Problems And Applications

1. Explain each of the following statements using supply-and-demand diagrams.

a. "When a cold snap hits Florida, the price of orange juke 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."

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.

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. Peopk* 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. i. Identify the flaw in this analysis: "If more

Americans go on a low-carb diet, the demand for bread will fall. The decrease in the demand for bread will cause the price of bread to fall. The lower price, however, will then increase the demand. In the new equilibrium, Americans might end up consuming more bread than they did initially." 5. Consider the markets for DVD movies, TV screens, and tickets at movie theaters, a. For each pair, identity whether they are complements or substitutes:

• DVDs and movie tickets

• TV screens and movie tickets b. Suppose a technokigical 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 DVDs and movie tickets.

6. Over the past 20 years, technological advances have reduced the cost of computer chips. How do you think this affected the market for computers? For computer software? For typewriters?

7. Using supply-and-demand diagrams, show the effect of the following events on tlx; 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.

A survey shows an increase in drug use by young people. In the ensuing debate, two hypotheses are proposed:

• Reduced police efforts have increased Unavailability of drugs on the street.

• Cutbacks in education efforts have decreased awareness of the dangers of drug addiction.

a. Use supply-and-demand diagrams to show how each of these hypotheses could lead to an increase in quantity of drugs consumed, b. How could information on what has happened to the prkre of drugs help us to distinguish between these explanatkms?

9. Suppose that in the year 2010 the number of births is temporarily high. How does this baby boom affect the price of babysitting services in 2015 and 2025? (Hint: 5-year-olds need babysitters, whereas 15-year-olds can be babysitters.)

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

11. The market for pizza has the following demand and supply schedules:

Pike Quantity OonwKfad Quantity Supplied

5 104 S3

a- Craph the demand and supply curves. What is the equilibrium price and quantity in this market?

b. If the actual price in this market were abntf the equilibrium price, what would drive the market toward the equilibrium?

c. If the actual price in this market were Mow the equilibrium price, what would drive the market toward the equilibrium?

12. Consider the following events: Scientists reveal thai consumption of oranges decreases the risk of diabetes and, at the sime time, farmers use a new fertilizer that makes orange trees more productive. Illustrate and explain whal effect these changes have On the equilibrium price a:>d quantity of oranges.

13. 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 thai the equilibrium price of cream cheese- Ivas 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 yivur answer.

14. Suppose that the price of basketball tickets at your college is determined by market forces.

Currently, the demand and supply schedules are as follows:

Prke Quantity Oamondttd Quantity SuppJiod i 4 10.030 tickets 8.COD octets

12 6.1X0 8.COD

16 4.C00 O.CCO

2D 2.COO 8.COD

a. Draw the demand and supply curves. Whal is unusual about this supply curve? Why might this be true?

b. What are I he equilibrium price and quantity of tickets?

c. Your collcge plans to increase Mai enrollment next year by 5,000 students. The additional students will have the following demand schedule:

Price

G\*snt«y Demanded

s *

4 ODD tefcet*

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