Exercise 1

Exploring Supply and Demand

First decide if the change affects demand, supply, or both, then
decide how the price and quantity will be affected.

1. If Jackie's income rises, what happens to her demand for airplane trips? If the income of most
consumers of air travel rises (and air travel is a normal good), what will happen to the market
equilibruim price P and quantity Q of this good?

P Rises P Falls P Indeterminant

Q Rises Q Falls Q Indeterminant

2. If the taste for sneakers severely declines, what happens to their price and the quantity sold?

P Rises P Falls P Indeterminant

Q Rises Q Falls Q Indeterminant

3. If the price of materials used to make sneakers rises sharply, what happens to the price and the
quantity sold of sneakers?

P Rises P Falls P Indeterminant

Q Rises Q Falls Q Indeterminant

4. If the technology for making some communications device (say, cellular telephones) leaps forward,
what is most likely to happen to the price and the quantity sold?

P Rises P Falls P Indeterminant

Q Rises Q Falls Q Indeterminant

5. Consider the supply and demand for coffee in London. Suppose the price of tea rises sharply. If
coffee is a substitute good for tea, what happens to the price and quantity of coffee?

P Rises P Falls P Indeterminant

Q Rises Q Falls Q Indeterminant

6. A new rumor sweeps the country that eggs are great diet food and they don't even raise cholesterol
levels. At the same time, advances in chicken husbandry increase the number of eggs that can be
produced. What happens to the price and quantity of eggs? (hint: both supply and demand are
affected)

P Rises P Falls P Indeterminant

Q Rises Q Falls Q Indeterminant
Exercise 2

Questions:

1. Suppose that there is an announcement that chocolate causes cancer. What would happen to
equilibrium price and quantity in the market for Godiva chocolate? Draw the graph that
illustrates your answer.

2. Suppose that the price of Hershey’s chocolate increases. What would happen to equilibrium
price and quantity in the market for Godiva chocolate? Draw the graph that illustrates your
answer.

3. Suppose that the price of sugar increases. What would happen to equilibrium price and
quantity in the market for Godiva chocolate? Draw the graph that illustrates your answer.

4. Suppose that a company invents a better machine for mixing the ingredients to make
chocolate candies. What would happen to equilibrium price and quantity in the market
for Godiva chocolate? Draw the graph that illustrates your answer.

5. Suppose the equation for demand can be expressed as P = 20 – Q. The equation for supply
can be expressed as P = Q. Find the equilibrium price and quantity. Draw the graph that
illustrates your answer.

6. Suppose the equation for demand can be expressed as P = 40 – 2Q. The equation for supply
can be expressed as P = Q. Find the equilibrium price and quantity. Draw the graph that
illustrates your answer.

7. Suppose the equation for demand can be expressed as P = 30 – Q. The equation for supply
can be expressed as P = 2Q. Find the equilibrium price and quantity. Draw the graph that
illustrates your answer.