Some Practice questions for Supply and Demand

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Economics for Management Studies
Gordon Cleveland

CHAPTER 2 THE BASICS OFSUPPLYAND DEMAND REVIEW QUESTIONS 1. Suppose that unusually hot weather causes the demand curve for ice cream to shift to the right. Why will the price of ice cream rise to a new market-clearing level? Assume the supply curve is fixed.The unusually hot weather will cause a rightward shift in the demand curve, creating short-run excess demand at the current price. Consumers will begin to bid against each other for the ice cream, putting upward pressure on the priceThe price of ice cream will rise until the quantity demanded and the quantity supplied are equal. Price S P2 P 1 D 1 D 2 Q 1= Q 2 Quantity of Ice Cream Figure 2.1 10.In a discussion of tuition rates, a university official argues that the demand for admission is completely price inelastic.As evidence she notes that while the university has doubled its tuition (in real terms) over the past 15 years, neither the number nor quality of students applying has decreased. Would you accept this argument? Explain briefly. (Hint: The official makes an assertion about the demand for admission, but does she actually observe a demand curve? What else could be going on?) If demand is fixed, the individual firm (a university) may determine the shape of the demand curve it faces by raising the price and observing the change in quantity sold. The university official is not observing the entire demand curve, but rather only the equilibrium price and quantity over the last 15 yIf demand is shifting upward, as supply shifts upward, demand could have any elastici(See Figure 2.7, for example.) Demand could be shifting upward because the value of a college education has increased and students are willing to pay a high price for each opMore market research would be required to support the conclusion that demand is completely price inelastic. Price D1996 S 1996 D 1986 S 1986 D 1976 S1976 Quantity EXERCISES: Consider a competitive market for which the quantities demanded and supplied (per year) at various prices are given as follows: Price Demand Supply ($) (millions) (millions) 60 22 14 80 20 16 100 18 18 120 16 20 a. Calculate the price elasticity of demand when the price When the price is $100. We know that the price elasticity of demand may be calculated using equation 2.1 from the text: Q D E  Q D  P Q D . D P Q D P P With each price increase of $20, the quantity demanded decreaTherefore, Q D    2  0.1. P 20   At P = 80, quantity demanded equals 20 and 80  E D   0.1  0.40.  20  Similarly, at P = 100, quantity demanded equals 18 and 100 E    0.1  0.56. D  18  b. Calculate the price elasticity of supply when the price When the price is $100. The elasticity of supply is given by: Q S Q S P Q S E S  P  Q P . S P With each price increase of $20, quantity supplied increaTherefore, Q S 2     0.1.  P  20 At P = 80, qua
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