Chapter 4 Exercise Answers
1a.
A change in the price of airfares does not change either the demand for or the
supply of air travel. (It changes the quantity demanded and the quantity supplied of
air travel.)
1b.
The rise in the price of jet fuel decreases the supply of air travel because it
raises the cost of producing air travel.
1c.
The reduction in the number of flights decreases the supply of air travel.
1d.
The demand for air travel increases when people expect airfares to increase
next summer because people fly now, when airfares are relatively cheaper, rather
than next summer.
1e.
The cold winter in the Northeast increases the demand for air travel because
more people want to fly to Florida.
1f.
People flocking to the ski slopes increases the demand for air travel.
1g.
Train travel is a substitute for air travel. So a fall in the price of train travel
decreases the demand for air travel.
1h.
Transporting cargo by air is a substitute in production for transporting
people by air. So the rise in the price of air cargo decreases the supply of air travel
for people.
2a.
The new technology that cuts the time to manufacture a pair of jeans
increases the supply of jeans.
2b.
The fall in the price of the cloth, a resource used in the production of jeans,
increases the supply of jeans.
2c.
Jeans going out of fashion reflects a change in people’s preferences that
decreases the demand for jeans.
2d.
A fall in the price of a pair of jeans does not change either the demand for
jeans or the supply of jeans. (It changes the quantity demanded and the quantity
supplied of jeans.)
2e.
An increase in the wage rate paid garment workers is a rise in the price of a
resource used to produce jeans, so the supply of jeans decreases.
2f.
As more companies produce jeans, the number of suppliers increases so the
supply of jeans increases.
2g.
Denim skirts and denim jeans are substitutes in production, so a rise in the
price of a denim skirt decreases the supply of jeans.
2h.
Jeans are likely a normal good, so an increase in people’s incomes increases
the demand for jeans.
3a.
The statement is true. Allowing Brazilian oranges into the United States
increases the supply of oranges and the supply curve shifts rightward. The
equilibrium price of an orange falls and the equilibrium quantity increases. The
quantity of oranges demanded increases and there is a movement down along the
demand curve.
Oranges are a resource used in the production of orange juice. When the
price of an orange falls, it costs less to produce orange juice and the supply of orange
juice increases. The quantity of orange juice demanded increases and there is a
movement down along the demand curve. The equilibrium price of orange juice falls
and the equilibrium quantity increases.
3b.
The statement is false. If basketball becomes less popular, the demand for
basketball shoes decreases and the demand curve for basketball shoes shifts
leftward. The equilibrium price of a pair of basketball shoes falls and the
equilibrium quantity decreases. The quantity of shoes supplied decreases and there
is a movement down along the supply curve.
3c.
The statement is true. More people want to ski in the winter than in the
spring and so the demand for skiing in the winter exceeds the demand for skiing in
the spring. The demand curve for skiing in winter lies to the right of the demand
curve for skiing in spring. In the winter, the demand for skiing increases and the
quantity of skiing supplied increases. Because the demand is higher in the winter
than in the spring, the price of skiing is higher in the winter than in the spring.
3d.
The statement is false. Frozen yogurt and ice cream are substitutes. When the
price of frozen yogurt falls, people substitute frozen yogurt for ice cream. The
demand for ice cream decreases and the demand curve shifts leftward. The
equilibrium quantity of ice cream decreases but the equilibrium price of ice cream
falls. There is a change in the quantity of ice cream supplied and a movement down
along the supply curve.
4a.
Apple juice and orange juice are substitutes for consumers. If the price of
apple juice decreases, people substitute apple juice for orange juice. The demand for
orange juice decreases and the demand curve for orange juice shifts leftward. The
equilibrium price of orange juice falls and the equilibrium quantity of orange juice
decreases.
4b.
Apple juice and orange juice are substitutes for consumers, so the fall in the
price of apple juice decreases the demand for orange juice. The demand curve for
orange juice shifts leftward. The increase in the wage rate paid to orange grove
workers raises the cost of producing orange juice. The supply of orange juice
decreases and the supply curve of orange juice shifts leftward. The net effect of
these events decreases the equilibrium quantity but has an undetermined effect on
equilibrium price. If supply decreases by more than the demand, the shift in the
supply curve is greater than the shift in the demand curve and the equilibrium price
rises. If demand decreases more than the supply, the shift in the demand curve is
greater than the shift in the supply curve and the equilibrium price falls.
