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PROBLEMS
1.
Using Figure 3.7 as a guide, determine the approximate size of the market surplus
or shortage that would exist at a price of (a) $40, (b) $20.
LO: 5
AACSB: Analytic
BT: Application
Using Figure 3.7, and the new demand curve: (a) at a price 0f $40, there
would be surplus of 50 (b) at a price of $20, there would be a shortage of
87.5.
2.
Illustrate the different market situations for the 1992 and 1997 U2 concerts,
assuming constant supply and demand curves. What is the equilibrium price?
(See text and Headline on p. 74 )
LO: 3,5
AACSB: Analytic
BT: Application
Market Supply
Surplus
Ticket
PRICE
$52.50
Price=$52.50
Shortage
$28.50
q1
Ticket Price=$28.50
q2
QUANTITY (Tickets)
The equilibrium price for U2 tickets is less than $52.50, since the
evidence was at this price, the market experienced a surplus (Qs=q2
>Qd=q1) and more than $28.50, since at that price the market
experienced a shortage (Qd=q2>Qs=q1).
3.
Given the following data, (a) construct market supply and demand curves and
identify the equilibrium price; and (b) identify the amount of shortage or surplus that
would exist at a price of $4.
Participant
Price
Supply Side
Alice
Quantity Supplied (per week)
$5
$4
$3
$2
$1
3
3
3
3
3
Butch
Connie
Dutch
Ellen
Market Total
LO: 2,3
4.
7
6
6
4
26
5
4
5
3
20
4
3
4
3
17
2
1
0
2
8
Participant
Quantity Demanded (per week)
Price
$5
$4
$3
$2
$1
Demand Side
Al
1
2
3
4
5
Betsy
1
2
2
2
3
Casey
2
2
3
3
4
Daisy
2
3
4
4
6
Eddie
2
2
2
3
5
Market Total 8
11
14
16
21
AACSB: Analytic
BT: Application
(a)
Equilibrium price is $2.
(b)
At a price of $4, there would be a surplus of 9, the difference between the
market quantity supplied of 20 and the market quantity demanded of 11.
(This regulation must be a price floor, since a price ceiling would have no
effect on the market.)
Suppose that the good described in problem 3 became so popular that every
consumer demanded one additional unit at every price. Illustrate this increase in
market demand and identify the new equilibrium. Which curve has shifted?
Along which curve has there been a movement of price and quantity?
Participant
Price
Demand Side
Al
Betsy
Casey
Daisy
Eddie
Market Total
LO: 4
4
3
3
3
16
AACSB: Analytic
Quantity Demanded (per week)
$5
$4
$3
$2
$1
2
2
3
3
3
13
3
3
3
4
3
16
4
3
4
5
3
19
5
3
4
5
4
21
6
4
5
7
6
26
BT: Application
Ch. 3, Problems 3 & 4
6
Market Supply
5
Price floor=$4
$Price
4
3
2
New D,
Prob. 4
1
Old Market
Demand, Prob. 3
0
5
0
10
15
20
25
30
Quantity
The market demand curve will shift to the right by 5 units at every price.
Given this new demand curve, the new equilibrium will be
approximately $3.50 and 17.5 units. The increase in price results in a
movement along the supply curve, resulting in an increase in quantity
supplied.
5.
Illustrate each of the following events with supply or demand shifts in the
domestic car market:
a.
The U.S. economy falls into a recession.
b.
U.S. autoworkers go on strike.
c.
Imported cars become more expensive.
d.
The price of gasoline increases.
LO: 4
AACSB: Analytic
BT: Application
S2, part b
Price
S1
D3
D1
D2, parts a and d
Quantity
(a)
This would result in a decrease in demand (leftward shift of the demand
due to a decline in buyer income.
(b)
This would result in a decrease in supply (leftward shift of the supply
curve) due to reduced ability to produce output.
(c)
This would result in an increase in demand (rightward shift of the
demand curve) as consumers substitute relatively less expensive
domestic cars for the now relatively higher priced imported cars.
(d)
This would result in a decrease in demand (leftward shift of the demand
curve) due to a higher price of a complementary good, gasoline.
curve)
6.
Show graphically the market situation for Wii consoles at Christmas 2007 (see
Headline on p. 70).
LO: 3, 4
AACSB: Analytic
BT: Application
Release of Strategic Petroleum Reserves would increase the supply of gasoline
available, leading to lower gas prices and more consumption, ceteris paribus.
7.
Assume the following data describe the gasoline market.
Price per gallon
Quantity Demanded
Quantity Supplied
New Quantity Supplied (part b&c)
a.
$2.00
26
16
11
What is the equilibrium price?
2.25
25
20
15
2.50
24
24
19
2.75
23
28
23
3.00
22
32
27
3.25
21
36
31
3.50
20
40
35
b.
c.
d.
LO: 3,4,5
a.
b.
If the quantity supplied at every price is reduced by 5 gallons, what will
the new equilibrium price be?
If the government freezes the price of gasoline at its initial equilibrium
price, how much of a surplus or shortage will exist when supply is reduced
as described above?
Illustrate your answers on a graph.
AACSB: Analytic
BT: Application
The equilibrium price is $2.50 where Qs=Qd.
If the quantity supplied at every price is reduced by 5 gallons, the new
equilibrium price would be $2.75.
If the government freezes the price of gasoline at its initial equilibrium
price of $2.50, the reduction in supply will result in a shortage of
gasoline of 5 gallons (24 – 19).
c.
d.
Chapter 3, Problem 7 d
New S
$3.50
Old S
$3.00
Price $
$2.50
$2.00
D
$1.50
$1.00
$0.50
$0.00
0
5
10
15
20
Gallons of Gasoline
25
30
35
40
8. Graph the response of students to higher alcohol prices, as discussed in the Headline
on p. 64.
LO: 2
AACSB: Analytic
BT: Application
Price
S2
S1
$3.17
$2.17
D1
Q2
Q1
Quantity
An increase in the tax on alcohol, for example, would decrease supply from S1 to S2.
This in turn would decrease the quantity demanded from Q1 to Q2.
9. Graph the outcomes in the orange market (Headline, p. 71) if Governor
Schwarzenegger had put a $2 per pound ceiling on orange prices after the 2007 freeze.
LO: 5
AACSB: Analytic
BT: Application
PRICE OF ORANGES (per pound)
Post-freeze supply
Pre-freeze
supply
$3.10
$2 ceiling
$1.60
shortage
Market demand
Qs
q2
w/ceiling
Qd q1
w/ceiling
QUANTITY (pounds)
The price ceiling is shown above; Qd with the ceiling is higher than Qs with the ceiling
and the post-freeze supply and demand curves. The difference between Qs and Qd is
the amount of the shortage.