Problems

  1. A survey indicated that chocolate is Americans’ favorite ice-cream flavor. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream.
    1. Question

      A severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream.

      Prob 3 1a. A severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream.
    2. Question

      A new report by the American Medical Association reveals that chocolate does, in fact, have significant health benefits.

      Prob 3 1b. A new report by the American Medical Association reveals that chocolate does, in fact, have significant health benefits.
    3. Question

      The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream.

      Prob 3 1c. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream.
    4. Question

      New technology for mixing and freezing ice cream lowers manufacturers’ costs of producing chocolate ice cream.

      Prob 3 1d. New technology for mixing and freezing ice cream lowers manufacturers’ costs of producing chocolate ice cream.
  2. In a supply and demand diagram, draw the shift of the demand curve for hamburgers in your hometown due to the following events. In each case, show the effect on equilibrium price and quantity.
    1. Question

      The price of tacos increases.

      Prob 3 2a. The price of tacos increases.
    2. Question

      All hamburger sellers raise the price of their french fries.

      Prob 3 2b. All hamburger sellers raise the price of their french fries.
    3. Question

      Income falls in town. Assume that hamburgers are a normal good for most people.

      Prob 3 2c. Income falls in town. Assume that hamburgers are a normal good for most people.
    4. Question

      Income falls in town. Assume that hamburgers are an inferior good for most people.

      Prob 3 2d. Income falls in town. Assume that hamburgers are an inferior good for most people.
    5. Question

      Hot dog stands cut the price of hot dogs.

      Prob 3 2e. Hot dog stands cut the price of hot dogs.
  3. The market for many goods changes in predictable ways according to the time of year, in response to events such as holidays, vacation times, seasonal changes in production, and so on. Using supply and demand, explain the change in price in each of the following cases. Note that supply and demand may shift simultaneously.
    1. Question

      Lobster prices usually fall during the summer peak lobster harvest season, despite the fact that people like to eat lobster during the summer more than at any other time of year.

      Prob 3 3a. Lobster prices usually fall during the summer peak lobster harvest season, despite the fact that people like to eat lobster during the summer more than at any other time of year.
    2. Question

      The price of a Christmas tree is lower after Christmas than before but fewer trees are sold.

      Prob 3 3b. The price of a Christmas tree is lower after Christmas than before but fewer trees are sold.
    3. Question

      The price of a round-trip ticket to Paris on Air France falls by more than $200 after the end of school vacation in September. This happens despite the fact that generally worsening weather increases the cost of operating flights to Paris, and Air France therefore reduces the number of flights to Paris at any given price.

      Prob 3 3c. The price of a round-trip ticket to Paris on Air France falls by more than $200 after the end of school vacation in September. This happens despite the fact that generally worsening weather increases the cost of operating flights to Paris, and Air France therefore reduces the number of flights to Paris at any given price.
  4. Show in a diagram the effect on the demand curve, the supply curve, the equilibrium price, and the equilibrium quantity of each of the following events.
    1. Question

      The market for newspapers in your town
      Case 1: The salaries of journalists go up.
      Case 2: There is a big news event in your town, which is reported in the newspapers.

      Prob 3 4a. The market for newspapers in your town Case 1: The salaries of journalists go up. Case 2: There is a big news event in your town, which is reported in the newspapers.
    2. Question

      The market for St. Louis Rams cotton T-shirts
      Case 1: The Rams win the Super Bowl.
      Case 2: The price of cotton increases.

      Prob 3 4b. The market for St. Louis Rams cotton T-shirts Case 1: The Rams win the Super Bowl. Case 2: The price of cotton increases.
    3. Question

      The market for bagels
      Case 1: People realize how fattening bagels are.
      Case 2: People have less time to make themselves a cooked breakfast.

      Prob 3 4c. The market for bagels Case 1: People realize how fattening bagels are. Case 2: People have less time to make themselves a cooked breakfast.
    4. Question

      The market for the Krugman and Wells economics textbook
      Case 1: Your professor makes it required reading for all of his or her students.
      Case 2: Printing costs for textbooks are lowered by the use of synthetic paper.

