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1. If price and quantity both rose, the simplest cause would be a shift of the demand
curve to the right.
2. If price fell and quantity remained constant, a possible cause would be a shift out
to the right of the supply curve and a shift of the demand curve in to the left.
Another possibility would be a shift of the demand curve in to the left with a
vertical supply curve.
3. Computer pricing of roads could end bottlenecks and rush hour congestion by
means of price rationing. Currently, at zero price, at certain times the quantity
demanded greatly exceeds the quantity supplied, resulting in congestion. Raising
prices during those times could eliminate excess demand and reduce the congestion.
This technological change will spread out congestions over wider geographic areas
and over the day as individuals with more flexibility with respect to route and
timing will choose to demand less of the current high-demand route at rush hour.
4. a. This would represent a shift in demand to the left, assuming that the decline in
Cookie Monster’s popularity represents a decline in the popularity of cookies.
The price and quantity of cookies would probably fall, as shown in the
accompanying graph.
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Chapter 05 - Using Supply and Demand
5. a. Both the shift in demand to the right and the shift of supply to the left lead to a
higher equilibrium price of oil. The effect on equilibrium is indeterminate.
Although the shift in demand to the right would lead to a rise in equilibrium
quantity, the shift in supply to the left would reduce it. Whether equilibrium
quantity rises or falls depends on the relative size of the shifts. The
accompanying graph shows no effect on equilibrium quantity and a significant
increase in equilibrium price.
b. The increase in the oil production of Libya back to its original level shifted supply
to the right, reducing the price of oil and increasing the equilibrium quantity, as is
shown in the accompanying graph.
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Chapter 05 - Using Supply and Demand
6. a. This represents a shift of the supply curve to the left because the offended decide
not to supply organs, increasing the legal price significantly and perhaps reducing
the equilibrium quantity to a quantity that is below the amount currently provided
at zero cost. This is shown in the accompanying graph.
b. How responsive quantity supplied is to price affects the slope of the supply curve.
If quantity supplied is very responsive to price, the equilibrium price might be
quite low and legalizing organ sales would have significant benefits to society. In
fact, the authors of the study estimate the equilibrium price of kidneys to be less
than $1,000. In the accompanying graph, S1 is much more responsive to price than
is S0.
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Chapter 05 - Using Supply and Demand
7. A drought in Australia shifted the supply curve for rice to the left. The equilibrium
price rose from $0.12 to $0.24 a pound, and quantity fell, as the accompanying
graph shows.
8. See the accompanying graph. A price ceiling of PC below equilibrium price will
cause a shortage shown by the difference between QD and QS
9. As you can see in the accompanying graph, the rent controls create a situation in
which demanders are willing to pay much more than the controlled price and
much more than the equilibrium price. These payments are sometimes known as
key money. In this graph, landlords are willing to supply QS at the current
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Chapter 05 - Using Supply and Demand
controlled rent, PC. Consumers are willing to pay up to PB for the quantity QS.
Key money can be an amount up to the difference between PB and PC.
10. See the accompanying graph. A price floor of PF above the equilibrium price will
cause a surplus shown by the difference between QS and QD.
11. A minimum wage is a price floor. A Pmin above the equilibrium wage will result in
the quantity of laborers looking for work increasing to QS and the quantity of
employers looking to hire decreasing to QD. The difference between the two is a
measure of the number of the unemployed.
12. a. A $4 per-unit tax on suppliers shifts the supply curve up by $4, which is shown as
a shift in the supply curve from S0 to S1. The equilibrium price will rise by $4 only
if the demand curve is perfectly vertical. In the case of a vertical demand curve,
quantity would not change. Otherwise, the equilibrium price rises by less than $4
and the equilibrium quantity falls, as shown in the accompanying graph. In this
example, the price increases by less than $4 to P1 and quantity declines to Q1. The
price that suppliers receive falls to P2.
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Chapter 05 - Using Supply and Demand
b. A $4 per unit tax on consumers shifts the demand curve down by $4, which is
shown as a shift down in the demand curve from D0 to D1. The equilibrium price
will fall by $4 only if the supply curve is perfectly vertical. In the case of a vertical
supply curve, quantity would not change. Otherwise, the equilibrium price falls by
less than $4 to P1 and the equilibrium quantity falls Q1, as shown in the
accompanying graph. The price paid by consumers, including the tax, is P2.
c. The unit tax on the consumers and suppliers has the same effect on both equilibrium
quantity and price. It doesn't matter who pays the tax.
13. a. The quantity supplied and the quantity demanded equal each other when the price
is $1.00. The equilibrium price is $1.00, and the equilibrium quantity is 150 units.
5-6
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Chapter 05 - Using Supply and Demand
b. The tax shifts the supply curve up by $0.75 from S0 to S1. The equilibrium price
(the price consumers pay) is $1.50, and the equilibrium quantity is 125. Suppliers
receive the equilibrium price minus the tax, or $0.75.
c. The tax shifts the demand curve down by $0.75 from D0 to D1. The equilibrium
price (the price producers receive) is $0.75, and the equilibrium quantity is 125.
Consumers pay ($0.75 + $0.75).
d. It doesn't matter upon whom the tax is levied. The result is the same.
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Chapter 05 - Using Supply and Demand
14. A quota places a quantity restriction on imports. Consumers are willing to pay a
higher price for the lower quantity (QQ) than the equilibrium price without a quota.
Therefore, quotas lead to higher import prices, as shown in the accompanying
graph.
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
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Chapter 05 - Using Supply and Demand
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 05 - Using Supply and Demand
1. Austrian
I might decide to hire my friends or to hire those with whom I like to work, such
as those from a preferred ethnic group or sex. Is doing so fair? Fairness is a
judgment question, and judgments differ. From most people’s perspective, such
methods are not fair. The problem is that wage controls set an equal base wage
level but leave open possibilities for other inequalities. Rather than helping the
least skilled end of the labor pool, it prices them out of the market, increasing
their unemployment and promoting other forms of discrimination. Austrians
believe that these market distortions are not good for society and prefer little or no
government intervention.
2. Feminist
There are probably a number of reasons why women are paid less than men. Part
of the pay gap may be explained by differences in work experience, education,
on-the-job training, and work interruptions for women. Economists typically
measure discrimination as a residual: the part of the pay gap that remains
“unexplained” after accounting for these factors. The second part of the question
is a judgment question, and judgments differ. A law that requires firms to pay
equal wages to those with comparable skills may be difficult to implement. How
would the skills be assessed? Others argue that the assessment itself would add
costs to a firm’s production and increase product prices. However, if the reason
for the pay gap is discrimination, the law can change values and make it more
costly to discriminate. Since discrimination necessarily implies that hiring is on
the basis of something other than productivity, reducing discrimination may
promote efficiency. Feminists generally support such laws.
3. Institutionalist
a. We can see cultural evolution through history; the appendix to Chapter 3 can be
used to trace the cultural evolution of the market system. Here it is important to
stress that religious values and social relationships had to evolve to accommodate
the needs of the new forms of economic organization that emerged. Markets
change overnight and increasingly require rapid adaptation by individuals, which
can cause shocks to social relationships. One might question the long-term
(in)stability caused by market evolution. The outcomes of biological evolution are
driven by natural selection: those organisms with traits that give them a
competitive edge in the competition for limited energy propagate; others
disappear. In this context, the only purpose is to reproduce successfully. Some
economists believe that the purpose of cultural evolution is betterment of the
human condition for all.
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
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Chapter 05 - Using Supply and Demand
b. In the U.S. market, evolution has elevated living standards for everyone relative
to those of, say, 1775. We see access to fresh fruits and vegetables year-round,
many diseases have been eliminated, and life spans have increased greatly. Yet
we are social beings who are aware of our social position. One may be well fed
but still feel socially destitute because one’s relative level of welfare is many
magnitudes below that of others. In this sense, market evolution has failed to
contribute to betterment.
4. Religious
5. Radical
a. Today’s rent controls are designed to be less invasive than the ones described in
the book, and thus they do not have the strong effects described there. They still
have some effects, and the policy question is whether the income redistribution
effects they have are sufficiently desirable to warrant the costs of the policies.
b. This is a judgment question; economics can tell one about what the costs and
benefits of a mechanism are, not about what is an appropriate mechanism.
c. This again is a judgment question that requires an integration of normative issues
into the analysis. Most mainstream economists would argue that it is better to deal
with the underlying income distribution issues rather than with specific ones and
that one must consider the problems of government intervention. Radical
economists would argue that although mainstream economists talk about
"underlying issues," they seldom deal with those problems.
