CHAPTER 3 SUPPLY AND DEMAND S-47
Solution
11. Fans of rock and rock stars often bemoan the high price of concert tickets. One
superstar has argued that it isn’t worth hundreds, even thousands, of dollars to hear
him and his band play. Let’s assume this star sold out arenas around the country at
an average ticket price of $75.
a. How would you evaluate the argument that ticket prices are too high?
b. Suppose that due to this star’s protests, ticket prices were lowered to $50. In what
11. a. If markets are competitive, the ticket price is simply the equilibrium price: the
price at which quantity supplied is equal to quantity demanded. No one is “made”
to pay $75 to go to a concert: a potential concert – goer will pay $75 if going to the
concert seems worth that amount and will choose to do something else if it isn’t.
S-48 CHAPTER 3 SUPPLY AND DEMAND
c. The band can lower the average price of a ticket by increasing supply: give more
concerts. This is shown as a rightward shift of the supply curve from S1 to S2,
resulting in a lower equilibrium price and a higher equilibrium quantity, shown by
the change of the equilibrium from E1 to E2.
P1
S1
Price
of ticket
S2
d. If the band’s CD is a total dud, the demand for concert tickets is likely to
decrease. This represents a leftward shift of the demand curve from D1 to D2,
resulting in a lower equilibrium price and quantity as the equilibrium changes
from E1 to E2. This is likely to eliminate the worry that ticket prices are “too high.”
S
Price
of ticket
P1
P2
S
Price
of ticket
E2
E1
KrugWellsECPS4e_Micro_CH03.indd S-48KrugWellsECPS4e_Micro_CH03.indd S-48 9/23/14 9:35 AM9/23/14 9:35 AM
CHAPTER 3 SUPPLY AND DEMAND S-49
Solution
12. After several years of decline, the market for hand made acoustic guitars is making a
comeback. These guitars are usually made in small workshops employing relatively
few highly skilled luthiers. Assess the impact on the equilibrium price and quantity
of handmade acoustic guitars as a result of each of the following events. In your
12. a. The cost of producing hand made acoustic guitars rises as more costly woods are
used to construct them. This reduces supply, as luthiers offer fewer guitars at any
given price. This is represented by a leftward shift of the supply curve and results
in a rise in the equilibrium price and a fall in the equilibrium quantity.
13. Demand twisters: Sketch and explain the demand relationship in each of the follow-
ing statements.
a. I would never buy a Miley Cyrus album! You couldn’t even give me one for
nothing.
b. I generally buy a bit more coffee as the price falls. But once the price falls to $2
KrugWellsECPS4e_Micro_CH03.indd S-49KrugWellsECPS4e_Micro_CH03.indd S-49 9/23/14 9:35 AM9/23/14 9:35 AM
S-50 CHAPTER 3 SUPPLY AND DEMAND
Solution
13. a. In this case, the quantity demanded is zero regardless of the price. So this person’s
demand curve for Miley Cyrus albums is a vertical line at the quantity of zero—
that is, a vertical line that lies on top of the vertical axis.
Price of
Miley Cyrus
album
b. The person here has the typical downward – sloping demand curve for coffee until it
reaches the price of $2 per pound, at which point it becomes horizontal, showing
that he or she would buy a very large quantity at that price.
Price
of coffee
(per pound)
she does not reduce the quantity demanded enough to offset the increased cost
per unit. This person will have a steep demand curve as shown in the diagram:
quantity demanded falls as price rises, but the fall in quantity demanded is pro-
portionately less than the rise in price.
Price of
orange juice
P2
CHAPTER 3 SUPPLY AND DEMAND S-51
Solution
d. Since students’ income has fallen, but the demand for cafeteria meals has
increased, cafeteria meals must be an inferior good. The rightward shift of the
demand curve, from D1 to D2, results in an increase in the equilibrium price and
quantity of cafeteria meals, as the equilibrium changes from E1 to E2.
Price
of meal
S
14. Will Shakespeare is a struggling playwright in sixteenth – century London. As the price
he receives for writing a play increases, he is willing to write more plays. For the fol-
lowing situations, use a diagram to illustrate how each event affects the equilibrium
price and quantity in the market for Shakespeare’s plays.
a. The playwright Christopher Marlowe, Shakespeare’s chief rival, is killed in a bar
brawl.