      Prob 3 4d. The market for the Krugman and Wells economics textbook Case 1: Your professor makes it required reading for all of his or her students. Case 2: Printing costs for textbooks are lowered by the use of synthetic paper.
  5. Question

    The U.S. Department of Agriculture reported that in 2004 each person in the United States consumed an average of 37 gallons of soft drinks (nondiet) at an average price of $2 per gallon. Assume that, at a price of $1.50 per gallon, each individual consumer would demand 50 gallons of soft drinks. The U.S. population in 2004 was 294 million. From this information about the individual demand schedule, calculate the market demand schedule for soft drinks for the prices of $1.50 and $2 per gallon.

    Prob 3 5. The U.S. Department of Agriculture reported that in 2004 each person in the United States consumed an average of 37 gallons of soft drinks (nondiet) at an average price of $2 per gallon. Assume that, at a price of $1.50 per gallon, each individual consumer would demand 50 gallons of soft drinks. The U.S. population in 2004 was 294 million. From this information about the individual demand schedule, calculate the market demand schedule for soft drinks for the prices of $1.50 and $2 per gallon.
  6. Suppose that the supply schedule of Maine lobsters is as follows:
    Price of lobster (per pound) Quantity of lobster supplied (pounds)
    $25 800
    20 700
    15 600
    10 500
    5 400

    Suppose that Maine lobsters can be sold only in the United States. The U.S. demand schedule for Maine lobsters is as follows:
    Price of lobster (per pound) Quantity of lobster demanded (pounds)
    $25 200
    20 400
    15 600
    10 800
    5 1,000
    1. Question

      Draw the demand curve and the supply curve for Maine lobsters. What are the equilibrium price and quantity of lobsters?

      Prob 3 6a. Draw the demand curve and the supply curve for Maine lobsters. What are the equilibrium price and quantity of lobsters?
    2. Now suppose that Maine lobsters can be sold in France. The French demand schedule for Maine lobsters is as follows:

      Price of lobster (per pound) Quantity of lobster supplied (pounds)
      $25 100
      20 300
      15 500
      10 700
      5 900

    3. Question

      What is the demand schedule for Maine lobsters now that French consumers can also buy them? Draw a supply and demand diagram that illustrates the new equilibrium price and quantity of lobsters. What will happen to the price at which fishermen can sell lobster? What will happen to the price paid by U.S. consumers? What will happen to the quantity consumed by U.S. consumers?

      Prob 3 6b. What is the demand schedule for Maine lobsters now that French consumers can also buy them? Draw a supply and demand diagram that illustrates the new equilibrium price and quantity of lobsters. What will happen to the price at which fishermen can sell lobster? What will happen to the price paid by U.S. consumers? What will happen to the quantity consumed by U.S. consumers?
  7. Find the flaws in reasoning in the following statements, paying particular attention to the distinction between shifts of and movements along the supply and demand curves. Draw a diagram to illustrate what actually happens in each situation.
    1. Question

      “A technological innovation that lowers the cost of producing a good might seem at first to result in a reduction in the price of the good to consumers. But a fall in price will increase demand for the good, and higher demand will send the price up again. It is not certain, therefore, that an innovation will really reduce price in the end.”

      Prob 3 7a. “A technological innovation that lowers the cost of producing a good might seem at first to result in a reduction in the price of the good to consumers. But a fall in price will increase demand for the good, and higher demand will send the price up again. It is not certain, therefore, that an innovation will really reduce price in the end.”
    2. Question

      “A study shows that eating a clove of garlic a day can help prevent heart disease, causing many consumers to demand more garlic. This increase in demand results in a rise in the price of garlic. Consumers, seeing that the price of garlic has gone up, reduce their demand for garlic. This causes the demand for garlic to decrease and the price of garlic to fall. Therefore, the ultimate effect of the study on the price of garlic is uncertain.”

      Prob 3 7b. “A study shows that eating a clove of garlic a day can help prevent heart disease, causing many consumers to demand more garlic. This increase in demand results in a rise in the price of garlic. Consumers, seeing that the price of garlic has gone up, reduce their demand for garlic. This causes the demand for garlic to decrease and the price of garlic to fall. Therefore, the ultimate effect of the study on the price of garlic is uncertain.”
  8. The following table shows a demand schedule for a normal good.
    Price Quantity demanded
    $25 70
    20 90
    15 110
    10 130
    1. Question

      Do you think that the increase in quantity demanded (say, from 90 to 110 in the table) when price decreases (from $21 to $19) is due to a rise in consumers’ income? Explain clearly (and briefly) why or why not.

