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Principles of Microeconomics for AP® Courses 2e

Steven A. Greenlaw, David Shapiro, Timothy Taylor

Chapter 3

Demand and Supply

Educators

EL
JG
LM

Problem 1

Review Figure $3.4 .$ Suppose the price of gasoline is $\$ 1.60$ per gallon. Is the quanded higher or lower than at the equilibrium price of $\$ 1.40$ per gallon? What about the quantity supplied? Is there a shore a shorplus in the market? If so, how much?

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Jiapeng G.
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Problem 2

Why do economists use the ceteris paribus assumption?

Tristan W.
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Problem 3

In an analysis of the market for paint, an economist discovers the facts listed below. State whether each of these changes will affect supply or demand, and in what direction.
a. There have recently been some important cost-saving inventions in the technology for making paint.
b. Paint is lasting longer, so that property owners need not repaint as often.
c. Because of severe hailstorms, many people need to repaint now.
d. The hailstorms damaged several factories that make paint, forcing them to close down for several months.

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Jiapeng G.
Numerade Educator

Problem 4

Many changes are affecting the market for oil. Predict how each of the following events will affect the equilibrium price and quantity in the market for oil. In each case, state how the event will affect the supply and demand diagram.
Create a sketch of the diagram if necessary.
a. Cars are becoming more fuel efficient, and therefore get more miles to the gallon.
b. The winter is exceptionally cold.
c. A major discovery of new oil is made off the coast of Norway.
d. The economies of some major oil-using nations, like Japan, slow down.
e. A war in the Middle East disrupts oil-pumping schedules.
f. Landlords install additional insulation in buildings.
g. The price of solar energy falls dramatically.
h. Chemical companies invent a new, popular kind of plastic made from oil.

Tristan W.
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Problem 5

Let's think about the market for air travel. From August 2014 to January $2015,$ the price of jet fuel decreased roughly 47$\%$ . Using the four-step analysis, how do you think this fuel price decrease affected the equilibrium price and quantity of air travel?

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Problem 6

A tariff is a tax on imported goods. Suppose the U.S. government cuts the tariff on imported flat screen televisions. Using the four-step analysis, how do you think the tariff reduction will affect the equilibrium price and quantity of flat screen TVs?

Tristan W.
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Problem 7

What is the effect of a price ceiling on the quantity demanded of the product? What is the effect of a price ceiling on the quantity supplied? Why exactly does a price ceiling cause a shortage?

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Jiapeng G.
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Problem 8

Does a price ceiling change the equilibrium price?

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Problem 9

What would be the impact of imposing a price floor below the equilibrium price?

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Jiapeng G.
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Problem 10

Does a price ceiling increase or decrease the number of transactions in a market? Why? What about a price floor?

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Problem 11

If a price floor benefits producers, why does a price floor reduce social surplus?

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Jiapeng G.
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Problem 12

What determines the level of prices in a market?

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Problem 13

What does a downward-sloping demand curve mean about how buyers in a market will react to a higher
price?

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Jiapeng G.
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Problem 14

Will demand curves have the same exact shape in all markets? If not, how will they differ?

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Problem 15

Will supply curves have the same shape in all markets? If not, how will they differ?

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Problem 16

What is the relationship between quantity demanded and quantity supplied at equilibrium? What is the relationship when there is a shortage? What is the relationship when there is a surplus?

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Problem 17

How can you locate the equilibrium point on a demand and supply graph?

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Jiapeng G.
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Problem 18

If the price is above the equilibrium level, would you predict a surplus or a shortage? If the price is below
the equilibrium level, would you predict a surplus or a shortage? Why?

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Problem 19

When the price is above the equilibrium, explain how market forces move the market price to equilibrium. Do the same when the price is below the equilibrium.

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Jiapeng G.
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Problem 20

What is the difference between the demand and the quantity demanded of a product, say milk? Explain in
words and show the difference on a graph with a demand curve for milk.

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Problem 21

What is the difference between the supply and the quantity supplied of a product, say milk? Explain in words and show the difference on a graph with the supply curve for milk.

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Jiapeng G.
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Problem 22

When analyzing a market, how do economists deal with the problem that many factors that affect the market are changing at the same time?

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Problem 23

Name some factors that can cause a shift in the demand curve in markets for goods and services.

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Problem 24

Name some factors that can cause a shift in the supply curve in markets for goods and services.

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Problem 25

How does one analyze a market where both demand and supply shift?

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Problem 26

What causes a movement along the demand curve?
What causes a movement along the supply curve?

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Problem 27

Does a price ceiling attempt to make a price higher or lower?

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Jiapeng G.
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Problem 28

How does a price ceiling set below the equilibrium level affect quantity demanded and quantity supplied?

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Problem 29

Does a price floor attempt to make a price higher or lower?

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Jiapeng G.
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Problem 30

How does a price floor set above the equilibrium level affect quantity demanded and quantity supplied?

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Problem 31

What is consumer surplus? How is it illustrated on a demand and supply diagram?

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Problem 32

What is producer surplus? How is it illustrated on a demand and supply diagram?

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Problem 33

What is total surplus? How is it illustrated on a demand and supply diagram?

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Problem 34

What is the relationship between total surplus and economic efficiency?

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Problem 35

What is deadweight loss?

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Problem 36

Review Figure 3.4. Suppose the government decided that, since gasoline is a necessity, its price should be legally capped at $1.30 per gallon. What do you anticipate would be the outcome in the gasoline market?

