PROBLEM-SOLVING

(Adapted from Mankiw, N.G. (2009). Principles of Microeconomics)

In a graphing paper or Excel/Google Sheet file, solve the following problems. Show your solution in good
form, and submit it through Blackboard Learn.
1. The market for pizza has the following demand and supply schedules:
Quantity
Price Quantity Supplied
Demanded

$4 135 pizzas 26 pizzas

5 104 53

6 81 81

7 68 98

8 53 110

9 39 121

a. Graph the demand and supply curves. What are the equilibrium price and quantity in this
market?

Answer:

b. If the actual price in this market were above the equilibrium price, what would drive the market
toward equilibrium?

Answer: If the price were greater than $6, quantity supplied would exceed quantity demanded,
so suppliers would reduce the price to gain sales. If the price were less than $6, quantity
demanded would exceed quantity supplied, so suppliers could raise the price without losing
sales.

c. If the actual price in this market were below the equilibrium price, what would drive the market
toward equilibrium?
 Answer:  The price would continue to adjust until it reached $6, the only price at which there is
neither a surplus nor a shortage.

2. Consider the following events: Scientists reveal that consumption of oranges decreases the risk of
diabetes and, at the same time, farmers use a new fertilizer that makes orange trees more
productive. Illustrate and explain what effect these changes have on the equilibrium price and
quantity of oranges.

These two phenomena will both boost supply and increase demand. This would result in a change to the
right of both the supply curve and the demand curve. Although we are not told by how much either
curve will shift, this will result in a new equilibrium price that is similar to the previous equilibrium price.

3. Because bagels and cream cheese are often eaten together, they are complements.
a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of
bagels have risen. What could be responsible for this pattern—a fall in the price of flour or a
fall in the price of milk? Illustrate and explain your answer.

Answer:
Because flour is an ingredient in bagels, a decline in the price of flour would shift the supply
curve for bagels to the right. The result, shown in Figure, would be a fall in the price of bagels
and a rise in the equilibrium quantity of bagels. Because cream cheese is a complement to
bagels, the fall in the equilibrium price of bagels increases the demand for cream cheese, as
shown in Figure below. The result is a rise in both the equilibrium price and quantity of cream
cheese. So, a fall in the price of flour indeed raises both the equilibrium price of cream cheese
and the equilibrium quantity of bagels.
 
 b. Suppose instead that the equilibrium price of cream cheese has risen but the equilibrium
quantity of bagels has fallen. What could be responsible for this pattern—a rise in the price of
flour or a rise in the price of milk? Illustrate and explain your answer.

Answer:
In part (a), we found that a fall in the price of flour led to a rise in the price of cream cheese
and a rise in the equilibrium quantity of bagels. If the price of flour rose, the opposite would
be true; it would lead to a fall in the price of cream cheese and a fall in the equilibrium
quantity of bagels. Because the question says the equilibrium price of cream cheese has risen,
it could not have been caused by a rise in the price of flour.

4. Suppose that the price of basketball tickets at your college is determined by market forces.
Currently, the demand and supply schedules are as follows:

Quantity
Price Quantity Supplied
Demanded

$4 10,000 tickets 8,000 tickets

8 8,000 8,000

12 6,000 8,000

16 4,000 8,000

20 2,000 8,000

a. Draw the demand and supply curves. What is unusual about this supply curve? Why might this
be true?

  As Figure above shows, the supply curve is vertical. The constant quantity supplied makes sense
because the basketball arena has a fixed number of seats at any price.
 b. What are the equilibrium price and quantity of tickets?

Answer:

 The equilibrium price is 8

 equilibrium quantity is 8000 tickets.

c. Your college plans to increase total enrollment next year by 5,000 students. The additional
students will have the following demand schedule:

Quantity
Price
Demanded

$4 4,000 tickets

8 3,000

12 2,000

16 1,000

20 0

d. Now add the old demand schedule and the demand schedule for the new students to
calculate the new demand schedule for the entire college. What will be the new equilibrium
price and quantity?
Answer:

The new equilibrium price will be $12, which equates quantity demanded to quantity supplied.
The equilibrium quantity remains 8,000 tickets.
5. Market research has revealed the following information about the market for chocolate bars: The
demand schedule can be represented by the equation QD = 1,600 – 300P, where QD is the quantity
demanded and P is the price.

The supply schedule can be represented by the equation QS = 1,400 + 700P, where QS is the quantity
supplied. Calculate the equilibrium price and quantity in the market for chocolate bars.

Answer:

Equilibrium Quantity
Qs=Qd = 1,540
Equilibrium price is P=0.2

To get the 0.2

Qs=Qd
1400 + 700P = 1600 - 300P
Solve to get P:
1000P = 200
P= 2/10 =0.2
Substitute P into original equation:
Qd= 1600-300 x 0.2 = 1600-60 = 154