Econ. 10ATauchen
Spring 2008
Practice Problems on Long-Run and Short-Run Demand and Supply Functions—Answers
1. The difference between the long-run and short-run supply curves is explained by the time required for construction. In the short-run, the supply responses to a price increase are somewhat limited. Some owners of apartment buildings or houses may have units that require very minor repairs that could be done very quickly. At a higher rental price, some owners will find it worth while to do the repairs. Over a longer period of time, new construction and major renovations can be undertaken.
The difference between the long-run and short-run demand curves is explained partly by life styles and attitudes which change slowly over time.
The price ceiling creates a shortage, and the amount of the shortage is larger in the long run than in the short run. The amount of the shortage in the short run is the difference between the short-run demand and supply curves. The amount of the shortage in the long-run is the difference between the long-run demand and supply curves.
2 a. The initial LR eq. is at the intersection of the demand curve D and the long-run supply curve. This is the point A on the graph.
b. Use the short run supply curve through point A. The new short run equilibrium is at the intersection of this short run supply curve and D'. The equilibrium quantity falls and the price falls (in comparison to the original long-run equilibrium)..
c. The new long run equilibrium is at B. The new long run equilibrium price is higher than the short-run equilibrium following the shift back in demand and the quantity is lower.
d. We now use the short run supply curve through B. The new short run equilibrium is at the intersection of the short-run supply curve through B and the demand curve D. In the long run the equilibrium moves to A. The new long run equilibrium price is lower and the quantity higher than at the short-run equilibrium following the shift back to demand curve D.
3. a. The short-run supply curve is less price sensitive than the long-run supply curve. An increase in the salary leads to a smaller short-run increase in the number of accountants than the long run increase. The primary reason for the difference in the short-run and long run adjustment to the salary increase is the time required to train accountants. Likewise, a decrease in the salary leads to a smaller drop in the quantity of accountants supplied in the short run than in the long run. In the short run, accountants who are at the ear the end of their careers remain in the profession even though the salary has dropped. In the longer run, these individuals retire fewer college students train as accountants (given the lower salary). Thus, the decline in the number of individuals who want to work in accounting is greater in the short run than the long run.
b. The new short-run equilibrium is at the intersection of the new demand curve and the short run supply curve. The new long-run eq. is at the intersection of the long-run supply curve and the new demand curve. Note that the eq. salary increases falls more in the short run. The eq. quantity falls more in the long run.
c. In the short-run their salaries might not be the same. It takes time to train and gain experience as a statistician. Some accountants may have some background in statistics and make a career change relatively easily but many could not make the switch quickly even though salaries are higher in statistics. Given the assumption that the training and work in statistics and accounting are regarded as equally demanding and rewarding by a large number of individuals, the salaries will eventually equalize. Accountants with some statistics training switch to statistics; relatively more students train in statistics and fewer in accounting.