2.

Use supply and demand curves to illustrate the impact of the following events on the
market for coffee:
a) The price of tea goes up by 100 percent.
b) A study is released that links consumption of caffeine to the incidence of cancer.
c) A frost kills half of the Colombian coffee bean crop.
d) The price of styrofoam coffee cups goes up by 300 percent.

a) An increase in the price of a substitute, such as tea, will increase demand for coffee,
raising the market equilibrium price and quantity. How much demand for coffee increases,
depends on how sensitive coffee demand is to the price of tea (cross-price elasticity).

P
S
P’
P
D’

Q Q’ Q

b) This study will reduce demand for caffeine drinks as people drink less to reduce the risk
of cancer, lowering the market equilibrium price and quantity.

P
S

P’

D
D’
Q’ Q Q
c) The frost will reduce supply raising the equilibrium price while lowering the equilibrium
quantity.
S’
P
S
P’
P

Q’ Q Q
d) Increasing the price of an input for a cup of coffee will reduce supply, increasing market
price and reducing market quantity. This will result in the same figure as that for part c).

5. A linear demand curve has the equation Q = 50 − 100P. What is the choke price?

The choke price is the price where Q 0 . Using the given demand curve we have
Q 50 100P
0 50 100P
100P 50
P $0.50

8. Explain why the price elasticity of demand for an entire 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.

If the prices for a particular product, such as Dannon, within a product category changes (say it
increases) then it is easy for a consumer to switch to another brand, implying a relatively high
percent change in quantity demanded for the product. On the other hand, if prices for the entire
product category change, substitutes are not as easily found and the percent change in quantity
demanded for the category will be relatively lower. This implies the elasticity for the entire
product category will be higher (less negative) than the elasticity for a single product.
2.11 Suppose that the quantity of corn supplied depends on the price of corn (P) and the
amount of rainfall (R). The demand for corn depends on the price of corn and the level of
disposable income (I). The equations describing the supply and demand relationships are
Qs = 20R + 100P and Qd = 4000 − 100P + 10I.
a) Sketch a graph of demand and supply curves that shows the effect of an increase in
rainfall on the equilibrium price and quantity of corn.
b) Sketch a graph of demand and supply curves that shows the effect of a decrease in
disposable income on the equilibrium price and quantity of corn.

a)
P S

P* S’

P’

D
Q
Q* Q’

An increase in rainfall will increase supply, lowering the equilibrium price and increasing the
equilibrium quantity.

b)
P
S
P*
P’
D
D’
Q
*
Q’ Q

A decrease in disposable income will reduce demand, shifting the demand schedule left,
reducing both the equilibrium price and quantity.
2.17 Consider the following demand and supply relationships in the market for golf
balls: Qd = 90 − 2P − 2T and Qs = −9 + 5P − 2.5R, where T is the price of titanium, a metal
used to make golf clubs, and R is the price of rubber.
a) If R = 2 and T = 10, calculate the equilibrium price and quantity of golf balls.
b) At the equilibrium values, calculate the price elasticity of demand and the price elasticity
of supply.
c) At the equilibrium values, calculate the cross-price elasticity of demand for golf balls
with respect to the price of titanium. What does the sign of this elasticity tell you about
whether golf balls and titanium are substitutes or complements?

a) Substituting the values of R and T, we get

Demand : Q d 70 2 P
s
Supply : Q 14 5P

In equilibrium, 70 – 2P = –14 + 5P, which implies that P = 12. Substituting this value back, Q =
46.
b) Elasticity of Demand = –2(12/46), or –0.52. Elasticity of Supply = 5(12/46) = 1.30.
10
c) golf ,ti tan ium 2( ) 0.43 . The negative sign indicates that titanium and golf balls are
46
complements, i.e., when the price of titanium goes up the demand for golf balls decreases.

