Textbook Notes (363,041)
Economics (727)
ECON 1B03 (302)
Chapter 4

# Micro Chapter 4 Solution.doc

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School
McMaster University
Department
Economics
Course
ECON 1B03
Professor
Hannah Holmes
Semester
Winter

Description
THE MARKET FORCES OF SUPPLY 4 AND DEMAND Problems and Applications 1. a. Cold weather damages the orange crop, reducing the supply of oranges. This can be seen in Figure 6 as a shift to the left in the supply curve for oranges. The new equilibrium price is higher than the old equilibrium price. Figure 6 b. People often travel to the Caribbean from Quebec to escape cold weather, so demand for Caribbean hotel rooms is high in the winter. In the summer, fewer people travel to the is a shift to the left in the demand curve. The equilibrium price of Caribbean hotel rooms is thus lower in the summer than in the winter, as the figure shows. 50 51 ✦ Chapter 4/The Market Forces of Supply and Demand Figure 7 c. When a war breaks out in the Middle East, many markets are affected. Since much oil production takes place there, the war disrupts oil supplies, shifting the supply curve for gasoline to the left, as shown in Figure 8. The result is a rise in the equilibrium price of gasoline. With a higher price for gasoline, the cost of operating a gas-guzzling automobile, like a SUV, will increase. As a result, the demand for used SUVs will decline, as people in the market for cars will not find SUVs as attractive. In addition, some people who already own SUVs will try to sell them. The result is that the demand curve for used SUVs shifts to the left, while the supply curve shifts to the right, as shown in Figure 9. The result is a decline in the equilibrium price of used SUVs. Figure 8 Figure 9 Chapter 4/The Market Forces of Supply and Demand ✦ 52 2. The statement that "an increase in the demand for notebooks raises the quantity of notebooks demanded, but not the quantity supplied," in general, is false. As Figure 10 shows, the increase in demand for notebooks results in an increased quantity supplied. The only way the statement would be true is if the supply curve was a vertical line, as shown in Figure 11. Figure 10 Figure 11 53 ✦ Chapter 4/The Market Forces of Supply and Demand 3. a. If people decide to have more children (a change in tastes), they will want larger vehicles for hauling their kids around, so the demand for minivans will increase. Supply won't be affected. The result is a rise in both price and quantity, as Figure 12 shows. Figure 12 b. If a strike by steelworkers raises steel prices, the cost of producing a minivan rises (a rise in input prices), so the supply of minivans decreases. Demand won't be affected. The result is a rise in the price of minivans and a decline in the quantity, as Figure 13 shows. Figure 13 Chapter 4/The Market Forces of Supply and Demand ✦ 54 c. The development of new automated machinery for the production of minivans is an improvement in technology. The reduction in firms' costs results in an increase in supply. Demand isn't affected. The result is a decline in the price of minivans and an increase in the quantity, as Figure 14 shows. Figure 14 d. The rise in the price of sport utility vehicles affects minivan demand because sport utility vehicles are substitutes for minivans (that is, there is a rise in the price of a related good). The result is an increase in demand for minivans. Supply is not affected. In equilibrium, the price and quantity of minivans both rise, as Figure 12 shows. e. The reduction in peoples' wealth caused by a stock-market crash reduces their income, leading to a reduction in the demand for minivans, since minivans are likely a normal good. Supply isn’t affected. As a result, both price and quantity decline, as Figure 15 shows. Figure 15 55 ✦ Chapter 4/The Market Forces of Supply and Demand 4. Technological advances that reduce the cost of producing computer chips represent a decline in an input price for producing a computer. The result is a shift to the right in the supply of computers, as shown in Figure 16. The equilibrium price falls and the equilibrium quantity rises, as the figure shows. Figure 16 Since computer software is a complement to computers, the lower equilibrium price of computers increases the demand for software. As Figure 17 shows, the result is a rise in both the equilibrium price and quantity of software. Figure 17 Chapter 4/The Market Forces of Supply and Demand ✦ 56 Since typewriters are substitutes for computers, the lower equilibrium price of computers reduces the demand for typewriters. As Figure 18 shows, the result is a decline in both the equilibrium price and quantity of typewriters. Figure 18 5. a. When a hurricane in South Carolina damages the cotton crop, it raises input prices for producing sweatshirts. As a result, the supply of sweatshirts shifts to the left, as shown in Figure 19. The new equilibrium has a higher price and lower quantity of sweatshirts. Figure 19 57 ✦ Chapter 4/The Market Forces of Supply and Demand b. A decline in the price of leather jackets leads more people to buy leather jackets, reducing the demand for sweatshirts. The result, shown in Figure 20, is a decline in both the equilibrium price and quantity of sweatshirts. Figure 20 c. The effects of colleges requiring students to engage in morning calisthenics in appropriate attire raises the demand for sweatshirts, as shown in Figure 21. The result is an increase in both the equilibrium price and quantity of sweatshirts. Figure 21 Chapter 4/The Market Forces of Supply and Demand ✦ 58 d. The invention of new knitting machines increases the supply of sweatshirts. As Figure 22 shows, the result is a reduction in the equilibrium price and an increase in the equilibrium quantity of sweatshirts. Figure 22 6. A temporarily high birth rate in the year 2005 leads to opposite effects on the price of babysitting services in the years 2010 and 2020. In the year 2010, there are more 5-year olds who need sitters, so the demand for babysitting services rises, as shown in Figure 23. The result is a higher price for babysitting services in 2010. However, in the year 2025, the increased number of 15-year olds shifts the supply of babysitting services to the right, as shown in Figure 24. The result is a decline in the price of babysitting services. Figure 23 Figure 24 59 ✦ Chapter 4/The Market Forces of Supply and Demand 7. Since ketchup is a complement for hot dogs, when the price of hot dogs rises, the quantity demanded of hot dogs falls, thus reducing the demand for ketchup, causing both price and quantity of ketchup to fall. Since the quantity of ketchup falls, the demand for tomatoes by ketchup producers falls, so both price and quantity of tomatoes fall. When the price of tomatoes falls, producers of tomato juice face lower input prices, so the supply curve for tomato juice shifts out, causing the price of tomato juice to fall and the quantity of tomato juice to rise. The fall in the price of tomato juice causes people to substitute tomato juice for orange juice, so the demand for orange juice declines, causing the price and quantity of orange juice to fall. Now you can see clearly why a rise in the price of hot dogs leads to a fall in price of orange juice! Figure 25 8. It is true that the change in preferences reduces the demand for bread and that the equilibrium price becomes lower. In the language of our demand and supply model, this change translates in a shift of the demand curve to the left. The flaw is that the new price- quantity point is located on the new demand curve, thus lower price does not reduce the quantity demanded even more. The author of the statement confuses demand with quantity demanded. 9. Quantity supplied equals quantity demanded at a price of \$6 and quantity of 81 pizzas (Figure 26). If price were greater than \$6, quantity supplied would exceed quantity demanded, so suppliers would reduce their price to gain sales. If price were less than \$6, quantity demanded would exceed quantity supplied, so suppliers could raise their price without losing sales. In both cases, the price would continue to adjust until it reached \$6, the only price at which there is nei
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