ch02_Solutions - Chapter 2 Supply and Demand Analysis...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 2 Supply and Demand Analysis Solutions to Review Questions 1. Excess demand occurs when price falls below the equilibrium price. In this situation, consumers are demanding a higher quantity than is being made available by suppliers. This creates pressure for the price to increase. As the price increases, quantity demanded will fall as quantity supplied increases returning the market to equilibrium. Excess supply occurs when price is above the equilibrium price. Suppliers have made available more units than consumers are willing to purchase at the high price. This creates pressure for the price to decrease. As the price decreases, the quantity demanded will go up while at the same time the quantity supplied will decrease, returning the market to equilibrium. 2. a) An increase in the price of a substitute, such as tea, will increase demand for coffee, raising the market equilibrium price and quantity. Page 2 - 1 P Q S D D’ Q Q’ P’ P
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
b) This study will reduce demand for caffeine drinks, lowering the market equilibrium price and quantity. c) The frost will reduce supply raising the equilibrium price while lowering the equilibrium quantity. d) Increasing the price of an input for a cup of coffee will reduce supply, increasing market price and reducing market quantity. This will result in the same figure as that for part c). Page 2 - 2 P’ Q’ P P Q Q S D D’ P P Q Q S D S’ P’ Q’
Background image of page 2
3. Any factor increasing demand and leaving the remainder of the market unchanged will increase both market price and quantity sold. If demand were to increase at the same time as supply changed, both market price and quantity sold could increase if the change in demand is large relative to the change in supply. 4. 80 . 0 10 8 % % , - = - = = P Q P Q ε 5. The choke price is the price where 0 = Q . Using the given demand curve we have 50 . 0 $ 50 100 100 50 0 100 50 = = - = - = P P P P Q 6. Speedboats could probably be categorized as a luxury item whereas light bulbs are more likely categorized as a necessity. For the necessity, the change in quantity demanded will be relatively small for any percent change in price. The change in quantity demanded may be quite large, however, for a luxury item. Page 2 - 3 P Q S D D’ Q Q’ P’ P P Q S D D’ Q Q’ P’ P S’
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Since the percent change in quantity demanded is likely higher for the luxury item for any given percent change in price, the elasticity of demand would be less (more negative). 7. Because business travelers receive reimbursement for expenses, they will probably be less sensitive to price changes than the vacation traveler who pays out of her own pocket. This implies the price elasticity for vacationers would be less (more negative) than for business travelers. 8.
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 14

ch02_Solutions - Chapter 2 Supply and Demand Analysis...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online