Economics Chapter 3 2 Both Economist Flores and Economist Jenkins have been monitoring the cucumber market

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(d) Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as

the shortage or surplus.

30. Is demand more important than supply in determining equilibrium price and quantity in a competitive

market? Explain.

31. (Consider This) Can ticket “scalping” be justified? Explain using economic analysis.

32. What is productive efficiency and how does it differ from allocative efficiency?

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33. What are the conditions necessary to produce neither an “underallocation” nor “overallocation” of

resources?

34. In the space below each of the following, indicate the effect [increase (+), decrease (−)] on equilibrium

price (P) and equilibrium quantity (Q) of each of these changes in demand and /or supply.

P Q

(a) Increase in demand, supply constant ________ ________

(b) Increase in supply, demand constant ________ ________

(c) Decrease in demand, supply constant ________ ________

(d) Decrease in supply, demand constant ________ ________

35. In the spaces below each of the following, indicate the [increase (+), decrease (−), or indeterminant (?)]

on equilibrium price (P) and equilibrium quantity (Q) of each of these changes in demand and/or supply.

P Q

(a) Increase in demand, increase in supply ________ ________

(b) Increase in demand, decrease in supply ________ ________

(c) Decrease in demand, decrease in supply ________ ________

(d) Decrease in demand, increase in supply ________ ________

36. In each case below, indicate the effect [increase (+); decrease (−); indeterminant (ind)] upon equilibrium

price (P) and equilibrium quantity (Q) and illustrate the change graphically. Where you believe the effect

is indeterminant, two graphical illustrations may be necessary to demonstrate your point.

P Q

(a) Increase in demand, supply constant ________ ________

(b) Decrease in supply, demand constant ________ ________

(c) Decrease in demand, decrease in supply ________ ________

(d) Decrease in demand, increase in supply ________ ________

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37. Given the products below and the events that affect them, indicate what happens to demand or supply, and

the equilibrium price and quantity in a competitive market. Identify the determinant of demand or supply

that causes the shift.

(a) Blue jeans. The wearing of blue jeans becomes less fashionable among consumers.

(b) Computers. Parts for making computers fall in price because of improvements in technology.

(c) Lettuce. El Nino produces heavy rains that destroy a significant portion of the lettuce crop.

(d) Chicken. Beef prices rise because severe winter weather reduces cattle herds.

38. Given the products below and the events that affect them, indicate what happens to demand or supply, and

the equilibrium price and quantity in a competitive market. Identify the determinant of demand or supply

that causes the shift.

(a) Digital cameras. There are improvements in the technology that increase the economic efficiency of

production.

(b) Automobiles. Consumer incomes rise as the economy moves out of recession.

(c) Beef. Chicken prices fall because of a decline in the cost of feeding chickens.

(d) Fast-food meals. The government imposes a significant tax on fast-food meals.

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39. Given the products below and the events that affect them, indicate what happens to demand, supply,

equilibrium quantity, and equilibrium price in a competitive market. Identify the determinant of demand

and supply that causes the shifts.

(a) Calculators. More schools require students to buy and use calculators; improved productivity shortens

the time it takes to make calculators.

(b) Gasoline. Oil production declines due to a crisis in the Middle East; people take more car vacations

and drive more.

(c) New homes. The average incomes fall as the economy moves into recession; the productivity of home

construction workers and builders increases.

(d) Tobacco. The government cut its subsidy to tobacco farmers; more people quit smoking.

40. Given the products below and the events that affect them, indicate what happens to demand, supply,

equilibrium quantity, and equilibrium price in a competitive market. Identify the determinant of demand

and supply that causes the shifts.

(a) Home heating oil. There is a severe winter in the regions using the oil; the cost of a barrel of oil rises

for producers of home heating oil.

(b) Organic foods. People become more concerned about chemical additives in food; traditional farms are

switching to more organic methods.

(c) Film cameras. The price of digital cameras falls for consumers; there is a decline in the number of

stores selling film cameras.

(d) Bread. Many consumers adopt a low carbohydrate diet and avoid bread products; the price of flour

falls for bread producers.

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41. (Consider This) Suppose a salsa manufacturers sells 1 million bottles of salsa at $4 a bottle in year 1; 2

million bottles at $5 in year 2; and 3 million bottles at $6 in year 3. Do these data show that the law of

demand does not hold? Explain.

42. What is a price ceiling and what are its economic effects?

43. Use data in the table below to explain the economic effects of a price ceiling at $6, at $5, and at $4.

Price

Quantity

demanded

Quantity

supplied

$7.00

4500

6.00

5000

3500

5.00

5500

2500

4.00

6000

1500

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44. Use economic analysis to explain why tenants in New York City who are covered by rent-controlled laws

do not want to move.

45. What is a price floor and what are its economic effects?

46. In the debate over passing a bill providing a minimum guaranteed price for corn, a congressman argued,

“Minimum guaranteed prices always cause a disruption of the natural equilibrium of a market, ultimately

costing taxpayers money.” Evaluate this statement.

47. Use data in the following table to explain the economic effects of a price floor at $8, at $9, and at $10.

Explain the economic effects.

Price

Quantity

demanded

Quantity

supplied

$10.00

3000

7500

9.00

3500

6500

8.00

4000

5500

7.00

4500

48. “Government-set prices undermine the rationing function of competitive prices.” Explain carefully in

terms of both price ceilings and price floors.

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49. (Last Word) Why is there a shortage of donated human organs that can be used for transplants?

50. (Last Word) Explain how a market for human organs would affect the supply curve and equilibrium price

and quantity.

