Chapter 03 – Demand, Supply and Market Equilibrium
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Answers:
(a) Equilibrium price = $4.00. There is neither a shortage nor a surplus at $4.00. Quantity
Feedback: Consider the following data.
Chapter 03 – Demand, Supply and Market Equilibrium
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(b)
4. How will each of the following changes in demand and/or supply affect equilibrium price and
equilibrium quantity in a competitive market; that is, do price and quantity rise, fall, or remain
unchanged, or are the answers indeterminate because they depend on the magnitudes of the
shifts? Use supply and demand to verify your answers. LO4
a. Supply decreases and demand is constant.
b. Demand decreases and supply is constant.
c. Supply increases and demand is constant.
d. Demand increases and supply increases.
e. Demand increases and supply is constant.
f. Supply increases and demand decreases.
g. Demand increases and supply decreases.
h. Demand decreases and supply decreases.
Chapter 03 – Demand, Supply and Market Equilibrium
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Answers:
(a) Price up; quantity down;
Price
S2
S1
P1
P2
Chapter 03 – Demand, Supply and Market Equilibrium
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Part d: The increase in supply and the increase in demand unambiguously increases the
equilibrium quantity. This is because the increase in supply and the increase in demand
Price
Quantity
S2
S1
D1
P1
Q1
P2
Q2
Price
S1
Quantity
D1
Q1
D2
Chapter 03 – Demand, Supply and Market Equilibrium
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Price
S1
P1
P2
Price
S2
S1
P1
Chapter 03 – Demand, Supply and Market Equilibrium
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Part f: The increase in supply and the decrease in demand unambiguously decreases the
equilibrium price. This is because the increase in supply and the decrease in demand
Price
S2
S1
P1
Chapter 03 – Demand, Supply and Market Equilibrium
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indeterminate because the decrease in supply puts upward pressure on the equilibrium
price and the decrease in demand puts downward pressure on the equilibrium price. The
figure below shows these effects when the supply effect dominates.
Price
S2
S1
P2
Price
S2
S1
P2
Chapter 03 – Demand, Supply and Market Equilibrium
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5. Use two market diagrams to explain how an increase in state subsidies to public colleges might
affect tuition and enrollments in both public and private colleges. LO4
Answer: The supply curve of the public colleges shifts to the right, reducing tuition and
increasing enrollments. Enrollment demand curve of private colleges shifts to the left
6. ADVANCED ANALYSIS Assume that demand for a commodity is represented by the
equation P = 10 – .2Qd and supply by the equation P = 2 + .2Qs, where Qd and Qs are quantity
demanded and quantity supplied, respectively, and P is price. Using the equilibrium condition Qs
= Qd, solve the equations to determine equilibrium price. Now determine equilibrium quantity.
LO4
Answer: equilibrium price is P = 6; equilibrium quantity is Q = 20
Feedback: Consider the following equations:
demand for a commodity is P = 10 – .2Qd
supply of the commodity is P = 2 + .2Qs
Chapter 03 – Demand, Supply and Market Equilibrium
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7. Suppose that the demand and supply schedules for rental apartments in the city of Gotham are
as given in the table below. LO5
a. What is the market equilibrium rental price per month and the market equilibrium number of
apartments demanded and supplied?
b. If the local government can enforce a rent-control law that sets the maximum monthly rent at
$1500, will there be a surplus or a shortage? Of how many units? And how many units will
actually be rented each month?
c. Suppose that a new government is elected that wants to keep out the poor. It declares that the
minimum rent that can be charged is $2500 per month. If the government can enforce that price
floor, will there be a surplus or a shortage? Of how many units? And how many units will
actually be rented each month?
d. Suppose that the government wishes to decrease the market equilibrium monthly rent by
increasing the supply of housing. Assuming that demand remains unchanged, by how many units
of housing would the government have to increase the supply of housing in order to get the
market equilibrium rental price to fall to $1500 per month? To $1000 per month? To $500 per
month?
Answers: (a) 12,500 apartments at a rent of $2000 per month; (b) A shortage of 5,000
Chapter 03 – Demand, Supply and Market Equilibrium
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Feedback: Consider the following demand and supply schedules:
Part b: If the government imposes a maximum rent of $1500 the quantity of apartments
supplied equals 10,000 and the quantity of apartments demanded equals 15,000. Thus,
there is a shortage of 5000 apartments (= 15,000 (demand) – 10,000 (supply)). The
amount of apartments actually rented will be determined by supply here. There are only
10,000 available for rent, so only 10,000 will be rented.
Part d: If the government wants to reduce the market equilibrium rent to $1500 per month
the government would need to increase the supply of apartments by 2500 units. To see
this, start in equilibrium. Here the equilibrium rent is $2000 and the equilibrium quantity
is 12,500 units. If the government adds 2500 units there will now be 15,000 unit for rent
in the market. The equilibrium price is now $1500 (the rent desired by government) and
the equilibrium quantity is 15,000.