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AK Macroeconomics – Chapter 2
CHAPTER TWO
Answers to Self-Test Questions
1. a)
Price
Total Quantity Demanded
$4.00
3.50
3.00
2.50
2.00
1
2
3
4
5
b) Downward sloping.
c) $3
2. A surplus will lead to competition amongst sellers causing the price to fall. This will
result in an increase in the quantity demanded and a decrease in the quantity supplied.
A shortage will lead to competition amongst buyers causing the price to rise. This will
result in a decrease in the quantity demanded and an increase in the quantity supplied.
3. a) $3.50 and 48.
b) See the following table:
Price
$2.00
2.50
3.00
3.50
4.00
Quantity
demanded
60
56
52
48
44
Quantity Surplus/Shortage
Supplied
30
-30
36
-20
42
-10
48
0
54
+10
$3.50 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 represents an increase in demand. Such an increase could
occur if the price of a complementary product like beer decreased or alternatively if
the price of a substitute like nuts increased.
5. a)
b)
c)
d)
Increase in demand; increase in price; increase in the quantity traded.
Decrease in demand; decrease in price; decrease in the quantity traded.
Increase in demand; increase in price; increase in the quantity traded.
Increase in demand; increase in price; increase in the quantity traded.
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AK Macroeconomics – Chapter 2
e) Decrease in demand; decrease in price; decrease in the quantity traded.
6. a) $5.00 and 100; see the following figure .
40
80
120
160
200
240
280
Quantity of strawberries
b) See the following table .
Price
$4.00
4.50
5.00
5.50
Quantity
Demanded
140
120
100
80
Supply 2
90
120
150
180
$4.50 and 120.
7. a)
b)
c)
d)
e)
f)
g)
h)
Decrease in supply; increase in price; decrease in quantity traded.
Increase in supply; decrease in price; increase in quantity traded.
Decrease in supply; increase in price; decrease in quantity traded.
Increase in supply; decrease in price; increase in quantity traded.
Increase in supply; decrease in price; increase in quantity traded.
Decrease in supply; increase in price; decrease in quantity traded.
Decrease in supply; increase in price; decrease in quantity traded.
Decrease in supply; increase in price; decrease in quantity traded.
8. a)
b)
c)
d)
e)
f)
g)
h)
Decrease in demand; decrease in price; decrease in quantity traded.
Increase in supply; decrease in price; increase in quantity traded.
Increase in supply; decrease in price; increase in quantity traded.
Increase in demand; increase in price; increase in quantity traded.
Decrease in demand; decrease in price; decrease in quantity traded.
Decrease in supply; increase in price; decrease in quantity traded.
Increase in demand; increase in price; increase in quantity traded.
Increase in demand; increase in price; increase in quantity traded.
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AK Macroeconomics – Chapter 2
Answers to Study Guide Questions
1. False: because demand means the quantities that people are willing and able to
purchase.
2. True
3. True
4. False: it leads to an increase in the quantity supplied.
5. 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: It causes an increase in the price and a decrease in the quantity traded.
11. b
12. b
13. a
14 a
15. a
16.
17.
18.
19.
20.
a
a
a
d
b
21. c
22. b
23. b
24. c
25. a
26.
27.
28.
29.
30.
b
d
b
c
c
36A. Key Problem
a) See the following figure:
Figure 2.16 (completed)
13
31.
32.
33.
34.
35.
b
d
a
c
a
AK Macroeconomics – Chapter 2
The plotting of the curves is straightforward. For the demand curve, plotting just the
first point (price $100 and quantity demanded 130) and the last point (price $700,
quantity demanded 10) is sufficient. Similarly with the supply curve.
b) Equilibrium price: $500; equilibrium quantity: 50
c) Surplus of 30.
A price of $600 is above the equilibrium price of $500. Any price above equilibrium
will produce a surplus because the quantity supplied will exceed the quantity
demanded. The amount of the shortage is the distance between the curves. In this case
it is 3 squares or 30 units.
d) See the following table:
Price ($)
Quantity
Demanded
Quantity
Supplied
100
190
200
170
300
150
400
130
500
110
600
90
700
70
10
20
30
40
50
60
70
Equilibrium price: $700; equilibrium quantity: 70
An increase in the demand of 60 means that the demand curve shifts parallel to the
right by 6 squares to D 2 in Figure 2.16. D 2 intersects with S 1, at e2.
e) See the following table:
Price ($)
Quantity
Demanded
Quantity
Supplied
100
190
200
170
300
150
400
130
500
110
600
90
700
70
15
30
45
60
75
90
105
Equilibrium price: $600; and equilibrium quantity: 90
An increase in supply of 50% means that the supply curve shifts right to reflect a
quantity which is 50% higher at each price level (e.g. at price $300 it is now 45
rather than 30). This is plotted above as S 2 in Figure 2.16. The intersection with the
D2 curve is marked as e 3.
37A.
c, d and e are the circled letters
38A.
a) Price = $6; quantity = 150
b) Price = $4; quantity = 160
c) surplus of 60
39A.
Graph A: increase in demand; increase in quantity supplied
Graph B: increase in supply; increase in quantity demanded
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AK Macroeconomics – Chapter 2
40A.
a) See Figure 2.18 (completed):
Figure 2.18 (completed)
b) Price:
$3
quantity:
60
41A. a) price down and quantity traded down
b) price up and quantity traded up
c) price down and quantity traded down
d) price up and quantity traded up
42A.
a) supply;
b) demand;
c) supply;
d) demand;
increased
decreased
decreased
increased
43A Demand refers to the whole range of quantities that are demanded at various prices as
depicted by a demand schedule or demand curve. The quantity demanded refers to a
particular quantity at a particular price, i.e. it is a point on a demand curve.
44A Shortages cause competitive bidding among buyers of a product. The result will be
that the price will be bid up and will continue to rise until the shortage disappears.
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AK Macroeconomics – Chapter 2
45A.
Table 2.15 (completed)
a
b
c
d
e
f
46A.
D





