978-0077660772 Chapter 3 Appendix

Chapter 03 Appendix

McConnell Brue Flynn 20e

APPENDIX DISCUSSION QUESTIONS

1. Why are shortages or surpluses more likely with preset prices, such as those on tickets, than

flexible prices, such as those on gasoline? LO7

Answer: Preset prices, rather than responding to demand conditions, attempt to

Preset prices often apply to one-time-only events, versus something like gasoline

2. Most scalping laws make it illegal to sell—but not to buy—tickets at prices above those printed

on the tickets. Assuming that is the case, use supply and demand analysis to explain why the

equilibrium ticket price in an illegal secondary market tends to be higher than in a legal

secondary market. LO7

Answer: Ticket prices tend to be higher in illegal secondary markets because

sellers face higher costs (thus reducing supply relative to what it would be in a

3. Go to the Web site of the Energy Information Administration, www.eia.doe.gov, and follow the

links to find the current retail price of gasoline. How does the current price of regular gasoline

compare with the price a year ago? What must have happened to either supply, demand, or both to

explain the observed price change? LO7

4. Suppose the supply of apples sharply increases because of perfect weather conditions

throughout the growing season. Assuming no change in demand, explain the effect on the

equilibrium price and quantity of apples. Explain why quantity demanded increases even though

demand does not change. LO7

Answer: The increase in supply will lower the equilibrium price and increase the

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Chapter 03 Appendix

demanded increases without a shift in the demand curve because the greater

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Price of Bottled Water

Quantity of Bottled Water

S1

S2

D1

D2

Q1 Q2

P2

P1

Chapter 03 Appendix

5. Assume the demand for lumber suddenly rises because of a rapid growth of demand for new

housing. Assume no change in supply. Why does the equilibrium price of lumber rise? What

would happen if the price did not rise under the demand and supply circumstances described?

LO7

Answer: Buyers are willing to purchase more new housing, causing price and

quantity to increase in that market. In order to satisfy the increased demand for

If something prevented an increase in the price of lumber (e.g., a price control by

6. Assume that both the supply of bottled water and the demand for bottled water rise during the

summer but that supply increases more rapidly than demand. What can you conclude about the

directions of the impacts on equilibrium price and equilibrium quantity? LO7

Answer: The equilibrium price will fall and the equilibrium quantity will rise.

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7. When asked for investment advice, humorist Will Rogers joked that people should “[b]uy land.

They ain’t making any more of the stuff.” Explain his advice in terms of the supply and demand

model. LO7

Answer: By saying they aren’t making any more land, he is signifying there will

eventually be a shortage of land. In the case of a shortage, quantity demanded

APPENDIX REVIEW QUESTIONS

1. Will the the equilibrium price of orange juice increase or decrease in each of the following

situations? LO7

a. A medical study reporting that orange juice reduces cancer is released at the same time that a

freak storm destroys half of the orange crop in Florida.

b. The prices of all beverages except orange juice fall in half while unexpectedly perfect weather

in Florida results in an orange crop that is 20 percent larger than normal.

Answer: a. Increase. The medical study reporting that orange juice reduces cancer will

cause the demand curve for orange juice to shift to the right. The storm that destroys half

b. Decrease. When the prices of other beverages fall in half, demand for orange juice

will fall as many people will drink less orange juice. Thus, the demand curve for orange

2. Consider the market for coffee beans. Suppose that the prices of all other caffeinated beverages

go up 30 percent while at the same time a new fertilizer boosts production at coffee plantations

dramatically. Can you tell what will happen to the equilibrium price? What about the equilibrium

quantity? LO7

a. Both the equilibrium price and the quantity will rise.

b. The equilibrium price will rise but the equilibrium quantity will fall.

c. The equilibrium price may rise or fall but the equilibrium quantity will rise for certain.

d. Neither the price change nor the quantity change can be determined for certain.

e. None of the above.

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Answer: C; the equilibrium price may rise or fall but the equilibrium quantity will rise

Coffee and other caffeinated beverages are substitutes. Thus, when the prices of all other

caffeinated beverages rise, people will substitute away from them and consume more

3. A price ceiling will result in a shortage only if the ceiling price is ____________ the

equilibrium price. LO7

a. less than

b. equal to

c. greater than

d. louder than

Answer: Less than. If the ceiling price is set at a value below the equilibrium price, then

a shortage will result because quantity demanded will exceed quantity supplied. By

4. Suppose that you are the economic advisor to a local government that has to deal with a

politically embarrassing surplus that was caused by a price floor that the government recently

imposed. Your first suggestion is to get rid of the price floor, but the politicians don’t want to do

that. Instead, they present you with the following list of options that they hope will get rid of the

surplus while keeping the price floor. Identify each one as either could work or can’t work. LO7

a. Restricting supply.

b. Decreasing demand.

c. Purchasing the surplus at the floor price.

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P2 = P1

Price of Olives

Quantity of Olives

Q1Q2

S1

S2

D2 D1

Chapter 03 Appendix

Answer:

a. Could work. There is currently a surplus because, at the floor price, quantity supplied

exceeds quantity demanded. If the government can restrict supply, it will be able to

b. Can’t work. There is a surplus because quantity supplied exceeds quantity demanded.

c. Could work. There is a surplus because the quantity that producers wish to supply at

the floor price exceeds the quantity that consumers wish to purchase at the floor price.

