CH4PROBLEMS - CHAPTER 4 PROBLEMS AND SOLUTIONS P4.1 Demand...

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Unformatted text preview: CHAPTER 4 PROBLEMS AND SOLUTIONS P4.1 Demand and Supply Curves. The following relations describe monthly demand and supply conditions in the metropolitan area for recyclable aluminum Q D = 317,500 - 10,000P (Demand) Q S = 2,500 + 7,500P, (Supply) where Q is quantity measured in pounds of scrap aluminum and P is price in cents. Complete the following table: Price (1) Quantity Supplied (2) Quantity Demanded (3) Surplus (+) or Shortage (-) (4) = (2) - (3) 15 16 17 18 19 20 P4.1 SOLUTION Price (1) Quantity Supplied (2) Quantity Demanded (3) Surplus (+) or Shortage (-) (4) = (2) - (3) 15 115,000 167,500 -52,500 16 122,500 157,500 -35,000 17 130,000 147,500 -17,500 18 137,500 137,500 0 19 145,000 127,500 17,500 20 152,500 117,500 35,000 P4.2 Demand and Supply Curves. The following relations describe monthly demand and supply relations for dry cleaning services in the metropolitan area: Q D = 500,000 - 50,000P (Demand) Q S = -100,000 + 100,000P (Supply) where Q is quantity measured by the number of items dry cleaned per month and P is average price in dollars. A. At what average price level would demand equal zero? B. At what average price level would supply equal zero? C. Calculate the equilibrium price/output combination. P4.2 SOLUTION A. From the demand relation, note that demand equals zero when: Q D = 500,000 - 50,000P 0 = 500,000 - 50,000P 50,000P = 500,000 P = $10 B. From the supply relation, note that supply equals zero when: Q S = -100,000 + 100,000P 0 = -100,000 + 100,000P 100,000P = 100,000 P = $1 C. The equilibrium price/output relation is found by setting Q D = Q S and solving for P and Q: Q D = Q S 500,000 - 50,000P = -100,000 + 100,000P 150,000P = 600,000 P = $4 Notice that Q D = Q S = 300,000 at this price because: Q D = 500,000 - 50,000(4) = 300,000 Q S = -100,000 + 100,000(4) = 300,000 P4.3 Demand Analysis. The demand for housing is often described as being highly cyclical and very sensitive to housing prices and interest rates. Given these characteristics, describe the effect of each of the following in terms of whether it would increase or decrease the quantity demanded or the demand for housing. Moreover, when price is expressed as a function of quantity, indicate whether the effect of each of the following is an upward or downward movement along a given demand curve or involves an outward or inward shift in the relevant demand curve for housing. Explain your answers. A. An increase in housing prices B. A fall in interest rates C. A rise in interest rates D. A severe economic recession E. A robust economic expansion P4.3 SOLUTION A. An increase in housing prices will decrease the quantity demanded and involve an upward movement along the housing demand curve....
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CH4PROBLEMS - CHAPTER 4 PROBLEMS AND SOLUTIONS P4.1 Demand...

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