ASSIGNMENT 2: CHAPTER 2

1. What are the supply schedule and the supply curve and how are they related? Why does
the supply curve slope upward?

2. Coke and pizza are complements because they are often enjoyed together. When the price
of coke rises, what happens to the supply, demand, quantity supplied, quantity demanded
and the price in the market for pizza?

3. Consider the market for minivans. For each of the events listed here, identify which of
the determinants of demand and supply are affected. Also indicate whether demand or
supply increases or decreases. Then draw a diagram to show the effect on the price and
quantity of minivans.

4. The market for pizza has the following demand and supply schedules:
Price (RM) Quantity Demanded Quantity Supplied
4 135 26
5 104 53
6 81 81
7 68 98
8 53 110
9 39 121
a) Graph the demand and supply curves. What is the equilibrium price and quantity
in this market?
b) If the actual price in this market were above the equilibrium price, what would
drive the market toward the equilibrium?
c) If the actual price in this market were below the equilibrium price, what would
drive the market toward the equilibrium?
5. Market research has revealed the following information about the market for chocolate
bars: The demand schedule can be represented by the equation Qd = 1600-300P, where Qd
is the quantity demanded and P is the price. The supply schedule can be represented by
the equation Qs=1400+700P, where Qs is the quantity supplied. Calculate the equilibrium
price and quantity in the market for chocolate bars.

6. uppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the
long run.
a) If the price of heating oil rises from RM1.80 to RM2.20 per gallon, what happens
to the quantity of heating oil demanded in the short-run? In the long-run? (Use the
midpoint method in your calculations.)
b) Why might this elasticity depend on the time horizon?

7. Suppose that your demand schedule for compact discs is as follows:

Price (RM) Quantity Demanded Quantity Supplied

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 (income = RM10,000) (income = RM12,000)
8 40 50
10 32 45
12 24 30
14 16 20
16 8 12

d) Use the midpoint method to calculate your price elasticity of demand as the price
of compact discs increase from RM8 to RM10 if your income is
i) RM10,000
ii) RM12,000

e) Calculate your income elasticity of demand as your income increase from

RM10,000 to RM12,000 if the price is
i) RM12
ii) RM16

8. Suppose that business travelers and vacationers have the following demand for airline
tickets from New York to Boston:

Price (RM) Quantity Demanded Quantity Supplied

(business travellers) (vacationers)
150 2100 1000
200 2000 800
250 1900 600
300 1800 400

a) As the price of tickets rises from RM200 to RM250, what is the price elasticity of
demand for
i) Business travelers
ii) Vacationers
(Use the midpoint method in your calculations.

9. Suppose the demand curve for a product is Q = 60/P. Compute the quantity demanded at
prices of RM1, RM2, RM3, RM4, RM5 and RM6. Graph the demand curve. Use the
midpoint method to calculate the price elasticity of demand between RM1 and RM2 and
between RM5 and RM6.

Price (RM) Quantity Demanded

Q = 60/P
1 60
2 30
3 20
4 15
5 12
6 10
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Answer

1. The supply schedule is a table that shows the quantity of a good that producers are willing and able to
sell at each price, holding all other factors constant and the supply curve is a graphical representation
of the supply schedule, showing the relationship between the price of a good and the quantity of good
that producers are willing and able to sell. The supply schedule and the supply curve are related
because they both show the relationship between the price of a good and the quantity of good that
producers are willing and able to sell.

The supply curve slopes upward because of the law of supply, which states that as the price of a good
increases, the quantity supplied of good also increases. This means that producers are more willing and
able to supply goods at higher prices, as they can earn more revenue and cover their costs. When the
price of a good increases, producers have an incentive to increase their production of that good, as they
can earn more profit per unit sold.

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2. Pc increase - Qdc decrease - Qdp decrease

Price

Coke

P1

P0

Quantity
D1 D0

Price

Pizza

D0

Quantity

D1

4
 D1

3. A) People decide to have more children.

When the quantity of children

increase, demand will increase from
D0 to D1. Quantity of supply also will
increase from S0 to S1.

B) A strike by steelworkers raises steel prices.

If steel prises increase, demand will

decrease from D0 to D1. Quantity of
supply also will decrease from S0 to
S1.

C )Engineers develop new automated machinery for the production of minivans.

Effect of new automated maschine for

production is demand will constant
and quantity of supply will increase
from S0 to S1.

