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Chapter 03 Demand, Supply and Market Equilibrium (+ Appendix) 3A-1 Chapter 03 Demand, Supply and Market Equilibrium (+ Appendix) APPENDIX QUESTIONS 1. Why are shortages or surpluses more likely with preset prices, such as those on tickets, than flexible prices, such as those on gasoline? LO6 Answer: Preset prices, rather than responding to demand conditions, attempt to predict the level of demand that will produce an equilibrium quantity. If these predictions are incorrect, there will be an imbalance between the quantity supplied and the quantity demanded. Preset prices often apply to one-time-only events, versus something like gasoline that is sold regularly and repeatedly. Sellers can learn from experience how to adjust prices to best meet demand. 2. Most scalping laws make it illegal to sellbut not to buytickets at prices above those printed on the tickets. Assuming that is the case, use supply and demand analysis to explain why the equilibrium ticket price in an illegal secondary market tends to be higher than in a legal secondary market. LO6 Answer: Ticket prices tend to be higher in illegal secondary markets because sellers face higher costs (thus reducing supply relative to what it would be in a legal secondary market). The additional costs include the higher transactions costs (finding secret locations to transact, monitoring for law enforcement, screening clients, etc.) and compensation for the risk of getting caught (with the associated costs of legal services, fines, incarceration, etc.). 3. Go to the Web site of the Energy Information Administration, http://www.eia.doe.gov , and follow the links to find the current retail price of gasoline. How does the current price of regular gasoline compare with the price a year ago? What must have happened to either supply, demand, or both to explain the observed price change? LO6 Answer: The answer here will depend on the time of the exercise. 4. Suppose the supply of apples sharply increases because of perfect weather conditions throughout the growing season. Assuming no change in demand, explain the effect on the equilibrium price and quantity of apples. Explain why quantity demanded increases even though demand does not change. LO6 Answer: The increase in supply will lower the equilibrium price and increase the equilibrium quantity of apples. The increase in supply implies that the supply schedule shifts to the right (more apples are supplied at every price). Quantity demanded increases without a shift in the demand curve because the greater supply causes price to fall. This fall in price causes movement along the demand schedule. Chapter 03 Demand, Supply and Market Equilibrium (+ Appendix) 3A-2 5. Assume the demand for lumber suddenly rises because of a rapid growth of demand for new housing. Assume no change in supply. Why does the equilibrium price of lumber rise? What would happen if the price did not rise under the demand and supply circumstances described? ... View Full Document

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