Answers to Exercises

1.a. Demand curve shifts in.
b. Demand curve shifts in.
c. Demand curve shifts in.
d. Demand curve shifts in.
e. Demand curve shifts in.

2.a. F. An increase in quantity demanded is represented by a move up the demand curve.
b. F. An increase in quantity supplied is represented by a move up the supply curve.
c. T. The demand curve shifts out, leading to an increase in the price.
d. F. The supply curve shifts out, leading to a decline in the price.

3. Equilibrium price = $5; equilibrium quantity = 300. At a price of $10, the quantity supplied is 975 and the quantity demanded is only 150. There is a surplus of 825. The surplus will cause the supplier to lower the price. Price must decline to $5. At a price of $2 there is a shortage of 280. The producer will raise the price until the shortage no longer exists. Price must increase to $5.

4. The minimum price of $7 means that a surplus of 240 will occur.

5. An effective price ceiling is one that is below equilibrium. Thus, the price would have to be fixed at some level below $5 to be an effective price ceiling. At an effective price ceiling, there will be a shortage. The size of the shortage depends on which price is chosen.

6. The price could change from minute to minute to ensure there are no lift lines. However, such a policy would be too costly for the owners to implement. Perhaps the owners and the skiers would prefer having some lift lines during the most popular times to not knowing what the price of a lift would be from minute to minute.

7. The opportunity cost of using barter is higher than it is with currency.

8. California and Florida citrus are substitutes. Thus, as the quantity of California citrus declines, the supply curve shifts in, and the price of California citrus rises. People shift their purchases from California to Florida citrus. The demand for Florida citrus rises. As a result, the price of Florida citrus rises.

9. People who buy the Polo line are also buying the prestige that comes with it. The prestige rises as the price rises. Thus, in our demand and supply curves we would look at the Polo brand and the J.C. Penney brand as two different goods. The law of demand would state that for the J.C. Penney brand, the higher the price, the lower the quantity demanded, everything else the same. Similarly, the higher the price of the Polo brand, the lower the quantity demanded, everything else the same.

10. No. The price of trees rises because the demand curve shifts out; the demand for trees rises.

11. The two goods are substitutes. Thus, a decrease in the price of artificial trees means a reduction in the demand for cut trees.

12. The restaurants have decided not to use the price of a meal as a way to allocate space in the restaurant to customers. As a result, some means other than price must do the allocation. One means is the length of time of the wait. Another means is to bribe or tip the maître d'.

13. In November 1992 it took 124 yen to purchase one dollar. Suppose that a bushel of oranges is priced at $20 in the United States. That dollar price in terms of yen is 2,480. The exchange rate between the yen and the dollar means that 2,480 converts to $20 (2,480 = $20 x 124/$). Suppose the exchange rate changes to 110 per dollar and nothing else changes. The U.S. price of the oranges remains at $20. In Japan, the yen value of the oranges falls to $20 x 110 = 2,200. Since the oranges are now less expensive in Japan because of the exchange rate change, the quantity of U.S. oranges demanded in Japan rises. This means that the demand for U.S. oranges has increased. The U.S. consumers buy the same amount, because for them the price has not changed. At the same time, the Japanese consumers buy more.

14. The cost of supplying the packaged meat will rise as a result of the new labeling law. This means that the supply curve will shift in (or up). As a result, the price of meat will rise.

15. The desired combination depends on society's preferences. Yes. For example, rent control may result in a shortage of housing.

Answers to Study Guide Homework

1. Demand: as the price of a good increases, the quantity demanded decreases; as the price of a good decreases, the quantity demanded increases.

Supply: as the price of a good increases, the quantity supplied increases; as the price of a good decreases, the quantity supplied decreases.

2. Income, tastes, prices of related goods, consumers' expectations, the number of buyers, exchange rates

3. A "change in demand" means the entire demand relationship has shifted. A "change in quantity demanded" means that, as a result of a change in the price of the good, the quantity that people are willing and able to buy has changed, but the demand relationship is still the same.

4. Prices of resources, technology and productivity, expectations of producers, number of producers, prices of related goods or services

5. a. Graph showing an increase in demand.

b. Tastes

c. Price increased

Answers to Internet Exercise

This exercise will use a familiar product, Coca-Cola, to explain the concepts of demand and supply. By accessing the annual report for the company, students will determine the large international span of this global company. The subsequent questions posed by this exercise will explore the impact of exchange rates on the demand and supply of the company's products.

Coca-Cola manufactures and sells its products in more than 195 countries around the world.

A change in the exchange rate of British pounds to US dollars will effect the world-wide demand for the product. If the exchange rate rises, taking more pounds to purchase a dollar, the demand for Coca-Cola would have declined because the product would be more expensive in Great Britain.

If each country is considered to be a separate market for Coca-Cola, i.e., the product is produced and sold solely in that country, then changes in the exchange rate will have no impact on the individual country's demand for the product.