4c.
Because orange juice becomes more popular, demand increases and the
demand curve for orange juice shifts rightward. The cheaper picking machine
lowers the production costs of orange juice, so the supply of orange juice increases
and the supply curve of orange juice shifts rightward. The equilibrium quantity
increases. But the effect on the equilibrium price is ambiguous. If the change in
supply is greater than the change in demand, the shift in the supply curve is greater
than the shift in the demand curve and the equilibrium price falls. If the change in
demand is greater than the change in supply, the shift in the demand curve is
greater than the shift in the supply curve and the equilibrium price rises.
4d.
When joggers switch from bottled water to orange juice, the demand for
orange juice increases and the demand curve for orange juice shifts rightward. The
equilibrium price rises and the equilibrium quantity increases.
5a.
As more people buy new cars, which
use the new fuel, the demand for gasoline
decreases. The demand curve for gasoline
shifts leftward, from D0 to D1 in Figure 4.5.
The equilibrium price falls from P0 to P1 and
the equilibrium quantity decreases from Q0
to Q1.
5b.
The supply of used cars increases as
people trade in their old cars for new cars. In
Figure 4.6 the supply curve shifts rightward
from S0 to S1. The equilibrium price falls
from P0 to P1 and the equilibrium quantity
increases from Q0 to Q1.
6a.
The market equilibrium occurs at a
price of $5.00 and 140 mouse pads a week. At the price of $5.00, the quantity
supplied equals the quantity demanded.
6b.
At a price of $7.00, the quantity demanded is 120 mouse pads and the
quantity supplied is 160 mouse pads. There is a surplus of 40 mouse pads a week
and the price falls. As the falls, the quantity demanded increases, the quantity
supplied decreases, and the surplus decreases. The price falls until the surplus
disappears. The price falls to $5.00 a mouse pad.
6c.
When the price of a computer
Price
New
Quantity
decreases, the quantity of mouse pads
(dollars
Quantity
supplied
demanded at each price increases by
per pad)
demanded
20 because mouse pads and
(mouse pads per week)
computers are complements. The
3.00
180
120
4.00
170
130
5.00
160
140
6.00
150
150
7.00
140
160
table shows the new demand schedule. At the original equilibrium quantity of $5.00
a mouse pad, there is a shortage and the price rises. As the price rises, the quantity
demanded decreases, the quantity supplied increases, and the shortage decreases.
The price rises until the shortage disappears. The price rises to $6.00 a mouse pad
and the quantity increases to 150 mouse pads a week.
6d.
The new voice-recognition software
affects the demand for mouse pads. The
demand for mouse pads decreases because
mouse pads and voice recognition software
are substitutes. The demand curve for mouse
pads shifts leftward, from D0 to D1 in Figure
4.7. Simultaneously the fall in the cost of
producing a mouse pad affects the supply.
The fall in the cost of producing a mouse pad
increases the supply and the supply curve
shifts rightward, from S0 to S1 in Figure 4.7.
At the initial price of a mouse pad, $5.00 in
Figure 4.7, there is a surplus of 60 mouse
pads per week. The surplus forces the price
lower, so the equilibrium price of a mouse
pad falls, to $2.00 in the figure. The effect on
the quantity of mouse pads, however, is
ambiguous. If the magnitude of the decrease in demand exceeds that of the increase
in supply, the quantity of mouse pads decreases. If the magnitude of the increase in
supply exceeds that of the decrease in demand, the quantity increases. And, if the
magnitudes of the changes are the same, as in Figure 4.7, the quantity of mouse pads
does not change.
7.
The first statement is false. As more people buy computers, the demand for
Internet service will increase because computers and Internet service are
complements. The price of Internet service will rise. The second statement is also
false. The demand for Internet service increases and the demand curve shifts
rightward. There is a movement along the supply curve and a change in the quantity
supplied but no change in supply.
8a.
From 2004 to March, 2005 the price of
oil rose by 32 percent to $56 a barrel. The
price is 2004 was $42 a barrel, 32 percent
than in March. The very cold winter in the
United States and Europe increased the
demand for oil. In Figure 4.8, the demand
curve for oil shifted rightward from D0 to D1.
