Answers to Back-of-the-Chapter Problems
1. a. According to the “law” of supply and demand, the existence of a large
b. If demand for Picasso’s work is inelastic, increasing the number of
pieces sold (by driving down prices) will reduce total revenue. The
b. This increase represents only .7 percent of total supply and will have
little price effect. The new quantity supplied is (1.007)(134) = 135.
c. If the total harvest is 10 percent above normal, QS = (1.10)(134) =
147.4 pounds per capita and P = 9.20 – (0.5)(147.4) = $1.83. Farm
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4. a. The tax per bottle on beer producers increases the cost per bottle and
shifts the industry supply curve upward. By itself, this effect implies a
lower total quantity sold at a higher equilibrium price. The fall in
b. The emerging economic recovery means an increased demand for
trucking transport services (a rightward shift in the industry demand
curve) increasing trucking volume and transport prices. The reduction
The four factors all move trucking rates (prices) in the same
direction, upward. As far as trucking volume is concerned, it’s likely
5. a. The Green Company’s marginal cost is MC = dC/dQ = 4 + 2Q, and the
price is P = $40. Setting MC = P implies 4 + 2Q = 40, or Q = 18 units.
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b. With the increase in fixed cost, the firm should continue to produce 18
units. Its profit is: = R – C = (40)(18) – [144 + (4)(18) + (18)2] =
c. In part a (when fixed costs are 100), ACmin = $24 at a quantity of 10
units for each firm. Thus, the original long-run equilibrium price is P =
$24. With elevated fixed costs, one would expect the long-run price to
6. a. Depicting the market effect of declining milk demand means reversing
the result shown in Figure 7.4. Now the new demand curve (call this D
b. At the reduced milk price, dairy farmers are making economic losses,
so dairy farmers exit the industry. Over time, enough dairy farmers exit
7. a. Average cost is AC = 300/Q + Q/3. Thus, total cost is C = 300 + Q2/3,
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b. A firm’s supply curve is found by setting P = MC = (2/3)QF. Therefore,
QF = 1.5P. With 10 firms, total supply is QS = 10QF = 15P. Setting QD =
c. In long-run equilibrium, P = min AC = $20. In turn, Q = 1,000 – (20)
c. Firms will exit the industry because all are making losses. In the long
d. Price increased enough to allow each remaining firm a zero economic
9. a. Here, MC = AC = $5. Thus, PC = $5. From the price equation, we have:
b. The industry displays constant returns to scale (constant LAC). The
c. Total profit is zero. Consumer surplus is (.5)(35 – 5)(6) = $90 million.
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10. a. Setting demand equal to supply, we have 200 – .2Q = 100 + .3Q, or Q
b. If a tax of $20 per unit is levied on suppliers, the industry supply curve
undergoes a parallel upward shift. Increasing the curve’s price
intercept by 20 implies P = 120 + .3Q. Setting the demand curve equal
c. If a tax of $20 per unit is levied on consumers, the demand curve
undergoes a parallel downward shift and becomes P = 180 – .2Q.
Setting the new demand curve equal to the supply curve, we have:
11. a. Setting QD = QS implies 28 – 4P = -12 + 6P, so P = $4 and Q = 12
million bushels of rice. To find consumer surplus and producer surplus,
b. With free trade, the world price establishes the new prevailing price,
P = $3. From the demand and supply equations, we find QD = 16 and
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c. Offering rice growers a $1 per bushel subsidy means a (subsidized)
price of $4 and restores domestic supply to QS = 12 million bushels as
b. Now we use 70 – Q = 25 + 2Q to find Q = 15 and P = $55. The subsidy
c. While the subsidy helps producers and consumers, it is not “free.”
Discussion Question
a. This does not contradict the law of demand, which states that price
and quantity are inversely related given that everything else stays the
same. A number of other determinants of demand may have changed
b. An increase in the population of high school graduates can be
represented as a rightward shift in the demand curve. The increase in
value of a college education can be represented as an upward shift in
the demand curve. (The demand curve also represents the marginal
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Spreadsheet Problems
S1. a. and b. Using the spreadsheet optimizer, we find the short-run
equilibrium price as follows: Set net demand (D-S) in cell F8 equal to
c. To find the long-run equilibrium price include the number of firms in
c. Using the spreadsheet optimizer, we maximize total trading gains in
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