Solutions to end of chapter 4 problems (3, 6, 7, 9, 13)

3. Each one of these problems should start out with a correctly labeled supply and demand graph with appropriate
labeling (see page 75). The event in each letter will shift either the supply curve or the demand curve. Use a
different supply and demand graph for each of the following.
a. Demand increases (the demand curve shifts to the right) since tastes have become more favorable for minivans (I
bought one on Saturday). Label the new equilibrium. Price increases and quantity traded increases.
b. Supply decreases (shifts to the left) since costs of production increased. Label. Price increases and quantity
traded decreases.
c. Supply increases since technology is better. Label. Price down, Q up.
d. Demand increases since the price of a substitute increased. Label. Price up, Q up.
e. Demand decreases since wealth (like income) decreases and minivans are undoubtedly a normal good. Label.
Price down, Q down.
6. Anything other than price shifts supply (supply changes) while a change in price causes a movement along the
supply curve (quantity supply changes). A is the shift, B is the movement.
7. Each one of these problems should start out with a correctly labeled supply and demand graph with appropriate
labeling (see page 75). The event in each letter will shift either the supply curve or the demand curve. Use a
different supply and demand graph for each of the following.
a. Supply decreases since the cost of production will increase (it will cost more to get cotton). Price up, Q down.
b. Demand decreases since the cost of a substitute decreases. Price down, Q down.
c. Demand increases since the number of consumers increases. Price up, Q up.
d. Supply increases since technology improves. Price down, Q up.
9. Use supply and demand graphs to show that
(i) If the price of hot dogs increases, the demand for ketchup will fall. Price down, Q down. (When the book asks
what happens to the market, it means what happens to equilibrium quantity and price.)
(ii) In the market for tomatoes, demand would fall since number of consumers decreases (Hunts doesnt need as
many tomatoes.) Price down, Q down.
(iii) In the market for tomato juice, supply increases since the cost of production decreases (tomatoes are cheaper in
(ii)). Price down, Q up.
(iv) In the market for orange juice, demand falls since the price of tomato juice decreased. Price down, Q down.
So, an increase in hot dog prices decreases the price of orange juice.
13. If Qd =1600 300P and Qs = 1400 + 700P, the demand and supply curves are correctly downward and upward
sloping, respectively. For an equilibrium to exist, a price must be found where Qd = Qs. Thus, 1600 300P = 1400
+ 700P for an equilibrium to exist. Solving this expression for P, we find that 1000P = 200. Dividing both sides by
1000, the equilibrium price must be P = 200/1000 = 0.2. Since equilibrium price must be 0.2, we can plug this price
into either the demand or supply equations to determine equilibrium quantity traded (they will be equal). From the
demand equation: Qd = 1600 300(0.2) = 1600 60 = 1540. From the supply equation: Qs = 1400 + 700(0.2) =
1400 + 140 = 1540.