      Prob 3 8a. Do you think that the increase in quantity demanded (say, from 90 to 110 in the table) when price decreases (from $21 to $19) is due to a rise in consumers’ income? Explain clearly (and briefly) why or why not.
    2. Question

      Now suppose that the good is an inferior good. Would the demand schedule still be valid for an inferior good?

      Prob 3 8b. Now suppose that the good is an inferior good. Would the demand schedule still be valid for an inferior good?
    3. Question

      Lastly, assume you do not know whether the good is normal or inferior. Devise an experiment that would allow you to determine which one it was. Explain.

      Prob 3 8c. Lastly, assume you do not know whether the good is normal or inferior. Devise an experiment that would allow you to determine which one it was. Explain.
  9. Question

    According to the New York Times (November 18, 2006), the number of car producers in China is increasing rapidly. The newspaper reports that “China has more car brands now than the United States…. But while car sales have climbed 38 percent in the first three quarters of this year, automakers have increased their output even faster, causing fierce competition and a slow erosion in prices.” At the same time, Chinese consumers’ incomes have risen. Assume that cars are a normal good. Use a diagram of the supply and demand curves for cars in China to explain what has happened in the Chinese car market.

    Prob 3 9. According to the New York Times (November 18, 2006), the number of car producers in China is increasing rapidly. The newspaper reports that “China has more car brands now than the United States…. But while car sales have climbed 38 percent in the first three quarters of this year, automakers have increased their output even faster, causing fierce competition and a slow erosion in prices.” At the same time, Chinese consumers’ incomes have risen. Assume that cars are a normal good. Use a diagram of the supply and demand curves for cars in China to explain what has happened in the Chinese car market.
  10. Aaron Hank is a star hitter for the Bay City baseball team. He is close to breaking the major league record for home runs hit during one season, and it is widely anticipated that in the next game he will break that record. As a result, tickets for the team’s next game have been a hot commodity. But today it is announced that, due to a knee injury, he will not in fact play in the team’s next game. Assume that season ticket-holders are able to resell their tickets if they wish. Use supply and demand diagrams to explain the following.
    1. Question

      Show the case in which this announcement results in a lower equilibrium price and a lower equilibrium quantity than before the announcement.

      Prob 3 10a. Show the case in which this announcement results in a lower equilibrium price and a lower equilibrium quantity than before the announcement.
    2. Question

      Show the case in which this announcement results in a lower equilibrium price and a higher equilibrium quantity than before the announcement.

      Prob 3 10b. Show the case in which this announcement results in a lower equilibrium price and a higher equilibrium quantity than before the announcement.
    3. Question

      What accounts for whether case a or case b occurs?

      Prob 3 10c. What accounts for whether case a or case b occurs?
    4. Question

      Suppose that a scalper had secretly learned before the announcement that Aaron Hank would not play in the next game. What actions do you think he would take?

      Prob 3 10d. Suppose that a scalper had secretly learned before the announcement that Aaron Hank would not play in the next game. What actions do you think he would take?
  11. In Rolling Stone magazine, several fans and rock stars, including Pearl Jam, were bemoaning the high price of concert tickets. One superstar argued, “It just isn’t worth $75 to see me play. No one should have to pay that much to go to a concert.” Assume this star sold out arenas around the country at an average ticket price of $75.
    1. Question

      How would you evaluate the argument that ticket prices are too high?

      Prob 3 11a. How would you evaluate the argument that ticket prices are too high?
    2. Question

      Suppose that due to this star’s protests, ticket prices were lowered to $50. In what sense is this price too low? Draw a diagram using supply and demand curves to support your argument.

      Prob 3 11b. Suppose that due to this star’s protests, ticket prices were lowered to $50. In what sense is this price too low? Draw a diagram using supply and demand curves to support your argument.
    3. Question

      Suppose Pearl Jam really wanted to bring down ticket prices. Since the band controls the supply of its services, what do you recommend they do? Explain using a supply and demand diagram.

      Prob 3 11c. Suppose Pearl Jam really wanted to bring down ticket prices. Since the band controls the supply of its services, what do you recommend they do? Explain using a supply and demand diagram.
    4. Question

      Suppose the band’s next CD was a total dud. Do you think they would still have to worry about ticket prices being too high? Why or why not? Draw a supply and demand diagram to support your argument.

