Chapter 2

Supply and Demand

Q.1

A) When the price of a substitute, such as tea, increases, so does demand for coffee, raising the

market equilibrium price and quantity. How much demand for coffee increases,

depends on how sensitive coffee demand is to the price of tea. Due to cross-price elasticity,

depending on how sensitive coffee demand is to the price of tea, the amount of demand for

coffee increases

B) As people drink less to reduce their cancer risk, this study will reduce demand for

caffeine drinks, lowering the market equilibrium price and quantity.

 C) Because the frost reduces supply, the equilibrium prices increase while the

equilibrium quantity lowers. S

D) Increasing the price of an input for a cup of coffee reduces supply, raising market

price and decreasing supply. S

Q.2

When Q=0 , it is usually given as the choke price

From the demand curve: Q= 50-100P

Therefore : 0= 50-100P

100P= 50

P= $0.50
 Q.3

P 0.10 0.45 0.50 0.55 2.50

Qd 290 255 250 245 50

εQ,P –0.035 -0.176 -_0.2 –0.225 –5

The elasticity of demand for a given good or service is calculated by dividing the

percentage change in quantity demanded by the percentage change in price. If the elasticity

quotient is greater than or equal to one, the demand is considered to be elastic.

The inverse demand function is P = 3 – 1/100 Qd

for price $1.50 the elasticity of demand is equal to:

1.5/ (1.5-3) = -1

Therefore, for all prices below $1.50, the demand is inelastic, while for all prices above

$1.50, the demand is elastic.

Q.4

A) An increase in rainfall will increase supply, lowering the equilibrium price and

increasing the equilibrium quantity.

 B) A decrease in disposable income will reduce demand, shifting the demand schedule

left, reducing both the equilibrium price and quantity: