Micro Unit 2 Answers 13th Edition

Ch 3: Problems 2, 4, 11, & 14

Ch 4: Problems 2, 3, 8, & 12

CHAPTER 3

2. The price of food increased during the past year.

a. Explain why the law of demand applies to food just as it does to all other
goods and services.

The law of demand applies to food because there is both a substitution and an
income effect that reinforce each other. When the price of food rises, people
substitute to different foods. For instance, some might substitute home cooked
meals for dining at a restaurant. And when the price rises, there is a negative
income effect, so people buy less food overall with the rising price. On both
counts, the higher price of food decreases the quantity of food demanded.

b. Explain how the substitution effect influences food purchases and provide
some examples of substitutions that people might make when the price of food
rises and other things remain the same.

When the price of food rises, people substitute away from (some) foods and
toward other foods and other activities. People substitute cheaper foods for more
expensive foods and they also substitute diets for food.

c. Explain how the income effect influences food purchases and provide
some examples of the income effect that might occur when the price of food rises
and other things remain the same.

Food is a normal good so a rise in the price, which decreases people’s real
incomes, decreases the quantity of food demanded. In the United States,
restaurants suffer as the negative income effect from a higher price of food leads
people to cut back their trips to restaurants. At home, people will buy fewer
steaks and instead will buy more noodles. In poor countries (and among the poor
in the United States), people literally eat less when the price of food rises and in
extremely poor countries starvation increases.

4. As the average income in China continues to increase, explain how the

following would change:

a. The demand for beef. Explain your answer.

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 Micro Unit 2 Answers 13th Edition

Beef is a normal good. The increase in income increases the demand for beef.

b. The demand for rice. Explain your answer.

Rice is probably an inferior good (relatively speaking). The increase in income

decreases the demand for rice.

11. What features of the world market for crude oil make it a competitive
market (so far as the author is concerned)?

The world oil market is a competitive market because there are a large number of
sellers and a large number of buyers. There are so many sellers and so many
buyers that no individual seller or individual buyer can influence the price of oil
[note: OPEC and other cases of market concentration (i.e., domestic producers
in U.S.) contribute to an oversized influence on oil markets at the crude oil
production level].

14. Think about the demand for the three game consoles: Xbox One,
PlayStation 4, and Wii U. Explain the effect of the following events on the
demand for Xbox One games and the quantity of Xbox One games demanded,
other things remaining the same. The events are:

a. The price of an Xbox One falls.

An Xbox One and an Xbox One game are complements. When the price of an
Xbox One falls, consumers respond by increasing the quantity of Xbox Ones
demanded so the equilibrium quantity of Xbox Ones increases. Consumers
increase their demand for Xbox one games because an Xbox One console is
useless without Xbox One games.

b. The prices of a PlayStation 4 and a Wii U fall.

A PlayStation 4 and a Wii U are substitutes for an Xbox One. When these game
consoles fall in price, the demand for Xbox One consoles decreases and so the
equilibrium quantity of Xbox Ones decreases. Consumers decrease their
demand for Xbox One games because an Xbox One game is useless without an
Xbox One console.

c. The number of people writing and producing Xbox One games increases.
The increase in the number of people writing Xbox One games increases the
supply of Xbox One games. The demand for Xbox One games does not change
but the increase in the supply lowers the price of an Xbox One game. The fall in
the price of Xbox One games increases the quantity of Xbox Ones demanded.

d. Consumers’ incomes increase.

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 Micro Unit 2 Answers 13th Edition

Xbox One games are surely a normal good. So an increase in consumers’

incomes increases the demand for Xbox One games.

e. Programmers who write code for Xbox One games become more costly to
hire.
The increase in the cost of programmers decreases the supply of Xbox One
games. When the supply of a good or service decreases, the price of that good
or service rises. Xbox One games are not an exception, so the price of an Xbox
One game rises. The rise in the price of an Xbox One game decreases the
quantity of Xbox One games demanded.

f. The expected future price of an Xbox One game falls.

