Homework Oniga Gabriel

Grupa:622

Chapter 4 :

Questions for review

1. A competitive market is a market in which there are many buyers and many sellers of an identical
product so that each has a negligible impact on the market price. Other types of markets include
monopoly, in which there is only one seller, oligopoly, in which there are a few sellers that do not always
compete aggressively, and monopolistically competitive markets, in which there are many sellers, each
offering a slightly different product.

2. The demand schedule is a table that shows the relationship between the price of a good and the
quantity demanded . The demand curve is the downward-sloping line relating price and quantity
demanded. The demand schedule and demand curve are related because the demand curve is simply a
graph showing the points in the demand schedule .The demand curve slopes downward because of the
law of demand—other things equal, when the price of a good rises, the quantity demanded of the good
falls.

3. A change in consumers' tastes leads to a shift of the demand curve. A change in price leads to a
movement along the demand curve.

4. Since Popeye buys more spinach when his income falls, spinach is an inferior good for him. Since he
buys more spinach, but the price of spinach is unchanged, his demand curve for spinach shifts out as a
result of the decrease in his income.

5. A supply schedule is a table showing the relationship between the price of a good and the quantity a
producer is willing and able to supply. The supply curve is the upward-sloping line relating price and
quantity supplied. The supply schedule and the supply curve are related because the supply curve is
simply a graph showing the points in the supply schedule. The supply curve slopes upward because
when the price is high, suppliers' profits increase, so they supply more output to the market. The result
is the law of supply—other things equal, when the price of a good rises, the quantity supplied of the
good also rises.

6. A change in producers' technology leads to a shift in the supply curve. A change in price leads to a
movement along the supply curve.

7. The equilibrium of a market is the point at which the quantity demanded is equal to quantity
supplied. If the price is above the equilibrium price, sellers want to sell more than buyers want to buy,
so there is a surplus. Sellers try to increase their sales by cutting prices. That continues until they reach
the equilibrium price. If the price is below the equilibrium price, buyers want to buy more than sellers
want to sell, so there is a shortage. Sellers can raise their price without losing customers. That continues
until they reach the equilibrium price.
8. When the price of beer rises, the demand for pizza declines, because beer and pizza are complements
and people want to buy less beer. When we say the demand for pizza declines, we mean that the
demand curve for pizza shifts to the left. The supply curve for pizza is not affected. With a shift to the
left in the demand curve, the equilibrium price and quantity both decline. Thus the quantity of pizza
supplied and demanded both fall. In sum, supply is unchanged, demand is decreased, quantity supplied
declines, quantity demanded declines, and the price falls.

9. Prices play a vital role in market economies because they bring markets into equilibrium. If the price is
different from its equilibrium level, quantity supplied and quantity demanded are not equal. The
resulting surplus or shortage leads suppliers to adjust the price until equilibrium is restored. Prices thus
serve as signals that guide economic decisions and allocate scarce resources.

Multiple choices

1. B

2. B

3. D

4. B

5. A

6. D

Problems and application

1. a. Cold weather damages the orange crop, reducing the supply of oranges. This can be seen as a shift
to the left in the supply curve for oranges. The new equilibrium price is higher than the old equilibrium
price.

b. People often travel to the Caribbean from New England to escape cold weather, so demand for
Caribbean hotel rooms is high in the winter. In the summer, fewer people travel to the Caribbean, since
northern climes are more pleasant. The result 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.

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. 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 Cadillac, will increase. As a result, the demand for used Cadillacs will
decline, as people in the market for cars will not find Cadillacs as attractive. In addition, some people
who already own Cadillacs will try to sell them. The result is that the demand curve for used Cadillacs
shifts to the left, while the supply curve shifts to the right. The result is a decline in the equilibrium price
of used Cadillacs.
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. 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.

3. a. TV screens and DVD's are complement. DVD's and tickets are substitutes.TV screens and tickets are
substitutes.

b. If technological advancement reduces the cost of TV screens, this results in a shift of supply curve to
the right.

c. This leads to a right shift in the demand curve for DVD's and a left shift for movie tickets.