2.20 For the following pairs of goods, would you expect the cross-price elasticity of
demand to be positive, negative, or zero? Briefly explain your answer.
a) Red umbrellas and black umbrellas
b) Coca-Cola and Pepsi
c) Grape jelly and peanut butter
d) Chocolate chip cookies and milk
e) Computers and software

a) Assuming red and black umbrellas are substitutes, we would expect the cross-price
elasticity of demand to be positive.
b) Coca-cola and Pepsi are substitutes. We would expect the cross-price elasticity of
demand to be positive.
c) Grape jelly and peanut butter are typically complements (people want both on their
sandwiches!). We would expect the cross-price elasticity of demand to be negative.
d) Chocolate chip cookies and milk are typically complements (people want to consume
them together). We would expect the cross-price elasticity of demand to be negative.
e) Computers and software are complements (consumers want to use them together). We
would expect the cross-price elasticity of demand to be negative.
2.21. Suppose that the market for air travel between Chicago and Dallas is served by just
two airlines, United and American. An economist has studied this market and has
estimated that the demand curves for round-trip tickets for each airline are as follows: QdU
= 10,000 − 100PU + 99PA (United’s demand) QdA = 10,000 − 100PA + 99PU (American’s
demand) where PU is the price charged by United, and PA is the price charged by
American.
a) Suppose that both American and United charge a price of $300 each for a round-trip
ticket between Chicago and Dallas. What is the price elasticity of demand for United flights
between Chicago and Dallas?
b) What is the market-level price elasticity of demand for air travel between Chicago and
Dallas when both airlines charge a price of $300? (Hint: Because United and American are
the only two airlines serving the Chicago–Dallas market, what is the equation for the total
demand for air travel between Chicago and Dallas, assuming that the airlines charge the
same price?)

QUd 10000 100(300) 99(300)

a)
QUd 9700
Using PU 300 and QUd 9700 gives
300
Q,P 100 3.09
9700
b) Market demand is given by Q d QUd QAd . Assuming the airlines charge the same price
we have
Qd 10000 100 PU 99 PA 10000 100 PA 99 PU
d
Q 20000 100 P 99 P 100 P 99 P
Qd 20000 2 P

When P 300 , Q d 19400 . This implies an elasticity equal to

300
Q,P 2 .0309
19400

2.22. You are given the following information:

• Price elasticity of demand for cigarettes at current prices is −0.5.
• Current price of cigarettes is $0.05 per cigarette.
• Cigarettes are being purchased at a rate of 10 million per year.
Find a linear demand that fits this information, and graph that demand curve.

We know that along a linear demand curve

P
Q, P b
Q
Using the given information this implies
.05
.5 b
10, 000, 000
b 100, 000, 000
Plugging this result into a demand equation using the known price and quantity then implies
Q d A bP
10, 000, 000 A 100, 000, 000(.05)
A 15, 000, 000
So a demand equation that fits this information is given by
Q d 15, 000, 000 100, 000, 000 P
Graphically, the demand curve looks like
P

0.15

Q
15,000,000

2.28. Consider the following sequence of events in the

U.S. market for strawberries during the years 1998–2000:
• 1998: Uneventful. The market price was $5.00 per bushel, and 4 million bushels were sold.
• 1999: There was a scare over the possibility of contaminated strawberries from Michigan.
The market price was $4.50 per bushel, and 2.5 million bushels were sold.
• 2000: By the beginning of the year, the scare over contaminated strawberries ended when
the media reported that the initial reports about the contamination were a hoax. A series of
floods in the Midwest, however, destroyed significant portions of the strawberry fields in
Iowa, Illinois, and Missouri. The market price was $8.00 per bushel, and 3.5 million
bushels were sold.
Find linear demand and supply curves that are consistent with this information.

The scare in 1999 would shift demand to the left, identifying a second point on the supply curve.
The information implies that price fell $0.50 while quantity fell 1.5 million. This implies
.5 1
b
.15 3

Using a linear supply curve we then have

 1 s
P aQ
3
1
5 a (4)
3
11
a
3

Finally, plugging these values for a and b into the supply equation results in
11 1 s
P Q
3 3
3P 11 Q s
Qs 11 3P

The floods in 2000 will reduce supply. The shift in supply will identify a second point along the
demand curve. Because the scare of 1999 is over, assume that demand has returned to its 1998
state. The change in price and quantity in 2000 imply that price increased $3.00 and that
quantity fell 0.5 million.

Performing the same exercise as above we have

3
b 6
0.5

Using the 1998 price and quantity information along with this result yields
P a bQ d
5 a 6(4)
a 29

Finally, plugging these values for a and b into a linear demand curve results in
P 29 6Q d
6Q d 29 P
29 1
Qd P
6 6