When the price of an Xbox One game is expected to fall, the (current) demand
for Xbox One games decreases.

g. A new game console that is a close substitute for Xbox One comes onto
the market.
The new game console decreases the demand for Xbox One consoles. As a
result, the equilibrium quantity of Xbox One consoles decreases. Consumers
decrease their demand for Xbox One games because an Xbox One game is
useless without an Xbox One console.

CHAPTER 4

2. If the quantity of dental services demanded increases by 10 percent when

the price of dental services falls by 10 percent, is the demand for dental
services inelastic, elastic, or unit elastic?

The demand for dental services is unit elastic. The price elasticity of demand for
dental services equals the percentage change in the quantity of dental services
demanded divided by the percentage change in the price of dental services. The
price elasticity of demand is 10 percent divided by 10 percent, which equals 1.
The demand is unit elastic.

3. The demand schedule for hotel rooms is in the table.

a. What happens to total revenue when the price falls from $400 to $250 a
night and from $250 to $200 a night?

Price Quantity
(dollars demanded
per night) (millions of
rooms per night)

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 Micro Unit 2 Answers 13th Edition

When the price is $400, the total revenue 200 100

is equal to $400 × 50 million rooms, or 250 80
$20 billion. When the price is $250, the 400 50
total revenue is equal to $250 × 80 million 500 40
rooms, or $20 billion. So the total revenue 800 25
does not change when the price falls from
$400 to $250 a night.

When the price is $250, the total revenue is equal to $250 × 80 million rooms, or
$20 billion. When the price is $200, the total revenue is equal to $200 × 100
million rooms, or $20 billion. So the total revenue does not change when the
price falls from $400 to $250 a night.

b. Is the demand for hotel rooms elastic, inelastic or unit elastic?

The total revenue is the same at all prices, $20 billion. Because a change in price
does not change the total revenue at any price, the demand is unit elastic at all
prices.

8. If a rise in the price of sushi from 98¢ to $1.02 a piece decreases the
quantity of soy sauce de-manded from 101 units to 99 units an hour and
decreases the quantity of sushi demanded by 1 percent an hour, calculate
the:

a. Price elasticity of demand for sushi.

The price of sushi rises by ($1.02 − $0.98)/$1.00 = 4 percent. Therefore the price
elasticity of demand for sushi equals |( −1 percent)/(4 percent)|, which is
0.25.

b. Cross elasticity of demand for soy sauce with respect to the price of sushi.
The quantity of soy sauce decreases by (99 – 101)/100 = −2 percent. Therefore
the cross elasticity of demand for soy sauce with respect to the price of sushi
equals |( −2 percent)/(4 percent), which is −0.5.

Use the following table to work Problems 12 to 14.

The demand schedule for computer chips is in the table.

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 Micro Unit 2 Answers 13th Edition
Price Quantity
12. a. What happens to total revenue if the (dollars demanded
price falls from $400 to $350 a chip and per chip) (millions of
from $350 to $300 a chip? chips per year)
When the price of a chip is $400, 30 200 50
million chips are sold and total 250 45
revenue equals $12,000 million. 300 40
When the price of a chip falls to $350, 350 35
35 million chips are sold and total 400 30
revenue is $12,250 million. The total
revenue increases when the price falls.

When the price is $350 a chip, 35 million chips are sold and total
revenue is $12,250 million. When the price of a chip is $300, 40 million
chips are sold and total revenue decreases to $12,000 million. The total
revenue decreases as the price falls.
b. At what price is total revenue at a maximum?
Total revenue is maximized at $350 a chip. When the price of a chip is
$300, 40 million chips are sold and total revenue equals $12,000 million.
When the price is $350 a chip, 35 million chips are sold and total
revenue equals $12,250 million. Total revenue increases when the price
rises from $300 to $350 a chip. When the price is $400 a chip, 30 million
chips are sold and total revenue equals $12,000 million. Total revenue
decreases when the price rises from $350 to $400 a chip. Total revenue
is maximized when the price is $350 a chip.

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