Practice set 3_suggested solutions.

Multiple-choice questions.

1. A change in which of the following will NOT shift the demand curve for hamburgers?

a) the price of hot dogs

b) the price of hamburgers
c) the price of hamburger buns
d) the income of hamburger consumers
Answer: B
Solution: Hot dogs are substitutes for hamburgers => demand determinant => shifts the demand
curve for hamburgers.
Hamburger buns are complements for hamburgers => demand determinant => shifts the demand
curve for hamburgers.
Income of consumers => demand determinant => shifts the demand curve for hamburgers
The price of hamburgers is not a demand determinant. If there is a change in the price of
hamburgers, we will move along the demand curve, and the quantity demanded will change.

2. Which of the following might lead to an increase in the equilibrium price of jelly and a decrease
in the equilibrium quantity of jelly sold? Explain your answer using a graph.

a) an increase in the price of peanut butter, a complement to jelly

b) an increase in the price of Marshmallow Fluff, a substitute for jelly
c) an increase in the price of grapes, an input into jelly
d) an increase in consumers’ incomes, as long as jelly is a normal good

Answer: C

Solution:

a) An increase in the price of a complement good will shift the demand curve. The demand
curve will shift to the left (from D1 to D2) because if the price for peanut butter increases,
the demand for peanut butter will decrease along with the demand for jelly (since they are
complements). If the demand curve shifts to the left => equilibrium price decreases =>
quantity supplied (sold) decreases.

1
 P

S1
E1
PE

PEnew
E2 D1

D2

QEnew QE Q

Eq-m price decreased (-) and eq-m quantity decreased. (+)

b) If the price of a substitute good increases (marshmallow) => the demand curve shifts. We
will consume more jelly instead of marshmallow (b.c. marshmallow is more expensive we
will substitute it), and demand for jelly will increase => the demand curve will shift to the
right. If the demand curve shifts to the right => the eq-m price increases, and quantity
supplied increases.

S1
E2
PEnew

PE

E1 D2

D1

QE QEnew Q

The Eq-m price increased (+), and eq-m quantity increased. (-)

c) If the price of an input for production increases => the supply curve shifts. If the price of
input (grapes to produce jelly) increases, then it is costly to produce jelly, and we can
produce less jelly => supply of jelly decreases, and the supply curve shifts to the left. If the
supply curve shifts to the left => the eq-m price increases, and quantity sold decreases.

2
 P

S2
S1
E2
PEnew

PE
E2

D1

QEnew QE Q

Eq-m price increased (+), and eq-m quantity decreased (+). (This is a correct answer)

d) If consumers’ incomes increase => the demand curve shifts. If incomes increase, they can
afford more goods => the demand curve shifts to the right. If it shifts to the right => the eq-m
price increases, and quantity supplied increases.

S1
E2
PEnew

PE

E1 D2

D1

QE QEnew Q

Eq-m price increased (+), and eq-m quantity increased (-).

3. If the economy goes into a recession and incomes fall, what happens in the markets for inferior
goods? Explain your answer using a graph.

a) Prices and quantities both rise.

b) Prices and quantities both fall.
c) Prices rise and quantities fall.
d) Prices fall and quantities rise.

Answer: A

Solution: For an inferior goods: recession => a decrease in incomes => an increase in the
demand for inferior goods. (If income decreases demand for inferior goods increases). Then the
demand curve will shift to the right. As a result, the price and quantity of this good (both) will
increase.

3
 P

S1
E2
PEnew

PE

E1 D2

D1

QE QEnew Q

4. Movie tickets and film streaming services are substitutes. If the price of film streaming
increases, what happens in the market for movie tickets?
a) The supply curve shifts to the left.
b) The supply curve shifts to the right.
c) The demand curve shifts to the left.
d) The demand curve shifts to the right.

Answer: D

Solution:

If they are substitutes, an increase in the price of film streaming increases => demand for movie
tickets will increase (people will substitute film streaming with movie tickets) => demand curve
for movie tickets will shift to the right. The price and quantity of movie tickets will increase
P

S1
E2
PEnew

PE

E1 D2

D1

QE QEnew Q

5. An increase in ________ will cause a movement along a given demand curve, which is called
a change in ________.
a) supply, demand
b) supply, quantity demanded
c) demand, supply
d) demand, quantity supplied

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Answer: B
Solution: “a movement along a given demand curve” means a change in the quantity demanded.

6. The discovery of a large new reserve of crude oil will shift the ________ curve for gasoline,
leading to a ________ equilibrium price.

a) supply, higher
b) supply, lower
c) demand, higher
d) demand, lower

Answer: B

Solution: Crude oil is an input to produce gasoline. If there is a new reserve discovered => price
of crude oil will decrease. Since the price of the input for production (supply determinant)
decreases => the supply curve of gasoline will increase. And from the graph, we can see that in
this case, the eq-m price will decrease.

Open-ended questions.

1. Assume you are given the following demand schedules. Draw individual demand curves and
market demand curve.

Tom’s Jerry’s Nibbles’s

quantity quantity quantity
Price demanded Price demanded Price demanded
0 10 0 25 0 5
1 8 1 20 1 4
2 6 2 15 2 3
3 4 3 10 3 2
4 2 4 5 4 1
5 0 5 0 5 0

Solution:

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 Price Total quantity demanded
0 10 + 25 + 5 = 40
1 8 + 20 + 4 = 32
2 6 + 15 + 3 = 24
3 4 + 10 + 2 = 16
4 2+5+1=8
5 0 +0+0=0

2. Consider the market for minivans. For each of the events listed here, identify which of the
determinants of demand or supply are affected. Also indicate whether demand or supply
increases or decreases. Then draw a diagram to show the effect on the price and quantity of
minivans.
a) People decide to have more children.
b) A strike by steelworkers raises steel prices.
c) Engineers develop new automated machinery to produce minivans.
d) The price of sports utility vehicles rises.
e) A stock market crash lowers people’s wealth.

