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Chapter 4

The Market Forces of Supply and Demand

Educators


Problem 1

Explain each of the following statements using supply-and-demand diagrams.
a. "When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout
the country."
b. "When the weather turns warm in New England every summer, the price of hotel rooms in Caribbean resorts plummets."
c. "When a war breaks out in the Middle East, the price of gasoline rises and the price of a used
Cadillac falls."

Yi Chun L.
Washington University in St Louis

Problem 2

"An increase in the demand for notebooks raises the quantity of notebooks demanded but not the quantity supplied." Is this statement true or false? Explain.

Yi Chun L.
Washington University in St Louis

Problem 3

Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or 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.
a. People decide to have more children.
b. A strike by steelworkers raises steel prices.
c. Engineers develop new automated machinery for the production of minivans.
d. The price of sports utility vehicles rises.
e. A stock market crash lowers people's wealth.

Kaylee M.
Numerade Educator

Problem 4

Consider the markets for film streaming services, TV screens, and tickets at movie theaters.
a. For each pair, identify whether they are complements or substitutes:
$\bullet$ Film streaming and TV screens
$\bullet$ Film streaming and movie tickets
$\bullet$ TV screens and movie tickets
b. Suppose a technological advance reduces the cost of manufacturing TV screens. Draw a diagram to show what happens in the market for TV screens.
c. Draw two more diagrams to show how the change in the market for TV screens affects the markets for film streaming and movie tickets.

Yi Chun L.
Washington University in St Louis

Problem 5

Over the past 40 years, technological advances have reduced the cost of computer chips. How do
you think this has affected the market for computers? For computer software? For typewriters?

Yi Chun L.
Washington University in St Louis

Problem 6

Using supply-and-demand diagrams, show the effect of the following events on the market for sweatshirts.
a. A hurricane in South Carolina damages the cotton crop.
b. The price of leather jackets falls.
c. All colleges require morning exercise in appropriate attire.
d. New knitting machines are invented.

Kaylee M.
Numerade Educator

Problem 7

Ketchup is a complement (as well as a condiment) for hot dogs. If the price of hot dogs rises, what happens in the market for ketchup? For tomatoes? For tomato juice? For orange juice?

Yi Chun L.
Washington University in St Louis

Problem 8

The market for pizza has the following demand and supply schedules:
a. Graph the demand and supply curves. What are 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?

Yi Chun L.
Washington University in St Louis

Problem 9

Consider the following events: Scientists reveal that eating oranges decreases the risk of diabetes, and at the same time, farmers use a new fertilizer that makes orange trees produce more oranges. Illustrate and explain what effect these changes have on the equilibrium price and quantity of oranges.

Kaylee M.
Numerade Educator

Problem 10

Because bagels and cream cheese are often eaten together, they are complements.
a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of bagels have risen. What could be responsible for this pattern$-$a fall in the price of flour or a fall in the price of milk? Illustrate and explain your answer.
b. Suppose instead that the equilibrium price of cream cheese has risen but the equilibrium quantity of bagels has fallen. What could be responsible for this pattern$-$a rise in the price of flour or a rise in the price of milk? Illustrate and explain your answer.

Yi Chun L.
Washington University in St Louis

Problem 11

Suppose that the price of basketball tickets at your college is determined by market forces. Currently, the demand and supply schedules are as follows:
$$
\begin{array}{rcc}
\text { Price } & \text { Quantity Demanded } & \text { Quantity Supplied } \\
\hline \$ 4 & 10,000 \text { tickets } & 8,000 \text { tickets } \\
8 & 8,000 & 8,000 \\
12 & 6,000 & 8,000 \\
16 & 4,000 & 8,000 \\
20 & 2,000 & 8,000
\end{array}
$$
a. Draw the demand and supply curves. What is unusual about this supply curve? Why might this be true?
b. What are the equilibrium price and quantity of tickets?
c. Your college plans to increase total enrollment next year by 5,000 students. The additional students will have the following demand schedule:
$$
\begin{array}{rc}
\text { Price } & \text { Quantity Demanded } \\
\hline \$ 4 & 4,000 \text { tickets } \\
8 & 3,000 \\
12 & 2,000 \\
16 & 1,000 \\
20 & 0
\end{array}
$$
Now add the old demand schedule and the demand schedule for the new students to calculate the new demand schedule for the entire college. What will be the new equilibrium price and quantity?
To find additional study resources, visit cengagebrain.com, and search for "Mankiw."

Yi Chun L.
Washington University in St Louis