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vacation travelers typically pay for their trips out of their 9. What does the sign of the cross-price elasticity of
own pockets. How would this affect the comparison be- demand between two goods tell us about the nature of
tween the price elasticity of demand for air travel for the relationship between those goods?
business travelers versus vacation travelers?
10. Explain why a shift in the demand curve identifies
8. Explain why the price elasticity of demand for an en- the supply curve and not the demand curve.
tire product category (such as yogurt) is likely to be less
negative than the price elasticity of demand for a typical
brand (such as Dannon) within that product category.

PROBLEMS

2.1. The demand for beer in Japan is given by the fol- 2.5. The demand curve for ice cream in a small town
lowing equation: Q d  700  2P  PN  0.1I, where P is has been stable for the past few years. In most months,
the price of beer, PN is the price of nuts, and I is average when the equilibrium price is $3 per serving for the most
consumer income. popular ice cream, customers buy 300 servings per month.
a) What happens to the demand for beer when the price For one month the price of materials used to make ice
of nuts goes up? Are beer and nuts demand substitutes or cream increased, shifting the supply curve to the left. The
demand complements? equilibrium price in that month increased to $4, and cus-
tomers bought only 200 portions in the month. With
b) What happens to the demand for beer when average
these data draw a graph of a linear demand curve for ice
consumer income rises?
cream in the town. Find price elasticity of demand for
c) Graph the demand curve for beer when and PN  100 prices equal to $3 and $4. At what price would the de-
and I  10,000. mand be unitary elastic?
2.2. Suppose the demand curve in a particular market is 2.6. Granny’s Restaurant sells apple pies. Granny knows
given by Q  5  0.5P. that the demand curve for her pies does not shift over
a) Plot this curve in a graph. time, but she wants to learn more about that demand. She
b) At what price will demand be unitary elastic? has tested the market for her pies by charging different
prices. When she charges $4 per pie, she sells 30 pies per
2.3. The demand and supply curves for coffee are given week. When she charges $5, she sells 24 pies per week. If
by Q d  600  2P and Q s  300  4P. she charges $4.50, she sells 27 apple pies per week.
a) Plot the supply and demand curves on a graph and a) With these data draw a graph of the linear demand
show where the equilibrium occurs. curve for Granny’s apple pies.
b) Using algebra, determine the market equilibrium b) Find the price elasticity of demand at each of the
price and quantity of coffee. three prices.
2.4. Suppose that demand for bagels in the local store is 2.7. Every year there is a shortage of Super Bowl tick-
given by equation Q d  300  100P. In this equation, P ets at the official prices P0. Generally, a black market
denotes the price of one bagel in dollars. (known as scalping) develops in which tickets are sold for
a) Fill in the following table: much more than the official price. Use supply and de-
mand analysis to answer these questions:
P 0.10 0.45 0.50 0.55 2.50 a) What does the existence of scalping imply about the
relationship between the official price P0 and the equilib-
Qd rium price?
b) If stiff penalties were imposed for scalping, how
Q, P
would the average black market price be affected?

b) Plot this curve in a graph. Is it linear? 2.8. You have decided to study the market for fresh-
picked cherries. You learn that over the last 10 years,
c) At what price is demand unitary elastic?
cherry prices have risen, while the quantity of cherries
d) At what price is demand inelastic? purchased has also risen. This seems puzzling because
e) At what price is demand elastic? you learned in microeconomics that an increase in price
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PROBLEMS 71

