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Tutorial Chapter 2: Supply and Demand
Questions for Review
1. Suppose that unus...
Oct 3, 2024
1 Answer
a
Demand Shift: When hot weather increases the demand for ice cream, the demand curve shifts to the right, indicating that at every price level, consumers are willing to buy more ice cream
b
Market-Clearing Price: This increased demand leads to a higher equilibrium price as suppliers respond to the higher quantity demanded, moving the market to a new equilibrium where supply meets the new demand
Answer
The price of ice cream rises due to increased demand from hot weather.
Key Concept
Demand shifts can lead to higher prices in a market.
Explanation
Increased demand results in a new market equilibrium with a higher price.
2a Answer
a
Demand for Butter: An increase in the price of margarine, a substitute for butter, will shift the demand curve for butter to the right, increasing both the price and quantity sold of butter
Answer
The price and quantity of butter will increase due to higher demand from margarine price increase.
Key Concept
Substitute goods affect each other's demand.
Explanation
Higher margarine prices lead to increased demand for butter, raising its price and quantity.
2b Answer
a
Supply of Butter: An increase in the price of milk, an input for butter production, will shift the supply curve for butter to the left, decreasing the quantity supplied and increasing the price
Answer
The price of butter will rise, and the quantity sold will decrease due to higher milk prices.
Key Concept
Input prices affect supply.
Explanation
Increased milk prices reduce butter supply, raising its price and lowering quantity sold.
2c Answer
a
Demand Shift: A decrease in average income levels will shift the demand curve for butter to the left, leading to a decrease in both the price and quantity sold of butter, assuming butter is a normal good
Answer
The price and quantity of butter will decrease due to lower demand from reduced income levels.
Key Concept
Income changes affect demand for normal goods.
Explanation
Lower income reduces demand for butter, leading to lower prices and quantities sold.
3 Answer
a
Price Elasticity of Demand: The price elasticity of demand (E_d) can be calculated using the formula: Ed=%ΔP%ΔQd. Here, %ΔQd=−6% and %ΔP=3%
b
Calculation: Thus, Ed=3%−6%=−2. The absolute value is 2, indicating elastic demand
Answer
The elasticity of demand is -2, indicating elastic demand.
Key Concept
Elasticity measures responsiveness of quantity demanded to price changes.
Explanation
An elasticity of -2 means a 1% increase in price leads to a 2% decrease in quantity demanded.
4 Answer
a
Shift vs. Movement: A shift in the supply curve occurs due to external factors (like input prices), leading to a new supply curve. A movement along the supply curve occurs due to a change in the price of the good itself, affecting the quantity supplied
Answer
A shift in the supply curve is caused by external factors, while movement along the curve is due to price changes.
Key Concept
Supply curve shifts vs. movements.
Explanation
Shifts indicate changes in supply conditions; movements reflect price changes.
5 Answer
a
Long-Run vs. Short-Run Elasticity: In the long run, firms can adjust all inputs and enter or exit the market, making supply more elastic. In the short run, firms face fixed inputs, leading to less elastic supply
Answer
Long-run price elasticity of supply is larger than short-run due to greater flexibility in production.
Key Concept
Long-run supply is more elastic than short-run supply.
Explanation
Firms can adjust resources more in the long run, increasing responsiveness to price changes.
6 Answer
a
Long-Run vs. Short-Run Elasticity: Long-run elasticities differ due to consumer adjustment over time. Durable goods like televisions have lower short-run elasticity as consumers take time to adjust, while non-durable goods like paper towels have higher short-run elasticity
Answer
Long-run elasticities differ as consumers adjust over time; paper towels are more elastic in the short run, while televisions are less elastic.
Key Concept
Elasticity varies between durable and non-durable goods.
Explanation
Consumers adjust demand for durable goods more slowly, leading to lower short-run elasticity.
7a Answer
a
Elasticity vs. Slope: The elasticity of demand is not the same as the slope of the demand curve; elasticity measures responsiveness, while slope measures the rate of change
Answer
False; elasticity is not the same as the slope of the demand curve.
Key Concept
Elasticity and slope are distinct concepts.
Explanation
Elasticity reflects responsiveness to price changes, while slope indicates the curve's steepness.
7b Answer
a
Cross-Price Elasticity: The cross-price elasticity can be positive or negative depending on whether the goods are substitutes or complements; it is not always positive
Answer
False; cross-price elasticity can be negative for complementary goods.
Key Concept
Cross-price elasticity varies with the relationship between goods.
Explanation
Positive for substitutes, negative for complements; not always positive.
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