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. The
equilibrium price falls and the equilibrium quantity rises. Since computer software is a complement to
computers, the lower equilibrium price of computers increases the demand for software .The result is a
rise in both the equilibrium price and quantity of software. Since typewriters are substitutes for
computers, the lower equilibrium price of computers reduces the demand for typewriters .The result is
a decline in both the equilibrium price and quantity of typewriters.

5. The supply of computer chips will increase, thereby shifting the supply curve to the right. The
equilibrium quantity will increase while the equilibrium price will decrease, so more computer chips will
be sold at a lower price. Because computers and computer software are complements of computer
chips, people will demand more of them, shifting the demand curve for these products to the right and
causing more of them to be bought at a higher price (equilibrium quantity and price increase).
Typewriters, on the other hand, are a substitute for computer chips (and not a very good one), and since
computer chips are cheaper, people will stop buying typewriters and opt for computer chips instead.

6. The supply of computer chips will increase, there by shifting the supply curve to the right. The
equilibrium quantity will increase while the equilibrium price will decrease, so more computer chips will
be sold at a lower price. Because computers and computer software are complements of computer
chips, people will demand more of them, shifting the demand curve for these products to the right and
causing more of them to be bought at a higher price (equilibrium quantity and price increase).
Typewriters, on the other hand, are a substitute for computer chips (and not a very good one), and since
computer chips are cheaper, people will stop buying typewriters and opt for computer chips instead.

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!

8. a. equilibrium price is 6 while equilibrium quantity is 81

b. If the price is charged above equilibrium price i.e. 7,8 or above the supplier won't be able to sell
enough products and hence it will lead to the surplus which means excess supply over demand.

c. Charging below prices also leads to worse situation known as shortage where market have more
demand than supply. The supplier will refused to offer product to the market price less than $6.

9.

Supply

Demand

Initial case

The equilibrium price will increase because the supply will increase because of the new fertilizer and
the quantity demanded will increase as well because of the new discovery about diabetes.

10. a) The production cost of bagels will be less if the price of flour decrease. That will lead to lower
price of bagel and higher demand for these products. That will cause a higher demand for cream cheese,
also. If the supply is constant, the equilibrium price for bagels will increase. That means higher demand
for cream cheese and milk, also. Milk is the ingredient which goes into ice cream cheese and lower price
of milk creates a lower price of cream cheese, and not his increasing. This shows that for the pattern
observed, the price of flour is significant.
b) Bigger prices of milk than before will cause higher prices of cream cheese. If demand is constant, the
prices of cream cheese will increase and the demand for bagels will be lower. So, the equilibrium
quantity of bagels will fall, and the equilibrium price of cream cheese will rise.

Chapter 5

Questions for Review :

1. The price elasticity of demand measures how much the quantity demanded responds to
changes in the price. The income elasticity of demand measures how much the quantity
demanded responds to changes in consumers' income.
2. Price elasticity of demand depends on I) if close substitutes are available

II) if the good is a luxury or necessity

III) if the market is narrowly defined

IV) if buyers have substantial time to react to a price change.

3. The demand is elastic. The demand is perfectly inelastic.

4. P

Pe E

Qe Q

Total revenue recived by producer is represented by the area market on the graph

5. When demand is elastic , price and total revenue move in opposite directions: If the price
increases, total revenue decreases. This is so because the demand is elastic, so quantity
decreases very much with small increases in price.
6. We call it an inferior product .
7. The price elasticity of supply is calculated as the percentage change in quantity supplied divided
by the percentage change in price. It measures how much the quantity supplied responds to
changes in the price.
8. 0 because the quantity is fixed so the hence is 0
9. This will more likely hurt fava bean farmers if demand curve is elastic. This is so because as the
supply decreases, price will increase. If the demand curve is elastic, there will be a sharp drop in
the quantity demanded too and hence the total revenue will decrease sharply.