14. a. The death of Marlowe means that the supply of a substitute good (Marlowe’s
plays) has decreased. As a result, the demand for Shakespeare’s plays will increase,
inducing a rightward shift of the demand curve in the market for Shakespeare’s
plays from D1 to D2. As a result, equilibrium price and quantity will rise as the
equilibrium changes from E1 to E2.
Price of
Shakespeare
play
S
KrugWellsECPS4e_Micro_CH03.indd S-51KrugWellsECPS4e_Micro_CH03.indd S-51 9/23/14 9:35 AM9/23/14 9:35 AM
S-52 CHAPTER 3 SUPPLY AND DEMAND
b. After the outbreak of the plague, fewer Londoners will wish to see Shakespeare’s
plays to avoid contracting the illness, inducing a leftward shift of the demand
curve from D1 to D2. Equilibrium price and quantity will fall as the equilibrium
changes from E1 to E2.
P1
E1
Price of
Shakespeare
play
S
c. Queen Elizabeth’s commissions result in a greater quantity of Shakespeare’s plays
demanded at any given price. This represents a rightward shift of the demand
curve from D1 to D2, resulting in a higher equilibrium price and quantity as the
equilibrium changes from E1 to E2.
Price of
Shakespeare
play
S
15. This year, the small town of Middling experiences a sudden doubling of the birth
rate. After three years, the birth rate returns to normal. Use a diagram to illustrate
the effect of these events on the following.
CHAPTER 3 SUPPLY AND DEMAND S-53
Solution
15. a. There are more babies today, so the demand for an hour of babysitting services
has increased. This produces a rightward shift of the demand curve for babysitting
services from D1 to D2, resulting in a rise in the equilibrium price and quantity as
the equilibrium changes from E1 to E2.
P2
S
E2
Price of
babysitting
services
b. The children born today will cause an increase in the supply of babysitters avail-
able 14 years from now, when there will be a rightward shift of the supply curve
for babysitting services from S1 to S2. This will result in a lower equilibrium price
and a higher equilibrium quantity as the equilibrium changes from E1 to E2.
P1
S1
S2
E1
Price of
babysitting
services
P2
S
E2
Price of
babysitting
services
KrugWellsECPS4e_Micro_CH03.indd S-53KrugWellsECPS4e_Micro_CH03.indd S-53 9/23/14 9:35 AM9/23/14 9:35 AM
S-54 CHAPTER 3 SUPPLY AND DEMAND
Solution
16. Use a diagram to illustrate how each of the following events affects the equilibrium
price and quantity of pizza.
a. The price of mozzarella cheese rises.
16. a. Mozzarella is an input in the production of pizza. Since the cost of an input has
risen, pizza producers will reduce the quantity supplied at any given price, a left-
ward shift of the supply curve from S1 to S2. As a result, the equilibrium price of
pizza will rise and the equilibrium quantity will fall as the equilibrium changes
from E1 to E2.
S2
Price
of pizza
b. Consumers will substitute pizza in place of hamburgers, resulting in an increased
demand for pizza at any given price. This generates a rightward shift of the
demand curve from D1 to D2, leading to a rise in the equilibrium price and quan-
tity as the equilibrium changes from E1 to E2.
P2
S
E2
Price
of pizza
CHAPTER 3 SUPPLY AND DEMAND S-55
c. Tomato sauce is an input in the production of pizza. Since the cost of an input
has fallen, pizza producers will increase the quantity supplied at any given price, a
d. The demand for an inferior good decreases when the incomes of consumers rise.
So a rise in consumer incomes produces a leftward shift of the demand curve
from D1 to D2, resulting in a lower equilibrium price and quantity as the equilib-
rium changes from E1 to E2.