5. Suppose both the demand for olives and the supply of olives decline by equal amounts over

some time period. Use graphical analysis to show the effect on equilibrium price and quantity.

LO7

Answer: The supply and demand curves would shift left by an equal amount (supply

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6. Governments can use subsidies to increase demand. For instance, the government can pay

farmers to use organic fertilizers rather than traditional fertilizers. That subsidy increases the

demand for organic fertilizer. Consider two industries, one in which supply is nearly vertical and

the other in which supply is nearly horizontal. Assume that firms in both industries would prefer a

higher market equilibrium price because a higher market equilibrium price would mean higher

profits. Which industry would probably spend more resources lobbying the government to

increase the demand for its output? (Assume that both industries have similarly sloped demand

curves.) LO7

a. The industry with a nearly flat supply curve.

b. The industry with a nearly vertical supply curve.

Any demand subsidy will shift the demand curve right. That will cause a larger increase

APPENDIX PROBLEMS

1. Demand and supply often shift in the retail market for gasoline. Here are two demand curves

and two supply curves for gallons of gasoline in the month of May in a small town in Maine.

Some of the data is missing. LO7

a. Use the following facts to fill in the missing data in the table. If demand is D1 and Supply is

S1, the equilibrium quantity is 7000 gallons per month. When demand is D2 and supply is S1, the

equilibrium price is $3.00 per gallon. When demand is D2 and supply is S1, there is an excess

demand of 4000 gallons per month at a price of $1.00 per gallon. If demand is D1 and supply is

S2, the equilibrium quantity is 8000 gallons per month.

b. Compare two equilibriums. In the first, demand is D1 and supply is S1. In the second, demand

is D1 and supply is S2. By how much does the equilibrium quantity change? By how much does

the equilibrium price change?

c. If supply falls from S2 to S1 while demand simultaneously declines from D2 to D1, does the

equilibrium price rise or fall or stay the same? What if only supply falls? What if only demand

falls?

d. Suppose that supply is fixed at S1 and that demand starts at D1. By how many gallons per

month would demand have to increase at each price level such that the equilibrium price per

gallon would be $3.00? $4.00?

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Answers: (a) See the complete table below for the missing values; (b) equilibrium

Part a: If demand is D1 and Supply is S1, the equilibrium quantity is 7000 gallons per

When demand is D2 and supply is S1, the equilibrium price is $3.00 per gallon.

When demand is D2 and supply is S1, there is an excess demand of 4000 gallons per

month at a price of $1.00 per gallon. The excess demand of 4000 occurs in row 4 for D2

and S1. This implies the price in row 4 is $1.00.

If demand is D1 and supply is S2, the equilibrium quantity is 8000 gallons per month.

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In summary, we have the following table:

Part b: Compare two equilibriums. In the first, demand is D1 and supply is S1. In the

The initial equilibrium for D1 and S1 is Q=7000 and P=$2.00. The second equilibrium

Part c: If supply falls from S2 to S1 while demand declines from D2 to D1, does the

equilibrium price rise or fall or stay the same? What if only supply falls? What if only

demand falls?

The initial equilibrium for S2 and D2 is Q=8500 and P=$2.00. The second equilibrium

Part d: Suppose that supply is fixed at S1 and that demand starts at D1. By how many

Since supply is fixed at S1 and demand starts at D1 the initial equilibrium is Q=7000 and

P=$2.00. For the equilibrium price to increase to $3.00 (from $2.00) demand would need

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Chapter 03 Appendix

2. The table below shows two demand schedules for a given style of men’s shoes—that is, how

many pairs per month will be demanded at various prices at a men’s clothing store in Seattle

called Stromnord.

Suppose that Stromnord has exactly 65 pairs of this style of shoe in inventory at the start of the

month of July and will not receive any more pairs of this style until at least August first. LO7

a. If demand is D1, what is the lowest price that Stromnord can charge so that it will not run out

of this model of shoes in the month of July? What if demand is D2?

b. If the price of shoes is set at $75 for both July and August and demand will be D2 in July and

D1 in August, how many pairs of shoes should Stromnord order if it wants to end the month of

August with exactly zero pairs of shoes in its inventory? What if the price is set at $55 for both

months?

Feedback: Consider the following table and information as an example:

Stromnord has exactly 65 pairs of this style of shoe in inventory at the start of the month

of July and will not receive any more pairs of this style until at least August first.

Part a: If demand is D1, the lowest price Stromnord can charge $70 if it does not want to

run out of shoes in the month of July. A price of $65 would result in a demand of 68 pairs

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Part b: If the price of shoes is set at $75 for both July and August and demand will be D2

3. Use the table below to answer the questions that follow: LO7

a. If this table reflects the supply of and demand for tickets to a particular World Cup soccer

game, what is the stadium capacity?

b. If the preset ticket price is $45, would we expect to see a secondary market for tickets? Would

the price of a ticket in the secondary market be higher than, the same as, or lower than the price in

the primary (original) market?

c. Suppose for some other World Cup game the quantities of tickets demanded are 20,000 lower

at each ticket price than shown in the table. If the ticket price remains $45, would the event be a

sellout?

Feedback: Consider the following table as an example:

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Part a: Stadium Capacity is 60,000. We can infer this from the constant supply

Part b: If the preset ticket price is $45 we would expect to see a secondary market

Part c: If demand were 20,000 less at each price, the quantity demanded at $45 would

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