      Prob 3 11d. Suppose the band’s next CD was a total dud. Do you think they would still have to worry about ticket prices being too high? Why or why not? Draw a supply and demand diagram to support your argument.
    5. Question

      Suppose the group announced their next tour was going to be their last. What effect would this likely have on the demand for and price of tickets? Illustrate with a supply and demand diagram.

      Prob 3 11e. Suppose the group announced their next tour was going to be their last. What effect would this likely have on the demand for and price of tickets? Illustrate with a supply and demand diagram.
  12. The accompanying table gives the annual U.S. demand and supply schedules for pickup trucks.
    Price of truck Quantity of trucks demanded (millions) Quantity of trucks supplied (millions)
    $20,000 20 14
    25,000 18 15
    30,000 16 16
    35,000 14 17
    40,000 12 18
    1. Question

      Plot the demand and supply curves using these schedules. Indicate the equilibrium price and quantity on your diagram.

      Prob 3 12a. Plot the demand and supply curves using these schedules. Indicate the equilibrium price and quantity on your diagram.
    2. Question

      Suppose the tires used on pickup trucks are found to be defective. What would you expect to happen in the market for pickup trucks? Show this on your diagram.

      Prob 3 12b. Suppose the tires used on pickup trucks are found to be defective. What would you expect to happen in the market for pickup trucks? Show this on your diagram.
    3. Question

      Suppose that the U.S. Department of Transportation imposes costly regulations on manufacturers that cause them to reduce supply by one-third at any given price. Calculate and plot the new supply schedule and indicate the new equilibrium price and quantity on your diagram.

      Prob 3 12c. Suppose that the U.S. Department of Transportation imposes costly regulations on manufacturers that cause them to reduce supply by one-third at any given price. Calculate and plot the new supply schedule and indicate the new equilibrium price and quantity on your diagram.
  13. After several years of decline, the market for handmade acoustic guitars is making a comeback. These guitars are usually made in small workshops employing relatively few highly skilled luthiers. Assess the impact on the equilibrium price and quantity of handmade acoustic guitars as a result of each of the following events. In your answers indicate which curve(s) shift(s) and in which direction.
    1. Question

      Environmentalists succeed in having the use of Brazilian rosewood banned in the United States, forcing luthiers to seek out alternative, more costly woods.

      Prob 3 13a. Environmentalists succeed in having the use of Brazilian rosewood banned in the United States, forcing luthiers to seek out alternative, more costly woods.
    2. Question

      A foreign producer reengineers the guitar-making process and floods the market with identical guitars.

      Prob 3 13b. A foreign producer reengineers the guitar-making process and floods the market with identical guitars.
    3. Question

      Music featuring handmade acoustic guitars makes a comeback as audiences tire of heavy metal and alternative rock music.

      Prob 3 13c. Music featuring handmade acoustic guitars makes a comeback as audiences tire of heavy metal and alternative rock music.
    4. Question

      The country goes into a deep recession and the income of the average American falls sharply.

      Prob 3 13d. The country goes into a deep recession and the income of the average American falls sharply.
  14. Will Shakespeare is a struggling playwright in sixteenth-century London. As the price he receives for writing a play increases, he is willing to write more plays. For the following situations, use a diagram to illustrate how each event affects the equilibrium price and quantity in the market for Shakespeare’s plays.
    1. Question

      The playwright Christopher Marlowe, Shakespeare’s chief rival, is killed in a bar brawl.

      Prob 3 14a. The playwright Christopher Marlowe, Shakespeare’s chief rival, is killed in a bar brawl.
    2. Question

      The bubonic plague, a deadly infectious disease, breaks out in London.

      Prob 3 14b. The bubonic plague, a deadly infectious disease, breaks out in London.
    3. Question

      To celebrate the defeat of the Spanish Armada, Queen Elizabeth declares several weeks of festivities, which involves commissioning new plays.

