Econ. 410 – Part 1

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Practice Problems Answers – Review of Supply and Demand

These problems cover the very basics of supply and demand and will not be collected. You should work through the problems before the second class period on Tuesday, January 15

  1. Assume that the market for widgets is competitive. Describe the effect on the equilibrium price and quantity of:

a. a rightward shift in demand / Eq. price and quantity increase.
b. a leftward shift in demand / Eq. price and quantity fall
c. a rightward shift in supply / Eq. price falls. Eq. quantity increases
d. a leftward shift in supply / Eq. price increases. Eq. quantity falls.
e. a rightward shift in demand and supply / Eq. quantity increases. The effect on the equilibrium price depends upon the relative magnitudes of the shifts in demand and supply.
f. a leftward shift in demand and supply / Eq. quantity falls. The effect on the equilibrium price depends upon the relative magnitudes of the shifts in demand and supply.
g. a leftward shift in demand and a rightward shift in supply / Eq. price falls. The effect on the equilibrium quantity depends upon the relative magnitudes of the shifts in demand and supply.
h. a rightward shift in demand and a leftward shift in supply / Eq. price increases. The effect on the equilibrium quantity depends upon the relative magnitudes of the shifts in demand and supply.
  1. Define each of the following terms.

a. Normal goodb. Inferior good

c. Substitute goodd. Complement good

By definition, a normal good is one for which the demand curve shifts to the right when income increases and shifts to the left when income falls. An inferior good is one for which the demand curve shifts to the left when income increases and to the right when income falls.

If good Y is a substitute for good X, then an increase in the price of good Y causes the demand curve for good X to shift to the right and a decrease in the price of good Y causes the demand curve for good X to shift to the left.

If good Y is a complement for good X, then an increase in the price of good Y causes the demand curve for X to shift to the left and a decrease in the price of good Y causes the demand curve for good X to shift to the right.

  1. Describe the shift in the demand curve caused by each of the following.
  2. An increase in income on the demand curve for an inferior good.

Demand shifts to the left.

  1. A decrease in income on the demand curve for an inferior good.

Demand shifts to the right.

  1. An increase in the price of a substitute good.

Demand shifts to the right.

  1. A decrease in the price of a substitute good.

Demand shifts to the left.

  1. An increase in the price of a complementary good.

Demand shifts to the left.

  1. A decrease in the price of a complementary good.

Demand shifts to the right.

  1. Changes in each of the following may cause shifts in the market demand curve:

PPrices of substitute or complementary goods

IIncome (average income of the consumers in the market)

NNumber of consumers

TTastes and preferences of consumers

EExpectations of future prices of the good or et cetera (for example, weather)

Suppose that the market for men’s suits is competitive. What is the effect of each of the following on the demand curve for suits?

a. a reduction in income assuming that suits are a normal good.

Demand shifts to the left.

b. more financial and legal services firms adopting casual dress Fridays

Demand shifts to the left.

  1. Changes in each of the following may cause shifts in the market supply curve:

PPrices of alternative products that the firms might produce

IInput prices

NNumber of firms selling the product

TTechnology

EExpectations of future prices of the good or et cetera (for example, weather)

Again, assume that the market for men’s suits is competitive. What is the effect of each of the following on the supply curve for suits?

a. a reduction in input prices Supply shifts to the right.

b. an increase in the number of firms selling the product Supply shifts to the right.

  1. During the Japanese recession of the 1990s, input prices fell and foreign producers were allowed to enter the market. What is the expected effect on the price of men’s suits?

As described in the Financial Times, the demand curve shifted to the left and the supply curve shifted to the right. The equilibrium price fell. (The equilibrium quantity also fell.)

  1. The chart below provides the demand and supply schedules for widgets in two countries.
  2. Identify the equilibrium price and quantity in each country if there is no trade. [Hint: Identify the price at which quantity demanded in Country A equals the quantity supplied. Do the same for Country B.]

The equilibrium price in Country A is 8 and in Country B is 3.

  1. Identify the equilibrium price if there is trade between the two countries (assuming no transport costs). Which country exports the good? How much is exported? [Hint: The total quantity supplied at each price is the quantity supplied in Country A plus the quantity supplied in Country B. Add another column to the table and enter the total quantity supplied at each price. Do the same for the total quantity demanded. Identify the price at which the total quantity demanded equals the total quantity supplied. How much is produced in Country A at this equilibrium price? How much is demanded in Country A?]

The chart below shows the total quantity supplied at each price and the total quantity demanded. The equilibrium price is 4 and the equilibrium quantity for the total market is 5. The firms in Country A supply 3 units and the consumers in Country a demand 15 units. Country A imports 12 units of the good. The firms in Country B supply 47 units and the consumers demand 35 units. Country B exports 12 units of the good.

Price / Supply in Country A / Demand in Country A / Supply in Country B / Demand in Country B / Total Supply / Total Demand
0 / 0 / 23 / 0 / 55 / 0 / 78
1 / 0 / 21 / 0 / 50 / 0 / 71
2 / 1 / 19 / 20 / 45 / 21 / 64
3 / 2 / 17 / 40 / 40 / 42 / 57
4 / 3 / 15 / 47 / 35 / 50 / 50
5 / 4 / 13 / 54 / 30 / 58 / 43
6 / 5 / 11 / 61 / 25 / 66 / 36
7 / 6 / 9 / 68 / 20 / 74 / 29
8 / 7 / 7 / 75 / 15 / 82 / 22
9 / 8 / 5 / 82 / 10 / 90 / 15
10 / 9 / 3 / 89 / 5 / 98 / 8