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C. Appendix Questions

51. Use supply and demand analysis to explain what is most likely to happen to price and quantity in a

competitive market for a crop such as lettuce, tomatoes, or oranges, when extreme weather destroys a large

portion of the crop.

52. What are exchange rates? If a product cost 30 euros and the exchange rate was 1 euro = $1.50, then how

much would the product cost in terms of U.S. dollars?

53. What does it mean when someone says that the U.S. dollar has depreciated or the U.S. dollar has

appreciated? Give an example of each case using the euro and the U.S. dollar.

54. What will happen to the U.S. dollar price of a euro and the quantity of euros exchanged when the demand

for the euro increases, but the supply does not change? Has the U.S. dollar appreciated or depreciated?

55. What will happen to the U.S. dollar price of a euro and the quantity of euros exchanged when the demand

for the euro decreases, but the supply does not change? Has the U.S. dollar appreciated or depreciated?

56. Use supply and demand analysis to explain what is most likely to happen to the price and quantity of corn

when there is an increase in the demand for ethanol. What other effects would such a change in the corn

market have on the price of beef, the price of farmland, and the price of corn syrup?

57. What effect will each of the following have upon the equilibrium price and equilibrium quantity of laptop

computers in a competitive market? Explain your reasoning in each case.

(a) the price decreases for wireless communications devices that consumers like to buy and attach to

laptop computers.

(b) fewer computer companies decide to produce laptop computers.

(c) new technology makes laptop computers cheaper to produce.

(d) the government imposes taxes on computer purchases.

58. Explain how the relative magnitudes of changes in supply and demand can affect equilibrium price and

quantity, if supply and demand change simultaneously.

59. “If demand increases and supply decreases, then both the equilibrium price and quantity will increase.”

What conditions are necessary to make this statement true?

60. Given the products and conditions below, indicate how the events affect the demand, supply, equilibrium

price and quantity of the goods.

(a) Videotapes. The price of DVDs and DVD players decreases. New technology makes videotapes

easier to produce. The shift in demand is greater than shift in supply.

(b) Roses. The Valentine’s Day season has just begun for the floral industry. A new pesticide decreases

the number of flowers affected by pests. The shift in supply is greater than the shift in demand.

(c) Tomatoes. FDA publicly announces that eating tomatoes and tomato-based products can significantly

reduce one’s risk of developing cancer. An unexpected freeze late in the tomato season destroys a

significant portion of this year’s crop. The shift in supply is greater than shift in demand.

(d) Healthcare. Highly publicized malpractice cases decrease consumer confidence in healthcare

providers. Malpractice insurance premiums paid by doctors increase. The shift in demand is greater

than shift in supply.

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61. Both Economist Flores and Economist Jenkins have been monitoring the cucumber market and have noted

that the equilibrium price of cucumbers and quantity of cucumbers sold have risen over the last year.

Flores and Jenkins, however, disagree about why this change has occurred. Flores holds that both supply

and demand have increased and that the shift in demand has been greater than the shift in supply. Jenkins,

however, argues that while demand has increased, supply has decreased and the shift in supply is greater

than the shift in demand. Which economist offers the most feasible theory of why the equilibrium price

and quantity of cucumbers have risen?

62. How is a preset price similar to a government-imposed price ceiling or a price floor? How is a preset price

different from a government-imposed price ceiling or price floor?

63. What condition causes a secondary market to arise?

64. The hottest, new boy band, 2Hot2Handle, has just begun their U.S. tour. The supply and demand schedules

for the local 2Hot2Handle show is below, with the arena capacity fixed at 2,000 seats.

Quantity demanded

(tickets)

Price

Quantity supplied

(tickets)

1000

$60.00

2000

50.00

2000

3000

40.00

2000

4000

30.00

2000

5000

20.00

2000

6000

10.00

2000

Answer the following questions.

(a) Riding on their enormous popularity, 2Hot2Handle decides to set the price of tickets of all tickets at

$60. Is the market for tickets at equilibrium? If not, calculate the size of the shortage/surplus.

(b) Hoping to gain publicity by creating long lines for tickets, 2Hot2Handle decides to lower ticket prices

to $30. Is the market for tickets at equilibrium? If not, calculate the size of the shortage/surplus.

(c) Will a price of $30 be an efficient outcome? If the price of $30 does not change, how might an

efficient outcome be reached?

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D. Answers to Appendix Questions

51. Use supply and demand analysis to explain what is most likely to happen to price and quantity in a

competitive market for a crop such as lettuce, tomatoes, or oranges, when extreme weather destroys a large

portion of the crop.

52. What are exchange rates? If a product cost 30 euros and the exchange rate was 1 euro = $1.50, then how

much would the product cost in terms of U.S. dollars?

53. What does it mean when someone says that the U.S. dollar has depreciated or the U.S. dollar has

appreciated? Give an example of each case using the euro and the U.S. dollar.

54. What will happen to the U.S. dollar price of a euro and the quantity of euros exchanged when the demand

for the euro increases, but the supply does not change? Has the U.S. dollar appreciated or depreciated?

55. What will happen to the U.S. dollar price of a euro and the quantity of euros exchanged when the demand

for the euro decreases, but the supply does not change? Has the U.S. dollar appreciated or depreciated?

56. Use supply and demand analysis to explain what is most likely to happen to the price and quantity of corn

when there is an increase in the demand for ethanol, which is produced using corn. What other effects

would such a change in the corn market have on the price of beef, the price of farmland, and the price of

corn syrup?

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