      Prob 3 14c. To celebrate the defeat of the Spanish Armada, Queen Elizabeth declares several weeks of festivities, which involves commissioning new plays.
  15. The small town of Middling experiences a sudden doubling of the birth rate. After three years, the birth rate returns to normal. Use a diagram to illustrate the effect of these events on the following.
    1. Question

      The market for an hour of babysitting services in Middling today

      Prob 3 15a. The market for an hour of babysitting services in Middling today
    2. Question

      The market for an hour of babysitting services 14 years into the future, after the birth rate has returned to normal, by which time children born today are old enough to work as babysitters

      Prob 3 15b. The market for an hour of babysitting services 14 years into the future, after the birth rate has returned to normal, by which time children born today are old enough to work as babysitters
    3. Question

      The market for an hour of babysitting services 30 years into the future, when children born today are likely to be having children of their own

      Prob 3 15c. The market for an hour of babysitting services 30 years into the future, when children born today are likely to be having children of their own
  16. Use a diagram to illustrate how each of the following events affects the equilibrium price and quantity of pizza.
    1. Question

      The price of mozzarella cheese rises.

      Prob 3 16a. The price of mozzarella cheese rises.
    2. Question

      The health hazards of hamburgers are widely publicized.

      Prob 3 16b. The health hazards of hamburgers are widely publicized.
    3. Question

      The price of tomato sauce falls.

      Prob 3 16c. The price of tomato sauce falls.
    4. Question

      The incomes of consumers rise and pizza is an inferior good.

      Prob 3 16d. The incomes of consumers rise and pizza is an inferior good.
    5. Question

      Consumers expect the price of pizza to fall next week.

      Prob 3 16e. Consumers expect the price of pizza to fall next week.

Extend Your Understanding

  1. Demand twisters: Sketch and explain the demand relationship in each of the following statements.
    1. Question

      I would never buy a Britney Spears CD! You couldn’t even give me one for nothing.

      Prob 3 17a. I would never buy a Britney Spears CD! You couldn’t even give me one for nothing.
    2. Question

      I generally buy a bit more coffee as the price falls. But once the price falls to $2 per pound, I’ll buy out the entire stock of the supermarket.

      Prob 3 17b. I generally buy a bit more coffee as the price falls. But once the price falls to $2 per pound, I’ll buy out the entire stock of the supermarket.
    3. Question

      I spend more on orange juice even as the price rises. (Does this mean that I must be violating the law of demand?)

      Prob 3 17c. I spend more on orange juice even as the price rises. (Does this mean that I must be violating the law of demand?)
    4. Question

      Due to a tuition rise, most students at a college find themselves with less disposable income. Almost all of them eat more frequently at the school cafeteria and less often at restaurants, even though prices at the cafeteria have risen, too. (This one requires that you draw both the demand and the supply curves for school cafeteria meals.)

      Prob 3 17d. Due to a tuition rise, most students at a college find themselves with less disposable income. Almost all of them eat more frequently at the school cafeteria and less often at restaurants, even though prices at the cafeteria have risen, too. (This one requires that you draw both the demand and the supply curves for school cafeteria meals.)
  2. Although he was a prolific artist, Pablo Picasso painted only 1,000 canvases during his “Blue Period.” Picasso is now dead, and all of his Blue Period works are currently on display in museums and private galleries throughout Europe and the United States.
    1. Question

      Draw a supply curve for Picasso Blue Period works. Why is this supply curve different from ones you have seen?

      Prob 3 18a. Draw a supply curve for Picasso Blue Period works. Why is this supply curve different from ones you have seen?
    2. Question

      Given the supply curve from part a, the price of a Picasso Blue Period work will be entirely dependent on what factor(s)? Draw a diagram showing how the equilibrium price of such a work is determined.

      Prob 3 18b. Given the supply curve from part a, the price of a Picasso Blue Period work will be entirely dependent on what factor(s)? Draw a diagram showing how the equilibrium price of such a work is determined.
    3. Question

      Suppose rich art collectors decide that it is essential to acquire Picasso Blue Period art for their collections. Show the impact of this on the market for these paintings.

      Prob 3 18c. Suppose rich art collectors decide that it is essential to acquire Picasso Blue Period art for their collections. Show the impact of this on the market for these paintings.
  3. Draw the appropriate curve in each of the following cases. Is it like or unlike the curves you have seen so far? Explain.
    1. Question

      The demand for cardiac bypass surgery, given that the government pays the full cost for any patient

      Prob 3 19a. The demand for cardiac bypass surgery, given that the government pays the full cost for any patient
    2. Question

      The demand for elective cosmetic plastic surgery, given that the patient pays the full cost

      Prob 3 19b. The demand for elective cosmetic plastic surgery, given that the patient pays the full cost
    3. Question

      The supply of reproductions of Rembrandt paintings

      Prob 3 19c. The supply of reproductions of Rembrandt paintings_