Quick check multiple choice :

 1. A
2. B
3. D
4. C
5. A
6. C

Problems and Applications

1. a. mystery novels

b. Beethoven recordings

c. subway rides during the next 5 years

d. root beer

2. P1=200$ Q1=2000

P2=250$ Q2=1900

∆P=50$ ∆Q=-100

i)Elasticity=-- -900
3900

ii)Elasticity=- 9:7=-1.28

5. a. The effect on the market for coffee beans is shown in Figure 2. When a hurricane destroys half of
the crop, the supply of coffee beans decreases, the price of coffee beans increases, and the quantity
decreases.

b. The effect on the market for cups of coffee is shown in Figure 2. When the price of coffee beans, an
important input into the production of a cup of coffee, increases, the Quantity Price Figure 2 Demand S1
S2 3 supply of cups of coffee decreases, the price of a cup of coffee increases, and the quantity
decreases. Because cups of coffee have an inelastic demand, when the price of a cup of coffee increases,
the total expenditure on coffee increases.

c. The effect on the market for donuts is shown in Figure 3. When the price of coffee increases and the
quantity demanded of coffee decreases, consumers demand fewer donuts because coffee and donuts
are complements. When demand decreases, the price of donuts decreases. Because donuts have an
inelastic demand, when the price of donuts decreases, the total expenditure on donuts decreases.

Chapter 6
Question for review

1. An example of price ceiling is rent control. An example of price floor is minimum wage.

3. When price of a good is not allowed to bring supply and demand into equilibrium forces of supply and
demand tend to move the market to equilibrium. When the price hits the ceiling price rationing
mechanisms develop and allocate resources.

4. Economists contend that prices are outcomes of millions of business and consumer decisions that lie
behind that supply and demand curve. Prices have the crucial role of balancing supply and demand and
hence balancing economic activities. When the policymakers set price controls they obscure the signal
that normally guides the society's resources.

5. This change in tax policy increases the amount that buyers pay to sellers for the good but the net
amount that buyers pay for the good remains the same because in the initial case buyers used to pay
taxes to government and paid less to sellers. The net amount sellers receive also doesn't change. The
quantity of goods that are sold also remains the same.

6. The incidence of tax places a wedge between the price paid by buyers and price received by sellers.
When the market reaches new equilibrium the buyers pay more for the good and sellers receive less for
the good. When taxed the equilibrium quantity of the good falls and reduces the size of the market for
the good.

7. The incidence of tax depends on the price elasticity of supply and demand. Most burden falls on the
side of the market that is less elastic. This happens because that side of the market cannot respond as
easily to the tax by changing the quantity bought or sold.

Quick check multiple answer:

1. D
2. C
3. C
4. A
5. D
6. D
Problems and application
1. Classical music concerts sell music to the music lovers and buyers get that experience through
the tickets they buy. When the price ceiling imposed on the price of tickets at 40 dollars is
binding then the concerts would not be able to afford the artists they earlier used to. This will
lead to not so good artists performing at the concerts which ultimately will reduce the
attendance at such concerts.
5. This will not accomplish the senator's goal because payroll taxes work in the same way as
taxes on goods. Labor is the good here and wage is the price that is being paid for it. Tax is a
wedge between what firms pay and what workers receive. When a payroll tax is enacted the
wage received by workers falls and that paid by firms rises. The payment of taxes will be made
by the firm according to the legislation and the wages for the workers will decrease according to
the elasticity of demand and supply of labor market and ultimately the tax paid by the firms and
the workers will not change.
6. The price paid by consumers will rise by less than 500 dollars. The equilibrium quantity will fall
because supply curve shifts towards left. The market will come to a new equilibrium depending
on the elasticity of supply and demand and then the burden of the tax will be shared by buyers
and sellers.
When demand will be completely inelastic the tax incidence will be on buyers only. In that case
the buyers will have to pay the whole tax burden.