978-1259663048 Chapter 4 Solutions Manual

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CHAPTER 4: SUPPLY AND DEMAND

Questions and Exercises

1. The law of demand states that quantity demanded falls as price increases; or that

2. a.

Price Market

Demand

2 64

4 56

6 44

b. See the accompanying graph of the table.

c. At the market price of $4, the total market demand is 56. If the price rises to $8,

d. All of the curves will shift to the right by 50 percent. [(Note: The top part of

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3. Four shift factors of demand are income, price of other goods, tastes, and

expectations. A fifth shift factor is taxes and subsidies to consumers. As income

4. A change in the price causes a movement along the demand curve to a new point

5. The law of supply states that quantity supplied rises as price increases or,

alternatively, that quantity supplied falls as price decreases. Price is directly

6. Saying that supply increases means that the curve has shifted to the right, which is

7. A shift in supply is the graphical representation of the effect of anything other

than price on supply, and these shift factors shift the entire supply curve. Shift

factors of supply include the price of inputs, technological advances, changes in

expectations, and taxes and subsidies. As the price of inputs increase, the supply

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8. When adding two supply curves, sum

horizontally the two individual supply

9. a. The market demand and market supply

b. At a price of $30, quantity demanded is 35

and quantity supplied is 15. Excess demand is

c. Equilibrium price is $40. Equilibrium quantity

is 25.

10. In the accompanying graph, the demand curve has

shifted to the left, causing a decrease in the

11. The price of airline tickets rises during the summer

months because demand for airline travel increases as

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12. Sales volume increases (equilibrium quantity rises)

when the government suspends the tax on sales by

retailers because the price to demanders falls and

13. Increased security measures imposed by government

will increase the cost of providing air travel. This will

shift the supply curve to the left, increase equilibrium

Some students might argue that increased security will increase demand because

consumers will feel more comfortable flying (they don’t have to worry about

14. Customers will flock to stores demanding that funky “economics professor” look,

creating excess demand (the demand curve shifts right). This excess demand will

15. As substitutes for bottled water—clean tap water—decrease, demand for bottled

water increases enormously, and there will be upward pressure on prices. Social

16. Since OPEC is a dominant producer of oil, increasing

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17. The results for each part are shown in the

accompanying graphs.

a. The bad weather causes a decrease in supply. This is

shown by a shift in supply from S0 to S1. Equilibrium

b. The medical report causes a decrease in demand. This

is shown by a shift in demand from D0 to D1.

c. The innovation causes an increase in supply. This is

shown as a shift in supply from S0 to S1. Equilibrium

d. The drop in income causes a decrease in demand.

This is shown by a shift in demand from D0 to D1.

18. a. I would expect wheat prices to decline since the supply of wheat is greater than

expected. Wheat commodity markets are very competitive, so the initial 30

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b. This is graphically represented by a shift to the right

in the supply of wheat, as shown in the

19. a. The cars in Italy are most likely much smaller than

b. As in (a), Italians will want to conserve gasoline more and thus use public

c. As in (a) and (b), Italians will be more concerned with fuel efficiency in their

d. Raising the price of gasoline in the United States to $5 per gallon will decrease

20. a. The tax shifts the supply curve to the left in the market for

natural gas exports because it increases the cost of

b. As it becomes more expensive to sell natural gas to other

21. It suggests that the price is above the equilibrium price so

that the quantity supplied exceeds the quantity demanded,

22. The fallacy of composition is the false assumption that what is true for a part will

also be true for the whole. It affects the supply/demand model by drawing our

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24. a. Because the market for pencils is relatively small, supply/demand analysis would

be appropriate without modification. Also, there are no significant political or

b. Because the labor market is very large, supply/demand analysis would not be

appropriate without modification. For example, an increase in labor supply will

c. Aggregate markets such as savings and expenditures include feedback effects, so

d. The CD market is relatively small. Supply/demand analysis would be appropriate

Questions from Alternative Perspectives

1. Austrian

It is difficult to estimate supply and demand curves without a market. Consumers

have an incentive to overstate demand, while suppliers have an incentive to overstate

costs. Without the need to pay in a market, it is almost impossible to get individuals to

2. Religious

a. There is some truth to this saying; if people were only selfish, they would lose much

b. Yes, there is a conflict, although how strong the conflict is a matter of debate. There

c. No probably not, although, again, the answer is debatable. Markets would not work

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3. Feminist

a. Women and men have not always been equally free to choose the amount of

education they receive. Established in 1833, Oberlin College was the first

b. Women did not have the right to vote until 1920. Women today continue to face

c. To the extent that women are not free to choose, they are not represented in the

analysis of supply and demand. The questions that economists consider, and therefore

4. Institutionalist

You will want to examine the determinants of supply and demand, and the conditions

under which they may or may not hold. There is also the problem of interdependency.

Discussion of each should include problems of measurement since, ultimately,

5. Post-Keynesian

a. Consumers follow rules of thumb for a variety of reasons, one being to save time.

b. Our decisions to buy goods are usually based on past behavior—habits that have been

incorporated in our consumer behavior. This behavior could have come from family,

friends or advertisements and may affect our consumption more than the desire to

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6. Radical

The hiring decisions of multinational corporations don’t appear to be very responsive

Issues to Ponder

1. It suggests that the job is being rationed, which means that the wage is above the

2. a. It increased the demand for housing and increased housing prices. The demand

b. It decreased the demand for housing and decreased housing prices. The demand

c. The price would increase more in San Francisco.

3. a. It would likely raise the value significantly – it was estimated that it would raise it

b. It would probably lower the value of the stamps – it was estimated that it would

c. They would likely sue to stop the additional sheets from being issued; they did

and they lost.

4. a. The number of punitive awards would decline because the incentive for plaintiffs

b. The number of pre-trial settlements would rise because the plaintiff would be

5. A supply/demand analysis that includes only economic forces will likely be

incomplete because social and political forces will also impact equilibrium price

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