8
12
16
20
Quantity per period
(millions of kilos)
Figure AK 12
$44 million (11 million x $4).
f)
3 million kilos;
$12 million.
g) See Figure AK 10; P = $4; Q = 11 million;
there is no surplus.
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