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Problem 37

Explain why the following statement is false: “In the goods market, no buyer would be willing to pay more than the equilibrium price.”

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Jiapeng G.
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Problem 38

Explain why the following statement is false: “In the goods market, no seller would be willing to sell for
less than the equilibrium price.”

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Problem 39

Consider the demand for hamburgers. If the price of a substitute good (for example, hot dogs) increases
and the price of a complement good (for example, hamburger buns) increases, can you tell for sure what
will happen to the demand for hamburgers? Why or why not? Illustrate your answer with a graph.

JG
Jiapeng G.
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Problem 40

How do you suppose the demographics of an aging population of “Baby Boomers” in the United States will affect the demand for milk? Justify your answer.

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Problem 41

We know that a change in the price of a product causes a movement along the demand curve. Suppose
consumers believe that prices will be rising in the future. How will that affect demand for the product in the present? Can you show this graphically?

JG
Jiapeng G.
Numerade Educator

Problem 42

Suppose there is a soda tax to curb obesity. What should a reduction in the soda tax do to the supply of
sodas and to the equilibrium price and quantity? Can you show this graphically? Hint: Assume that the soda tax is collected from the sellers.

Tristan W.
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Problem 43

Use the four-step process to analyze the impact of the advent of the iPod (or other portable digital music
players) on the equilibrium price and quantity of the Sony Walkman (or other portable audio cassette
players).

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Jiapeng G.
Numerade Educator

Problem 44

Use the four-step process to analyze the impact of a reduction in tariffs on imports of iPods on the
equilibrium price and quantity of Sony Walkman-type products.

Tristan W.
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Problem 45

Suppose both of these events took place at the same time. Combine your analyses of the impacts of the iPod and the tariff reduction to determine the likely impact on the equilibrium price and quantity of Sony Walkman- type products. Show your answer graphically.

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Jiapeng G.
Numerade Educator

Problem 46

Most government policy decisions have winners and losers. What are the effects of raising the minimum
wage? It is more complex than simply producers lose and workers gain. Who are the winners and who are the losers, and what exactly do they win and lose? To what extent does the policy change achieve its goals?

Tristan W.
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Problem 47

Agricultural price supports result in governments holding large inventories of agricultural products. Why
do you think the government cannot simply give the products away to poor people?

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Jiapeng G.
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Problem 48

Can you propose a policy that would induce the market to supply more rental housing units?

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Problem 49

What term would an economist use to describe what happens when a shopper gets a “good deal” on a
product?

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Problem 50

Explain why voluntary transactions improve social welfare.

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Problem 51

Why would a free market never operate at a quantity greater than the equilibrium quantity? Hint: What would be required for a transaction to occur at that quantity?

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Jiapeng G.
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Problem 52

Review Figure 3.4 again. Suppose the price of gasoline is $1.00. Will the quantity demanded be lower or higher than at the equilibrium price of $1.40 per gallon? Will the quantity supplied be lower or higher? Is
there a shortage or a surplus in the market? If so, of how much?

Tristan W.
Numerade Educator

Problem 53

Table 3.8 shows information on the demand and supply for bicycles, where the quantities of bicycles are measured in thousands.
a. What is the quantity demanded and the quantity supplied at a price of $210?
b. At what price is the quantity supplied equal to 48,000?
c. Graph the demand and supply curve for bicycles. How can you determine the equilibrium price
and quantity from the graph? How can you determine the equilibrium price and quantity
from the table? What are the equilibrium price and equilibrium quantity?
d. If the price was $120, what would the quantities demanded and supplied be? Would a shortage or surplus exist? If so, how large would the shortage or surplus be?

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Problem 54

The computer market in recent years has seen many more computers sell at much lower prices. What shift in demand or supply is most likely to explain this outcome?
Sketch a demand and supply diagram and explain your
reasoning for each.
a. A rise in demand
b. A fall in demand
c. A rise in supply
d. A fall in supply

Tristan W.
Numerade Educator

Problem 55

Table 3.9 illustrates the market's demand and supply for cheddar cheese. Graph the data and find the
equilibrium. Next, create a table showing the change in quantity demanded or quantity supplied, and a graph of the new equilibrium, in each of the following situations:
a. The price of milk, a key input for cheese production, rises, so that the supply decreases by 80 pounds at every price.
b. A new study says that eating cheese is good for your health, so that demand increases by 20$\%$ at
every price.

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Problem 56

Table 3.10 shows the supply and demand for movie tickets in a city. Graph demand and supply and
identify the equilibrium. Then calculate in a table and graph the effect of the following two changes.
a. Three new nightclubs open. They offer decent bands and have no cover charge, but make their money by selling food and drink. As a result, demand for movie tickets falls by six units at every price.
b. The city eliminates a tax that it placed on all local entertainment businesses. The result is that
the quantity supplied of movies at any given price increases by 10$\% .$

Tristan W.
Numerade Educator

Problem 57

A low-income country decides to set a price ceiling on bread so it can make sure that bread is affordable to the poor.Table 3.11 provides the conditions of demand and supply. What are the equilibrium price and
equilibrium quantity before the price ceiling? What will the excess demand or the shortage (that is, quantity demanded minus quantity supplied) be if the price ceiling is set at $2.40? At $2.00? At $3.60?

JG
Jiapeng G.
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