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Chapter 05 - Using Supply and Demand
Issues to Ponder
1. a. Airways have value because they produce revenue and there are only a limited
number of airways in the industry.
b. Television networks have incentives to produce high-definition television only to
the extent that they would receive more revenue for using extra bandwidth.
2. a. The supply curve is vertical at 10,000 tickets. We know there is an excess demand
at $130 because there is a secondary market for scalped tickets at a higher price.
The accompanying graph shows excess demand of QD – 10,000.
b. The people represented by QD – 10,000 will make offers to scalpers for any
amount above $130 up to the equilibrium price (if there had been a market) of
$2,000. The accompanying graph shows the range of $200 to $2,000.
c. If scalping became legalized, more people would be willing to sell their tickets
because there would be no risk of being arrested and fined. The shift of the
supply curve for resold tickets to the right will reduce the secondary-market price
of Final Four tickets.
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 05 - Using Supply and Demand
3. a. A weakly enforced antiscalping law would add an additional cost to those selling
scalped tickets and push up the resale cost of tickets to include the expected cost
of being caught, which would be fairly small with weak enforcement. In the
accompanying graph, this shifts the supply curve from S0 to S1, raising the
equilibrium price slightly from P0 to P1. (Note: This assumes that only selling, not
buying, is illegal.)
b. A strongly enforced antiscalping law (against suppliers) would push up prices far
more as the cost of supply rose and the supply curve shifted to the left. If
enforcement were sufficiently strong, a two-tier price system would emerge with
a low legal price at P0 and another very high price, P2.
4. a. Boards often exist to benefit the consumer but also to benefit those who currently
produce. Often those who are currently certified attempt to limit the number of
new certifications to limit the supply and thus boost the price they receive.
b. Possible changes include eliminating the board of certification, limiting its
regulation to only those skills which it addresses directly, and requiring continual
recertification so that the skills of those already certified reflect the current
demand for skills in that market.
c. A political difficulty with implementing these changes is that a relatively small
group of those currently certified will be hurt and will lobby hard for the status
quo. Those currently certified may have more “clout” with the board if the board
is composed of certified hairdressers. The benefits of the changes are also large,
but they are spread out over large groups of consumers, with each consumer
benefiting very little. Therefore, it will be easier for the small group whose benefit
per individual is large to organize.
5. a. The Oregon health plan includes a prioritized list of medical services that
determine whether a service is covered. The list is based on comparative benefit
to those covered. Those services which have the highest net benefit are ranked
highest. Those with a lower net benefit are not covered.
b. Economists should not oppose the Oregon plan because it involves rationing. The
market involves rationing through the price mechanism. Economists might oppose
the Oregon plan because in general they support the market as the least-cost
5-13
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
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Chapter 05 - Using Supply and Demand
method of providing goods and services. Economists are open to the argument
that the market may not distribute goods and services in the way that society
wants, which may require government intervention.
c. In the market, the interaction of demand and supply determines the equilibrium
price and the quantity that is bought and sold. Those who are able to pay the
equilibrium price are the ones who receive the health care. The Oregon plan uses
a benefit-ranking system rather than price as the rationing mechanism.
7. a. An import quota will increase the price of imported sugar. The accompanying graph
shows how a higher imported sugar price increases the price domestic producers
can charge and increase the quantity they can supply to the market. For example, at
world price P0, domestic consumers demand the quantity E–B from importers and
quantity B from domestic producers. After a quota represented by quantity D minus
C is imposed, the import price is P1. Domestic consumers demand the quantity D–
C from importers and quantity C from domestic producers.
b. The government could have imposed a tariff on imported sugar. This would also
have raised the price of imported sugar.
c. A minimum required import level of 1.25 million will limit the ability of the
United States to support domestic sugar prices. The increase in quantity supplied
will put downward pressure on sugar prices.