As a result, the equilibrium price of oil rose,
in the figure from $42 per barrel to $56 per
barrel. The equilibrium quantity increased, in
the figure from 76.7 million barrels a day to
84.5 million barrels a day. (While it is
unlikely that the cold weather was the sole
reason the price increased from $42 per barrel to $56, as assumed in the figure, the
cold weather serves to increase the price.)
8b.
If OPEC increased its production in
March by a very small amount, the supply
curve shifts rightward by a small amount.
This shift is illustrated in Figure 4.9, in which
the supply curve shifts from S0 to S1. The
price falls, but because the change in supply
is small, the change in the price is likewise
small. In the figure, the price falls from $56
per barrel to $52 per barrel and the quantity
increases to 85.5 million barrels per day.
8c.
If there are supply disruptions, say
from war or similar activities, the supply of
oil decreases and the supply curve shifts
leftward. The equilibrium price of a barrel of
oil rises and the equilibrium quantity
decreases. Figure 4.10 shows the situation in
the world oil market if disruptions occur. The
supply curve shifts leftward from S0 to S1.
The price rises in the figure from an initial
price of $42 a barrel to $56 a barrel, and the
quantity decreases in the figure from an
initial quantity of 76.5 million barrels a day
to 72.5 million barrels a day.
8d.
If oil traders expect the price of a
barrel of oil will move to $60 per barrel, the
traders increase their current demand for oil
in order to beat the price hike. The demand
for oil increases and the demand curve shifts rightward. The equilibrium price of oil
rises and the equilibrium quantity increases. In Figure 4.8, the initial equilibrium
price is $42 a barrel and the initial equilibrium quantity is 76.7 million barrels a day.
When the demand curve shifts rightward from D0 to D1, the equilibrium price of oil
rises to $56 a barrel and the equilibrium quantity of oil increases to 84.5 million
barrels of oil a day. (While it is unlikely that the traders’ beliefs were the sole reason
the price increased from $42 per barrel to $56, as assumed in the figure, these
expectations serve to increase the price.)
8e.
Rapid growth in the use of petroleum in China increases the demand for oil.
The demand curve shifts rightward and the equilibrium price of oil rises and the
equilibrium quantity increases. In Figure 4.8, the initial equilibrium price is $42 a
barrel and the initial equilibrium quantity is 76.7 million barrels a day. When the
demand curve shifts rightward from D0 to D1, the equilibrium price of oil rises to
$56 a barrel and the equilibrium quantity of oil increases to 84.5 million barrels of
oil a day. (While it is unlikely that the rapid growth in use of oil in China was the sole
reason the price increased from $42 per barrel to $56, as assumed in the figure, this
growth did increase the price.).
9a.
Figure 4.11 shows equilibrium in the
world market for oranges in a normal year.
The assumed equilibrium price of a ton of
oranges is $2,000 and the assumed
equilibrium quantity of oranges is 60 million
tons a year.
9b.
The smaller harvest of oranges in
Florida decreases the supply of wheat and
the supply curve shifts leftward. In Figure
4.12, the supply curve of oranges shifts
leftward from S0 to S1. The equilibrium price
of a ton of oranges rises from $2,000 a ton to
$2,100 a ton, and the equilibrium quantity of
oranges decreases from 60 million tons to 55
million tons of oranges a year.
9c.
The price of a ton of oranges rose and the quantity of oranges bought and
sold decreased.
9d.
Oranges are an input used to produce frozen orange juice. The higher price of
a ton of oranges means that the price of a resource used to produce frozen orange
juice rises. The supply of frozen orange juice decreases and the price of a frozen
orange juice rises.
10a. Figure 4.13 shows the world coffee
market in 2000. The equilibrium price was
60¢ a pound and the equilibrium quantity
was 140 million pounds.
10b. The expansion of nations producing
coffee increased the supply of coffee and the
supply curve shifted rightward. The
expansion of coffee shops such as Starbucks
increased the demand for coffee and the
demand curve shifted rightward.
10c. The price of coffee fell in the early
2000s because the supply of coffee increased
more than the demand increased. The price
of coffee rose after the early 2000s because
during these years the demand for coffee
increased by more than the supply.
Critical Thinking
11a. The price of a music download is determined by the demand and supply of
music downloads.
11b. Self-interest plays a major role in the market for music downloads.
Consumers follow their self interest by trying to acquire downloads as cheaply as
possible. The demand for music downloads is the result of consumers following
their self interest. Producers, however, follow their self interest and try to sell music
downloads as expensively as possible. The supply of music downloads is the result
of producers following their self interest.