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 D )The price of sports utility vehicles rises.

When the prises of sport utility

vehicle rises, demand will decrease
from D0 to D1. Quantity of supply will
increase from S0 to S1.

E )A stock-market crash lowers people’s wealth.

When the stock market crash lower

people wealth, demand will decrease
from D0 to D1. Quantity of supply will
be constant.

4. a) Price,P (RM)

Equilibrium price for this market is RM6 and quantity in this market is 81 units.

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 b) If the actual price in the market were above the equilibrium price, quantity supplied (SS) is more
than quantity demanded (DD) Qs>Qd. For example at RM8, the pizza sellers are willing to sell 110
units of pizzas and the buyers is willing to buy 53 units of pizzas. There is a surplus of 57 units of
pizzas. The sellers will supply less because now it is unprofitable to sell due to the price cut. When
price decreases, it may attract new buyers. Quantity demanded for pizzas will increase. This process
will continue until the surplus is eliminated and market equilibrium achieved.

c) If the actual price in this market were below the equilibrium price, quantity demanded (DD) is more
than quantity supplied (SS) Qd > Qs. For example at RM4, the buyers are willing to buy 135 units of
pizzas and the pizza sellers are willing to sell 26 units of pizzas. There is a shortage of 109 units of
pizzas. Therefore, there is a tendency for price to increase as demanders compete against each other for
the limited supply of pizzas. Quantity supplied (SS) for the pizzas will increase because pizza sellers
found it is profitable to increase supplies of pizzas. This process will continue until the shortage of
pizzas is eliminated. When quantity demanded and quantity supply for pizzas are equal, the process has
achieved the equilibrium market.

5. Qd = Qs
1600-300P = 1400+700P
-700P-300P = 1400-1600
-1000P = -200
P = -200/-1000
P = RM0.20 Equilibrium price in market for chocolate bars is RM0.20

Qd = 1600-300P
Qd = 1600-300(0.2)
Qd = 1600-60
Qd = 1540 Equilibrium quantity in market for chocolate bars is 1540.

6 a) Midpoint form = Q2-Q1 x 100

((Q2+Q1)/2

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 ____________
P2-P1 x 100
((P2+P1)/2

Short run, =((2.20 - 1.80) / ((2.20 + 1.80) / 2)) * 100

= (0.40 / (4.00 / 2)) * 100
=(0.40 / 2) * 100
= 20%
= 0.2 * 20%
= 4%

So, in the short run, the quantity of heating oil demanded will decrease by 4%.

Long run, = 0.7 * 20%

= 14%
In the long run, the quantity of heating oil demanded will decrease by 14%.

b) The more time horizon needed to decide goods, there will be more opportunity for consumers to
decide the goods and that is why long period is elastic while short period is inelastic.
7 d) i)RM10,000

= (32 - 40) x 100

( (32 + 40)/2)
________________
(10 - 8 ) x 100
( (10 + 8)/2)

= -22.22%
22.22%
= -1

ii)RM12,000

8
= (45 - 50) x 100
( (45 + 50)/2)
__________________
(10 - 8 ) x 100
( (10 + 8)/2)

= -10.53%
22.22%

= -0.47

e)Formula:

Percent Change in Income= Income 2 - Income 1 x 100

Income 1

Percent Change in Qd= Qd 2 - Qd 1 x 100

Qd 1

Income Elasticity of Demand= % change in Qd x 100

% change in Income

Percent Change in Income= 12,000 - 10,000 x 100

10,000
= 20%

i) at price RM12

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 = 30 - 24 x 100
24
= 25%
= 25% x 100
20%
= 1.25

ii) at price RM16

= 12 - 8 x 100
8
= 50%
= 50% x 100
20%
= 2.5

8. i) Business travellers
Ed = (Q2-Q1) / [ (Q2+Q1) / 2 ] / (P2-P1) / [ (P2+P1) / 2 ]
= [ (1900-2000) / 1950] / [ (250-200) / 225 ]
= -0.23
Therefore, elasticity = |-0.23| = 0.23

ii) Vacations
= (Q2-Q1) / [ (Q2+Q1) / 2 ] / (P2-P1) / [ (P2+P1) / 2 ]
= [(600-800) / 700] / [(250-200) / 225]
= -1.29
Therefore, elasticity = |-1.29| = 1.29

9. Demand Curve

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