978-1259663048 Chapter 5 Solutions Manual Part 1

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CHAPTER 5: USING SUPPLY AND DEMAND

Questions and Exercises

1. If the equilibrium price and quantity both rose, the simplest cause would be a shift

2. If price fell and quantity remained constant, a possible cause would be a shift out

to the right of the supply curve and a shift of the demand curve in to the left.

3. Computer pricing of roads could end bottlenecks and rush hour congestion by

price rationing. Currently at zero price, at certain times, the quantity demanded

greatly exceeds the quantity supplied, resulting in congestion. Raising prices,

4. a. This would represent a shift in demand to the left

assuming the decline in Cookie Monster’s popularity

b. This is represented by a shift in demand for bread

5. a. Both the shift in demand to the right and the shift of supply to the left lead to a

higher equilibrium price of oil. The effect on equilibrium is indeterminate. While

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b. With an in production (supply shifts to the right), equilibrium price will decline

and equilibrium quantity will decline as shown in the graph below. Because

6. a. This represents a shift of the supply curve to the left because the offended decide

not to supply organs, increasing the legal price significantly and perhaps reducing

b. How responsive quantity supplied is to price affects the slope of the supply curve.

If quantity supplied is very responsive to price, the equilibrium price might be

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(a) (b)

7. The drought in Australia caused a decrease in supply, which shifted the supply

8. See the accompanying graph. A price ceiling of PC below equilibrium price will

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9. As you can see in the accompanying graph, the rent

controls create a situation in which demanders are willing

to pay much more than the controlled price and much

10. See the accompanying graph. A price floor of PF

11. A minimum wage is a price floor as in question 10. A

Pmin, above the equilibrium wage will result in the

quantity of laborers looking for work to increase to QS

12. a. A $4 per unit tax on suppliers shifts the supply curve up by $4 shown as a shift in

the supply curve from S0 to S1. Equilibrium price will rise by $4 only if the

demand curve is perfectly vertical. In the case of a vertical demand curve,

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b. A $4 per unit tax on consumers shifts the demand curve down by $4 shown as a

shift down in the demand curve from D0 to D1. Equilibrium price will fall by $4

c. The unit tax on the consumers and suppliers has the same effect on the both

equilibrium quantity and price. It doesn’t matter who pays the tax. Because

13. a. The quantity supplied and demanded equal each other when the price is $1.00.

b. The tax shifts the supply curve up by $0.75 from S0 to S1. Equilibrium price (the

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c. The tax shifts the demand curve down by $0.75 from D0 to D1. The equilibrium

d. It doesn’t matter upon whom the tax is levied. The result is the same. We can see

this by considering what happens to demand when customers pay the tax. Because

14. A quota places a quantity restriction on imports. Consumers are willing to pay a

higher price for the lower quantity (QQ) than the equilibrium price without a

15. a. See the accompanying graph.

b. There is excess demand of 300.

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16. Public postsecondary education is an example of a third-party payer market

because it is heavily subsidized by state government and in most cases, a student’s

17. a. Equilibrium price is $6 and equilibrium quantity is 300.

b. In third-party-payer markets, the person who demands the good differs from the

c. Total spending in part a is $1,800 ($6 × 300). Total spending in part b is $12,600

Questions from Alternative Perspectives

1. Austrian

I might decide to hire my friends, or to hire those with whom I like to work—such as

those from a preferred ethnic group or gender. Is doing so fair? Fairness is a judgment

question and judgments differ. From most people’s perspective, such methods are not

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2. Religious

This is a judgment question and judgments differ. Christians believe that people

should care about society, not just about themselves. So, since spending $20 of your

3. Feminist

There are likely a number of reasons why women are paid less than men. Part of the

pay gap may be explained by differences in work experience, education, on-the-job

training, and work interruptions for women. Economists typically measure

discrimination as a residual – that part of the pay gap that remains “unexplained” after

accounting for these factors. The second part of the question is a judgment question

4. Institutionalist

a. We can see cultural evolution through history; the appendix to Chapter 3 can be used

to trace the cultural evolution of the market system. Here it is important to stress that

religious values and social relationships had to evolve to accommodate the needs of

the new forms of economic organization that emerged. Markets change overnight and

increasingly require rapid adaptation by individuals, which can cause shocks to social

b. In the U.S. market, evolution has elevated living standards for everyone relative to

those of say 1775. We see access to fresh fruits and vegetables year round; many

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5. Religious

What is appropriate depends on one’s normative judgments, and most normative

systems see taking undue advantage of someone in a crisis as wrong. Early

economists have examined a concept that they called the “just price,” which is the

price that should be charged in various situations. There are many interpretations of

6. Radical

a. Today’s rent controls are designed to be less invasive than the ones described in the

b. This is a judgment question; economics can tell one about what the costs and benefits

c. This again is a judgment question that requires an integration of normative issues into

the analysis. Most mainstream economists would argue that it is better to deal with

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