11c. If recoding companies tried to hike the price of a download to $2.99 a song
the number of songs downloaded would decrease. Some consumers would do
without music downloads entirely or in part. Other consumers would use less legal
music download services. There would be a surplus of songs available for download.
12a. The quotation from the Heart and Stroke Foundation indicates that over the
past years consumers became increasingly aware that salmon is a healthy food. So,
between 1996 and 2001, the demand for farm-raised salmon increased. The price of
farm-raised salmon rose and the quantity of farm-raised salmon increased.
12b. The lifting of the ban allows new salmon farms to be established in British
Columbia. As new farms are created, the supply of farm-raised salmon increases.
The increase in the supply of farm-raised salmon lowers the equilibrium price of
farm-raised salmon and increases the equilibrium quantity of farm-raised salmon.
12c. There are two effects on the market for wild Pacific salmon if disease breaks
out in the salmon farms. First, wild Pacific salmon are substitutes for farm-raised
salmon. If disease breaks out in salmon farms, the supply of farm-raised salmon
decreases and the price of farm-raised salmon rises. The rise in the price of farmraised salmon increases the demand for wild Pacific salmon. The equilibrium price
of wild Pacific salmon rises. But there is the possibility of a second effect: The
disease spreads from farm-raised salmon to wild Pacific salmon. If the disease
spreads, the supply of wild Pacific salmon decreases and the equilibrium price of
wild Pacific salmon rises. If both effects occur, the impact on the quantity is
uncertain: The quantity increases if the demand effect is largest and decreases if the
supply effect is largest.
Web Exercises
13a. The market for crude oil shows wide price swings. OPEC was formed in 1960.
Since World War II, oil-exporting countries have experienced an increasing demand
for crude oil. Although OPEC has tried to set production quotas to stabilize prices,
these attempts have met with repeated failure.
13b. The price of oil rose the most in 1972-1974, in 1979-1980, and after 2001.
13c. The Yom Kippur War started with an attack by Syria and Egypt on Israel on
October 5, 1973. Many western countries, including the United States, supported
Israel. Arab exporters of crude oil imposed an embargo on the nations supporting
Israel and cut supply.
In 1979 and 1980, events in Iran and Iraq (the Iranian revolution and the
Iran-Iraq War) resulted in an increase in the price of crude oil.
After 2001, market participants were worried about terrorist attacks that
would disrupt oil supplies. The United States invaded Iraq, which diminished
(somewhat) the supply of oil. The demand for oil in China increased rapidly as the
Chinese economy grew rapidly.
13d. Both events described in part c for the first two oil price hikes decreased the
supply of crude oil. After 2001, the U.S. invasion of Iraq decreased (slightly) the
supply of oil but the concerns of market participants and the rapid economic growth
in China both increased the demand for oil.
13e. Figure 4.14 illustrates the first two
events, in which the supply of oil decreased.
In the figure, the supply curve shifts leftward
from S0 to S1. At the original equilibrium
price, P0, there is a shortage of crude oil. As
the price rises, the quantity supplied
increases, the quantity demanded decreases,
and the shortage decreases. The price
continues to rise until the shortage is
eliminated.
Figure 4.15 illustrates the last event,
after 2001. In the figure the supply of oil
decreases slightly so that the supply curve
shifts leftward a little from S0 to S1. The
demand for oil increases substantially, so the
demand curve shifts rightward from D0 to D1.
At the original equilibrium price, P0, there is a
shortage of crude oil. As the price rises, the quantity supplied increases, the quantity
demanded decreases, and the shortage decreases. The price continues to rise until
the shortage is eliminated.
13f. Oil is a substitute in both consumption and production for coal and natural
gas. When the price of crude oil rises, the demand for coal and natural gas increases.
And when the price of crude oil rises, the supply of coal and natural gas decreases.
The equilibrium price of coal and natural gas rises, but the change in the equilibrium
quantity is unknown.
13g. Advances in technology that increase fuel efficiency decrease the demand for
oil. The equilibrium price of oil falls and the equilibrium quantity decreases.
14a. eBay is a web site on which people and firms auction goods and services.
14b. The prices of the items auctioned on eBay are determined by supply and
demand. The greater the demand for an item, the more people are willing to bid for
it and so the higher the price. Similarly, the more people who list a specific item, the
greater the supply of the item and so the lower the price.