S

-
P
Q












a) shortage of 15;
quantity sold = 60
b) $14 (If you extend the quantity of 60 – answer a) – up to the demand curve it
touches the demand curve at a price of $14.)
c) surplus of 30. (At a price of $14 – answer b) – the quantity supplied of 90
exceeds the quantity demanded of 60 by 30 units.
47A. Change the second sentence to: “The quantity demanded for houses decreases
when the price increases.”
48A The first determinant of market demand is consumer preferences, i.e. the tastes and
fashions of consumer. The second is consumer incomes. For a normal product, higher
incomes leads to a higher demand; on the other hand, for an inferior product higher
incomes lead to a lower demand. The third determinant is the prices of related
products, which include substitute products, and complementary products. The demand
will be higher if the price of a substitute increases or the price of a complement
decreases. The fourth determinant is expectations of the future. The demand will
increase if future prices or incomes are expected to be higher or a future shortage is
anticipated. The final determinant is the population. The market demand for a product
may be affected if there is a change in the size or in the income or age distribution of
the population.
49A. An increase in the demand for a product will initially lead to a shortage. As a result
competition among the buyers will cause the price to increase. The effect of an
increase in the price will be a fall in the quantity demanded and an increase in the
quantity supplied. Both factors will help to eliminate the shortage. Eventually both the
price and the quantity traded of the product will have increased.
50A. a) price = $3. Perhaps a table might help. Start off with any quantity supplied at
$1; the quantity demanded should be 60 more. In this table we start with a quantity
supplied of 100.
Price
Quantity supplied
Quantity demanded
Surplus/shortage
1.00
100
160
- 60
1.50
110
155
- 45
2.00
120
150
- 30
16
2.50 3.00 3.50
130 140 150
145 140 135
- 15
0
+ 15
4.00
160
130
+ 30
4.50
170
125
+45
5.00
180
120
+60
AK Macroeconomics – Chapter 2
b) surplus of 45
51A.
Five possible causes are:
 an increases in the price of resources used;
 an increase in business taxes;
 an increase in the price of a substitute in production;
 the expectation of suppliers that there will be higher prices in the future;
 a decrease in the number of suppliers.
Five specific effects (in order) are:
 a shortage;
 a price increases;
 an increase in the quantity supplied;
 a decreases in quantity demanded;
 a decrease in the quantity traded.
52A
S1
S2 (S1 + 5000)
Rental
P1
P2
D
Q1 Q2
Number of Rental Units
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AK Macroeconomics – Chapter 2
APPENDIX TO CHAPTER TWO
1. P = 6;
Q = 28.
2. a) P = 15;
Q = 25.
b) Shortage of 12.
c) P = 17;
Q = 27.
3. a) Qd = 244 – 4P
b) Qs = –8 + ½ P
c) P = 56;
Q = 20
4. a) Qd = 675 – 100P (or P = 6.75 – 0.01Qd).
b) Qs = 50P (or P = 0.02Qs)
c) P = 4.5;
Q = 225
5. a) shortage of 60. (Qd = 185; Qs = 125)
b) surplus of 24. (Qd = 164; Qs = 188
6. a) P = 70. (Solve the equation: 380 = 100 + 4P)
b) Qd = 310. (Plug 70 into the demand equation.)
c) Surplus of 70. (Qd = 310 and Qs = 380).
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