Chapter 2, The Basics of Supply and Demand Video Solutions, Microeconomics

Problem 1

Suppose the demand curve for a product is given by $Q=300-2 P+4 I,$ where $I$ is average income measured in thousands of dollars. The supply curve is $Q=3 P-50$
a. If $I=25,$ find the market-clearing price and quantity for the product.
b. If $I=50,$ find the market-clearing price and quantity for the product.
c. Draw a graph to illustrate your answers.

Andrew Davis

Numerade Educator

04:04

Problem 2

Consider a competitive market for which the quantities demanded and supplied (per year) at various prices are given as follows:
a. Calculate the price elasticity of demand when the price is $\$ 80$ and when the price is $\$ 100$
b. Calculate the price elasticity of supply when the price is $\$ 80$ and when the price is $\$ 100$
c. What are the equilibrium price and quantity?
d. Suppose the government sets a price ceiling of $\$ 80$. Will there be a shortage, and if so, how large will it be?

Akash M

Numerade Educator

03:52

Problem 3

Refer to Example 2.5 (page 59 ) on the market for wheat. In 1998 , the total demand for U.S. wheat was $Q=3244-283 P$ and the domestic supply was $Q_{S}=1944+207 P .$ At the end of $1998,$ both Brazil and Indonesia opened their wheat markets to U.S. farmers. Suppose that these new markets add 200 million bushels to U.S. wheat demand. What will be the
free-market price of wheat and what quantity will be produced and sold by U.S. farmers?

Akash M

Numerade Educator

02:41

Problem 4

A vegetable fiber is traded in a competitive world market, and the world price is $\$ 9$ per pound. Unlimited quantities are available for import into the United States at this price. The U.S. domestic supply and demand for various price levels are shown as follows:
a. What is the equation for demand? What is the equation for supply?
b. At a price of $\$ 9,$ what is the price elasticity of demand? What is it at a price of $\$ 12 ?$
c. What is the price elasticity of supply at $\$ 9 ?$ At $\$ 12 ?$
d. In a free market, what will be the U.S. price and level of fiber imports?

Jin-Hwan Ro

Numerade Educator

03:52

Problem 5

Much of the demand for U.S. agricultural output has come from other countries. In $1998,$ the total demand for wheat was $Q=3244-283 P .$ Of this, total domestic demand was $Q_{D}=1700-107 P$, and domestic supply was $Q_{s}=1944+207 P .$ Suppose the export demand for wheat falls by 40 percent.
a. U.S. farmers are concerned about this drop in export demand. What happens to the free-market price of wheat in the United States? Do farmers have much reason to worry?
b. Now suppose the U.S. government wants to buy enough wheat to raise the price to $\$ 3.50$ per bushel. With the drop in export demand, how much wheat would the government have to buy? How much would this cost the government?

Akash M

Numerade Educator

08:15

Problem 6

The rent control agency of New York City has found that aggregate demand is $Q_{D}=160-8 P .$ Quantity is measured in tens of thousands of apartments. Price, the average monthly rental rate, is measured in hundreds of dollars. The agency also noted that the increase in $Q$ at lower $P$ results from more three-person families coming into the city from Long Island and demanding apartments. The city's board of realtors acknowledges that this is a good demand estimate and has shown that supply is $Q_{s}=70+7 P$
a. If both the agency and the board are right about demand and supply, what is the free-market price? What is the change in city population if the agency sets a maximum average monthly rent of $\$ 300$ and all those who cannot find an apartment leave the city?
b. Suppose the agency bows to the wishes of the board and sets a rental of $\$ 900$ per month on all apartments to allow landlords a "fair" rate of return. If 50 percent of any long-run increases in apartment offerings comes from new construction, how many apartments are constructed?

Oluwadamilola Ameobi

Numerade Educator

16:46

Problem 7

In $2010,$ Americans smoked 315 billion cigarettes, or 15.75 billion packs of cigarettes. The average retail price (including taxes) was about $\$ 5.00$ per pack. Statistical studies have shown that the price elasticity of demand
is $-0.4,$ and the price elasticity of supply is 0.5
a. Using this information, derive linear demand and supply curves for the cigarette market.
b. In $1998,$ Americans smoked 23.5 billion packs of cigarettes, and the retail price was about $\$ 2.00$ per pack. The decline in cigarette consumption from 1998 to 2010 was due in part to greater public awareness of the health hazards from smoking, but was also due in part to the increase in price. Suppose that the entire decline was due to the increase in price. What could you deduce from that about the price elasticity of demand?