5-14
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 05 - Using Supply and Demand
b. Since at the existing quantity supplied, Qs, demanders would be willing to pay PB,
there is a strong incentive to make side payments to existing tenants to acquire an
apartment. At PB, more tenants are willing to supply their apartments than at Pc,
and so a side payment can induce a tenant to give up his or her apartment. This is
one form of rationing. When market price rationing does not take place, some
other form of rationing must replace it.
c. Eliminating rent controls most likely would allow the market price of apartments
to increase and eliminate side payments. The quantity supplied will rise until it
equals the quantity demanded at the market price. The price–quantity combination
is (PE, QE) in the graph. However, if there are few additional apartments available
to be rented (the supply curve is almost vertical), price will increase dramatically
and quantity supplied will rise only slightly.
d. The political appeal of rent control is that it benefits those who currently rent
apartments. Apartment renters who live in rent-controlled apartments are more
likely to vote, and this is why it is maintained. There are other possible reasons as
well.
9. a. The government subsidy of mohair provided an enormous incentive for those who
were allowed to sell mohair to sell large quantities at a lower price than otherwise.
The elimination of this subsidy shifted the supply curve to the left (shown in the
accompanying graph as a shift from Ssubsidy to S no subsidy, increasing the market
price for mohair from P0 to P1 and decreasing the quantity demanded and
supplied from Q0 to Q1.
5-15
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the brain at this period of life leads to an early death, while children
affected with partial atrophy may continue to live, though almost
always in a state of idiocy. The forms mostly observed in children are
unilateral or bilateral atrophy of the cerebrum, partial or almost entire
absence of the cerebellum, imperfect development of the large
cerebral ganglia, and slight partial atrophy of the medulla oblongata.
The large commissures as well as the crura cerebri are very seldom
found atrophied.
The most frequent and, from a practical point of view, the most
important of these forms is the unilateral atrophy of the cerebrum, for
the reason that in a mild form it is to a certain degree consistent with
the mental and physical development of the child. It is mostly found
on the left side. In some cases the atrophy extends evenly
throughout the hemisphere, while in others it affects more or less
one or the other lobe. The loss in the bulk of the hemisphere may
amount to only a slight diminution, or to as much as to one-half of
the normal size. Its thickness above the ventricle may be reduced to
a few millimeters; in some cases even the membranes of the brain
may lie in contact with the ependyma. The ventricle of the atrophied
hemisphere is almost always enlarged. The convolutions of the
cerebrum are very narrow, sometimes quite indistinct. One or both of
the corpora striata also are generally found atrophied. In many cases
even the atrophy extends to one of the crura cerebri and to the
pyramid of the same side, and to the anterior and lateral columns of
the spinal cord on the opposite side. Frequently, one or the other
lateral half of the cerebellum also is found affected. The condition of
the substance of the cerebrum is nearly the same as in the senile
atrophy of the brain to be described hereafter. The skull is mostly
thickened on the side of the atrophy, and frequently asymmetrical.
In senile atrophy of the brain, which represents the most simple form
of total atrophy of this organ, the first symptoms frequently appear
toward the end of some intercurrent disease. They consist in a very
slow and gradually increasing derangement of the cerebral functions,
associated with a general loss of innervation, manifesting itself by
talkative wanderings of the mind, restless sleep, hallucinations,
foolish activity, attacks of tremor senilis, etc. The intellectual
functions diminish and the memory is lost. The physical forces also
gradually sink, the tremor senilis increases, and the patient, no more
able to walk, becomes confined to bed. Finally, a relaxation of the
sphincters takes place, and death is produced by the disturbance of
the automatic functions of deglutition and respiration.
Introduction.
11 Archiv. de Physiologie, 1871-72, p. 319; also to his “Leçons sur le Syphilis hered.,”
Progrès méd., 1877 and 1878.
14 Ibid., p. 14.
The fact that nervous syphilis may occur many years after the
cessation of all apparent evidences of the diathesis is of great
practical importance, especially as the nervous system is more
prone to be attacked when the secondaries have been very light
than when the earlier manifestations have been severe. I have
repeatedly seen nervous syphilis in persons whose secondaries
have been so slight as to have been entirely overlooked or forgotten,
and who honestly asserted that they never had had syphilis,
although they acknowledged to gonorrhœa or to repeated exposure,
and confessed that their asserted exemption was due to good
fortune rather than to chastity.
33 Ibid.
34 Ibid.