usually decreases the quantity demanded. What might unit, which of the following levels of output could the
explain this seemingly strange pattern of prices and con- firm possibly expect to see? Explain.
sumption levels? a) 400
2.9. Suppose that, over a period of 6 months, the price b) 600
of corn increased. Yet, the quantity of corn sold by pro- c) 800
ducers decreased. Does this contradict the law of supply? d) 1000
If not, why not?
2.16. Gina usually pays a price between $5 and $7 per
2.10. Explain why a good with a positive price elastic- gallon of ice cream. Over that range of prices, her
ity of demand must violate the law of demand. monthly total expenditure on ice cream increases as the
2.11. Suppose that the quantity of corn supplied price decreases. What does this imply about her price
depends on the price of corn (P) and the amount of rain- elasticity of demand for ice cream?
fall (R). The demand for corn depends on the price of 2.17. Consider the following demand and supply rela-
corn and the level of disposable income (I). The equa- tionships in the market for golf balls: Q d  90  2P  2T
tions describing the supply and demand relationships are and Q s  9  5P  2.5R, where T is the price of
Q s  20R  100P and Q d  4000  100P  10I. titanium, a metal used to make golf clubs, and R is the
a) Sketch a graph of demand and supply curves that price of rubber.
shows the effect of an increase in rainfall on the equilib- a) If R  2 and T  10, calculate the equilibrium price
rium price and quantity of corn. and quantity of golf balls.
b) Sketch a graph of demand and supply curves that b) At the equilibrium values, calculate the price elasticity
shows the effect of a decrease in disposable income on the of demand and the price elasticity of supply.
equilibrium price and quantity of corn. c) At the equilibrium values, calculate the cross-price
2.12. Recall that when demand is perfectly inelastic, elasticity of demand for golf balls with respect to the
Q, P  0. price of titanium. What does the sign of this elasticity tell
you about whether golf balls and titanium are substitutes
a) Sketch a graph of a perfectly inelastic demand curve. or complements?
b) Suppose the supply of 1961 Roger Maris baseball
cards is perfectly inelastic. Suppose, too, that renewed 2.18. In Metropolis only taxicabs and privately owned
interest in Maris’s career caused by Mark McGwire and automobiles are allowed to use the highway between the
Sammy Sosa’s quest to break his home run record in airport and downtown. The market for taxi cab service is
1998 caused the demand for 1961 Maris cards to go up. competitive. There is a special lane for taxicabs, so taxis
What will happen to the equilibrium price? What will are always able to travel at 55 miles per hour. The de-
happen to the equilibrium quantity of Maris baseball mand for trips by taxi cabs depends on the taxi fare P, the
cards bought and sold? average speed of a trip by private automobile on the
highway E, and the price of gasoline G. The number of
2.13. Consider a linear demand curve, Q  350  7P. trips supplied by taxi cabs will depend on the taxi fare and
a) Derive the inverse demand curve corresponding to the price of gasoline.
this demand curve. a) How would you expect an increase in the price of
b) What is the choke price? gasoline to shift the demand for transportation by taxi
c) What is the price elasticity of demand at P  50? cabs? How would you expect an increase in the average
speed of a trip by private automobile to shift the demand
2.14. Suppose that the quantity of steel demanded in for transportation by taxi cabs? How would you expect an
France is given by Qs  100  2Ps  0.5Y  0.2PA, where increase in the price of gasoline to shift the demand for
Qs is the quantity of steel demanded per year, Ps is the transportation by taxi cabs?
market price of steel, Y is real GDP in France, and PA is b) Suppose the demand for trips by taxi is given by the
the market price of aluminum. In 2011, Ps  10, Y  40, equation Q d  1000  50G  4E  400P. The supply of
and PA  100. How much steel will be demanded in trips by taxi is given by the equation Q s  200  30G 
2011? What is the price elasticity of demand, given 100P. On a graph draw the supply and demand curves for
market conditions in 2011? trips by taxi when G  4 and E  30. Find equilibrium
2.15. A firm currently charges a price of $100 per unit taxi fare.
of output, and its revenue (price multiplied by quantity) c) Solve for equilibrium taxi fare in a general case, that is,
is $70,000. At that price it faces an elastic demand when you do not know G and E. Show how the equilib-
(Q,P 1). If the firm were to raise its price by $2 per rium taxi fare changes as G and E change.
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72 CHAPTER 2 D E M A N D A N D S U P P LY A N A LYS I S

2.19. For the following pairs of goods, would you ex- 2.23. For each of the following, discuss whether you
pect the cross-price elasticity of demand to be positive, expect the elasticity (of demand or of supply, as specified)
negative, or zero? Briefly explain your answers. to be greater in the long run or the short run.
a) Tylenol and Advil a) The supply of seats in the local movie theater.
b) DVD players and VCRs b) The demand for eye examinations at the only
c) Hot dogs and buns optometrist in town.
c) The demand for cigarettes.
2.20. For the following pairs of goods, would you
expect the cross-price elasticity of demand to be positive, 2.24. Suppose that in 2011, the global market for
negative, or zero? Briefly explain your answer. hard drives for notebook computers consists of a large
a) Red umbrellas and black umbrellas number of producers. It is relatively easy for new pro-
ducers to enter the industry, and when the market for
b) Coca-Cola and Pepsi notebook hard drives is booming, new producers do, in
c) Grape jelly and peanut butter fact, enter.
d) Chocolate chip cookies and milk In February 2011, there is an unexpected temporary
e) Computers and software surge in the demand for notebook hard drives, increas-
ing the monthly demand for hard drives by 25 percent
2.21. Suppose that the market for air travel between
at any possible price. As a result, the price of notebook
Chicago and Dallas is served by just two airlines, United
hard drives increased by $5 per megabyte by the end
and American. An economist has studied this market and
of February. This surge in demand ended in March
has estimated that the demand curves for round-trip
2011, and the price of notebook hard drives fell back
tickets for each airline are as follows:
to its level just before the temporary demand surge
occurred.
Q dU 10,000 100P U 99P A (United’s demand)
Later that year, in August 2011, a permanent increase
Q dA 10,000 100P A 99P U (American’s demand)
in the demand for notebook computers occurs, in-
creasing the monthly demand for hard drives by 25
where PU is the price charged by United, and PA is the percent per month at any possible price. Nine months
price charged by American. later, the price of notebook hard drives had increased
a) Suppose that both American and United charge a by $1 per unit.
price of $300 each for a round-trip ticket between
In both circumstances, the market experienced a shift in
Chicago and Dallas. What is the price elasticity of
demand of exactly the same magnitude. Yet, the change
demand for United flights between Chicago and
in the equilibrium price appears to have been different.
Dallas?
Why?
b) What is the market-level price elasticity of demand
for air travel between Chicago and Dallas when both 2.25. The demand for dinners in the only restaurant in
airlines charge a price of $300? (Hint: Because United town has a unitary price elasticity of demand when the
and American are the only two airlines serving the current average price of a dinner is $8. At that price 120
Chicago–Dallas market, what is the equation for the people eat dinners at the restaurant every evening.
total demand for air travel between Chicago and a) Find a linear demand curve that fits this information
Dallas, assuming that the airlines charge the same and draw it on a clearly labeled graph.
price?) b) Do you need the information on the price elasticity of
2.22. You are given the following information: demand to find the curve? Why?