Oluwadamilola Ameobi

Numerade Educator

06:42

Problem 8

In Example 2.8 we examined the effect of a 20 -percent decline in copper demand on the price of copper, using the linear supply and demand curves developed in Section $2.6 .$ Suppose the long-run price elasticity of copper demand were -0.75 instead of -0.5
a. Assuming, as before, that the equilibrium price and quantity are $P^{*}=\$ 3$ per pound and $Q^{*}=18 \mathrm{mil}$ lion metric tons per year, derive the linear demand curve consistent with the smaller elasticity.
b. Using this demand curve, recalculate the effect of a 55-percent decline in copper demand on the price of copper.

Anurag Kumar

Numerade Educator

02:41

Problem 9

In Example 2.8 (page 74 ), we discussed the recent decline in world demand for copper, due in part to China's decreasing consumption. What would happen, however, if China's demand were increasing?
a. Using the original elasticities of demand and supply (i.e., $\left.E_{s}=1.5 \text { and } E_{D}=-0.5\right),$ calculate the effect of a 20 -percent increase in copper demand on the price of copper.
b. Now calculate the effect of this increase in demand on the equilibrium quantity, $Q^{*}$
c. As we discussed in Example 2.8 , the U.S. production of copper declined between 2000 and 2003 Calculate the effect on the equilibrium price and quantity of both a 20 -percent increase in copper demand (as you just did in part a) and of a 20 -percent decline in copper supply.

Anurag Kumar

Numerade Educator

07:57

Problem 10

Example 2.9 (page 76 ) analyzes the world oil market. Using the data given in that example:
a. Show that the short-run demand and competitive supply curves are indeed given by
\[
\begin{array}{l}
D=36.75-0.035 P \\
S_{C}=21.85+0.023 P
\end{array}
\]
b. Show that the long-run demand and competitive supply curves are indeed given by
\[
\begin{array}{l}
D=45.5-0.210 P \\
S_{C}=16.1+0.138 P
\end{array}
\]
c. In Example 2.9 we examined the impact on price of a disruption of oil from Saudi Arabia. Suppose that instead of a decline in supply, OPEC production increases by 2 billion barrels per year (bb/yr) because the Saudis open large new oil fields. Calculate the effect of this increase in production on the price of oil in both the short run and the long run.

John Lee

Numerade Educator

07:57

Problem 11

Refer to Example 2.10 (page 81 ), which analyzes the effects of price controls on natural gas.
a. Using the data in the example, show that the following supply and demand curves describe the market for natural gas in $2005-2007$ :
\[
\begin{aligned}
\text {Supply:} & Q=15.90+0.72 P_{G}+0.05 P_{O} \\
\text {Demand:} & Q=0.02-1.8 P_{C}+0.69 P_{O}
\end{aligned}
\]
Also, verify that if the price of oil is $\$ 50,$ these curves imply a free-market price of $\$ 6.40$ for natural gas.
b. Suppose the regulated price of gas were $\$ 4.50$ per thousand cubic feet instead of $\$ 3.00 .$ How much excess demand would there have been?
c. Suppose that the market for natural gas remained unregulated. If the price of oil had increased from $\$ 50$ to $\$ 100,$ what would have happened to the freemarket price of natural gas?

John Lee

Numerade Educator

04:02

Problem 12

The table below shows the retail price and sales for instant coffee and roasted coffee for two years.
a. Using these data alone, estimate the short-run price elasticity of demand for roasted coffee. Derive a linear demand curve for roasted coffee.
b. Now estimate the short-run price elasticity of demand for instant coffee. Derive a linear demand curve for instant coffee.
c. Which coffee has the higher short-run price elasticity of demand? Why do you think this is the case?

Oluwadamilola Ameobi

Numerade Educator