S
Price
of pizza
e. Consumers will delay their purchases of pizza today in anticipation of consuming
more pizza next week. As a result, the demand curve shifts leftward from D1 to
Q2
D1
D2
Q1Quantity of pizza
KrugWellsECPS4e_Micro_CH03.indd S-55KrugWellsECPS4e_Micro_CH03.indd S-55 9/23/14 9:35 AM9/23/14 9:35 AM
S-56 CHAPTER 3 SUPPLY AND DEMAND
Solution
17. Although he was a prolific artist, Pablo Picasso painted only 1,000 canvases during his
“Blue Period.” Picasso is now dead, and all of his Blue Period works are currently on
display in museums and private galleries throughout Europe and the United States.
17. a. There are no more Picasso Blue Period works available. Hence the supply curve is a
vertical line at the quantity 1,000.
S
Price of
painting
b. Since supply is fixed, the price of a Picasso Blue Period work is entirely determined
by demand. Any change in demand is fully reflected in a change in price.
S
Price of
painting
Equilibrium
KrugWellsECPS4e_Micro_CH03.indd S-56KrugWellsECPS4e_Micro_CH03.indd S-56 9/23/14 9:35 AM9/23/14 9:35 AM
CHAPTER 3 SUPPLY AND DEMAND S-57
Solution
c. This results in a rightward shift of the demand curve for these works from D1 to
D2, and the equilibrium changes from E1 to E2. But since no more works are avail-
able, this increase in demand simply results in an increase in the equilibrium price.
S
Price of
painting
P2
E2
18. Draw the appropriate curve in each of the following cases. Is it like or unlike the
curves you have seen so far? Explain.
18. a. Since the government pays the full cost of cardiac by pass surgery, the price paid
by the patient is always zero. Consequently, the demand for surgery is constant,
regardless of the price actually paid by the government. The quantity demanded is
constant at the quantity that would be demanded by patients if the government,
not the patient, pays for surgery. That is, it is a vertical line at the quantity that
patients would demand if the price of surgery to them were zero.
D
Price of
cardiac surgery
KrugWellsECPS4e_Micro_CH03.indd S-57KrugWellsECPS4e_Micro_CH03.indd S-57 9/23/14 9:35 AM9/23/14 9:35 AM
S-58 CHAPTER 3 SUPPLY AND DEMAND
b. In this case, the patient must pay the cost of the surgery, so the quantity demand-
ed is affected by price, and the demand curve has its usual downward – sloping
shape.
Price of
cosmetic surgery
19. The accompanying table gives the annual U.S. demand and supply schedules for pick–
up trucks.
Quantity of Quantity of
Price trucks demanded trucks supplied
of truck (millions) (millions)
$20,000 20 14
$25,000 18 15
$30,000 16 16
KrugWellsECPS4e_Micro_CH03.indd S-58KrugWellsECPS4e_Micro_CH03.indd S-58 9/23/14 9:35 AM9/23/14 9:35 AM
CHAPTER 3 SUPPLY AND DEMAND S-59
Solution
19. a. The supply curve is S1 and the demand curve is D1. The equilibrium in the market
for pickup trucks is indicated by point E1, with an equilibrium price of $30,000
and an equilibrium quantity of 16 million trucks bought and sold.
$40,000
35,000
Price
of truck
S1
b. The announcement of a defect is likely to decrease the demand for pickup trucks.
This is represented by a leftward shift of the demand curve, as shown by the shift
from D1 to D2, and causes the equilibrium price and quantity to fall as the equi-
librium changes from E1 to E2.
Price
of truck
c. The new supply schedule is as follows.
Price Quantity of trucks supplied
of truck (millions)
$20,000 9.3
KrugWellsECPS4e_Micro_CH03.indd S-59KrugWellsECPS4e_Micro_CH03.indd S-59 9/23/14 9:35 AM9/23/14 9:35 AM
This one – third decrease in the quantity supplied at any given price is shown as a
leftward shift of the supply curve from S1 to S2. It results in a new, higher equi-
librium price, $40,000 per truck, and a lower equilibrium quantity, 12 million
trucks, as shown by the change of the equilibrium from E1 to E3.
Price
of truck
S1
S2
S-60 CHAPTER 3 SUPPLY AND DEMAND
KrugWellsECPS4e_Micro_CH03.indd S-60KrugWellsECPS4e_Micro_CH03.indd S-60 9/23/14 9:35 AM9/23/14 9:35 AM