• Price elasticity of demand for cigarettes at current 2.26. In each of the following pairs of goods, identify
prices is 0.5. the one that you would expect to have a greater price
elasticity of demand. Briefly explain your answers.
• Current price of cigarettes is $0.05 per cigarette.
a) Butter versus eggs
• Cigarettes are being purchased at a rate of 10 mil- b) Trips by your congressman to Washington (say, to
lion per year. vote in the House) versus vacation trips by you to Hawaii
Find a linear demand that fits this information, and graph c) Orange juice in general versus the Tropicana brand of
that demand curve. orange juice
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PROBLEMS 73

2.27. In a city, the price for a trip on local mass transit January: Initial demand and supply are given by the equa-
(such as the subway or city buses) has been 10 pesos for a tions Q s  30P  30 (when P  1), and Q d  120  20P
number of years. Suppose that the market for trips is
February: Due to higher prices of gasoline, the supply of
characterized by the following demand curves: in the
cab service changed to Q s  30P  60 (when P  2).
long run: Q  30 2P; in the short run: Q  15  P2.
Verify that the long-run demand curve is “flatter” than March: Over the spring break, the demand for taxi serv-
the short-run curve. What does this tell you about the ice was higher and therefore the demand curve was given
sensitivity of demand to price for this good? Discuss why by the equation Q d  140  20P.
this is the case.
a) For each month find the equilibrium price and quantity.
2.28. Consider the following sequence of events in b) Illustrate your answer with a graph. Illustrate the
the U.S. market for strawberries during the years equilibrium prices and quantities on the graph.
1998–2000:
2.30. Consider the demand curve for pomegranates
• 1998: Uneventful. The market price was $5 per in two countries. In one country, pomegranates are a
bushel, and 4 million bushels were sold. critical part of the diet and are central to the prepara-
tion of many popular food recipes. For most of these
• 1999: There was a scare over the possibility of dishes, there is no feasible substitute for pomegranates.
contaminated strawberries from Michigan. The In the second country, households will purchase pome-
market price was $4.50 per bushel, and 2.5 million granates if the price is right, but consumers do not con-
bushels were sold. sider them to be particularly special or unique, and few
• 2000: By the beginning of the year, the scare over popular dishes rely on pomegranates in their recipes.
contaminated strawberries ended when the media Suppose pomegranates are native to both countries.
reported that the initial reports about the contami- Suppose, further, that due to inherent limitations of
nation were a hoax. A series of floods in the shipping options, there is no intercountry trade in
Midwest, however, destroyed significant portions pomegranates. Each country’s market for pomegranates
of the strawberry fields in Iowa, Illinois, and is independent of that of the other countries. Finally,
Missouri. The market price was $8 per bushel, and suppose that in both countries, droughts and other
3.5 million bushels were sold. weather-related shocks periodically cause unexpected
changes in supply conditions.
Find linear demand and supply curves that are consistent
with this information. The following graphic shows the time paths of pome-
granate prices over a 10-year period in each country (the
2.29. Consider the following sequence of changes in solid line is the time path in one country; the dashed line
the demand and supply for cab service in some city. The is the time path in the other country). Based on the in-
price P is a price per mile, while quantity is the total formation provided, which is the time path for each
length of cab rides over a month (in thousands of miles). country?
Price of pomegranates

Time