Solution:

a) If people decide to have more children, their tastes will change (they will prefer minivans).
Hence demand curve will shift to the right. If it shifts to the right the price and quantity of
minivans will increase.
P

S1
E2
PE new

PE

E1 D2

D1

QE QEnew Q

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b) If there is an increase in steel prices => this is an increase in the prices of inputs for
production of minivans => it is more costly to produce smth => the supply curve will shift to
the left => price will increase, and quantity supplied will decrease.
P

S2
S1
E2
PE new

PE
E2

D1

QEnew QE Q

c) If there is new machinery => technological improvement and we can produce more given the
same inputs => the supply curve shifts to the right => the eq-m price decreases, and quantity
supplied increases
P

S1
S2
E1
PE
PEnew
E2

D1

QE QEnew Q

d) Sport utility vehicles are substitutes for minivans => if the price of sport vehicles increases
=> demand for minivans increases => demand curve shifts to the right => the new eq-m
price, and quantity of minivans increases.
P

S1
E2
PEnew

PE

E1 D2

D1

QE QEnew Q

e) Minivans are normal goods. Hence, if incomes decrease => demand for minivans decreases,
and demand curve shifts to the left => new eq-m price and quantity will decrease.
P

S1
E1
PE

PEnew E2
D1

D2

QEnew QE Q

3. Explain each of the following statements using supply-and-demand diagrams.

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a) “When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the
country.”
b) “When the weather turns warm in New England every summer, the price of hotel rooms in
Caribbean resorts plummets.”
c) “When a war breaks out in the Middle East, the price of gasoline rises and the price of a used
Cadillac falls.”
Solution:

a) If there is a cold snap => orange trees are destroyed => the price of oranges, which are inputs
of production, increases => supply of orange juice decreases => the supply curve shifts to the
left => the eq-m price will increase (see the graph).

b) When the weather turns warm in New England => people prefer to stay in New England rather
than to travel to Caribbean resorts (demand determinant: tastes) => demand for a hotel room
in the Caribbean decreases => demand curve shifts to the left => the eq-m price decreases (see
the graph).

c) If there is a war in the Middle East, which is the main supplier of gasoline => supply of gasoline
will decrease => the supply curve for gasoline will shift to the left => the eq-m price will
increase (see graph 1).

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 People use gasoline to drive their Cadillac => if there is a war, people expect the price of
gasoline (demand determinant: expectation about the price of gasoline) to increase => their
demand for Cadillac decreases => demand curve shifts to the left. But at the same, those people
who already own Cadillac would want to sell them (supply determinant: expectation about the
price of gasoline) => supply of Cadillac will increase => the supply curve will shift to the right.
Hence an eq-m price for Cadillac will decrease. (see graph 2),

4. “An increase in the demand for notebooks raises the quantity of notebooks demanded but not
the quantity supplied.” Is this statement true or false? Explain.

Solution:

False. If there is an increase in demand => demand curve shifts right => the eq-m price
increases, and quantity supplied also increases in response to an increase in price.

S1
E2 S2
PEnew
E1
PE

D1

QE QEnew Q

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 True. If supply would be a vertical line (we will discuss later, when this may happen).
P
S1
PEnew
E2
E1
PE

D2

D1

QE= QEnew Q

5. The market for pizza has the following demand and supply schedules:

a) Graph the demand and supply curves. What are the equilibrium price and quantity in this
market?
b) If the actual price in this market were above the equilibrium price, what would drive the
market toward the equilibrium?
c) If the actual price in this market were below the equilibrium price, what would drive the
market toward the equilibrium?

Solution:

a)

Eq-m price is when demand = supply. The eq-m quantity is 81 units, and the eq-m price =
$6.
b) If the actual price is higher than eq-m => demand will be smaller than supply =>
sellers will keep decreasing price, and in response to the reduction in price the demand
will keep increasing and supply will keep decreasing till the eq-m is reached.

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 Pa

Pe

Qad Qe QaS

d) If actual price is below than eq-m => demand will exceed supply, and prices will keep
increasing, which will result in a decreasing demand and increasing supply, till eq-m is
attained.

Pe
Pa

QaS Qe Qad

In both cases, prices will keep adjusting till eq-m is achieved.

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

a) Draw the demand and supply curves. What is unusual about this supply curve? Why might this
be true?
b) What are the equilibrium price and quantity of tickets?
c) Your college plans to increase total enrollment next year by 5,000 students. The additional
students will have the following demand schedule:

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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?

Solutions:
a) The supply curve here is a straight line, i.e. does not change as price changes. No matter what
the price is, supply is always 8K
24

20

16

12

. 0 2 4 6 8 10 12 14

b) Eq-m price $8, where demand = supply = 8K.

c) Then total demand will increase:
$4: 10 + 4 = 14
$8: 8+ 3 = 11
$12: 6 + 2 = 8
$16: 4 + 1 = 5
$20: 2+0 = 2

24

20

16

12

0
0 2 4 6 8 10 12 14

The new eq-m price is $12, where demand = supply = 8 K tickets.

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