GE273.U3.

ProblemSet1-Instructor
Unit 3, Problem Set 1 Problem 4.12 on page 94, 4.15 on page 95, 3.6 on page 122, and
3.14 on page 123
Problem 4.12, page 94 award up to 100 points
a)

True, if supply and demand are both shifting to the right, the equilibrium quantity will
increase in all cases, although the equilibrium price may go up, go down, or stay the
same depending on the size of the two shifts.

b)

False, if supply and demand are both shifting to the right, equilibrium price will
increase if the demand curve shifts more than the supply curve, but will stay the
same if both curves shift by the same amount and will fall if the supply shift is larger.

c)

False, if supply shifts to the right and demand shifts to the left, the equilibrium price
will definitely fall whether the two shifts are the same size or one shift is larger than
the other. The effect on equilibrium quantity depends on the size of the shifts.

Problem 4.15, page 95 award up to 100 points

a)

Scenario a. is shown in the first graphdemand for Pepsi rises because a decrease
in the supply of Coke will raise the price of Coke, which is a substitute for Pepsi.

b)

Scenario b. is shown in the fourth graphdemand for Pepsi falls when incomes fall
because it is a normal good.

c)

Scenario c. is shown in the third graphan improvement in technology shifts the

supply curve to the right.

d)

Scenario d. is shown in the second grapha rise in an inputs price shifts the supply
curve to the left.

GE273.U3.ProblemSet1-Instructor
Problem 3.6, page 122 award up to 100 points
a.

Equilibrium price is equal to $20 and equilibrium quantity is equal to 100

million crates per year. When the market is in equilibrium, kumquat producers earn
revenue equal to $2,000 million or $2 billion per year. The graph is shown below.

b.

If there is a price floor of $30 per crate, consumers are willing and able to
purchase 80 million crates per year. If government does not purchase any surplus
kumquats, producers will earn revenue equal to $2,400 million or $2.4 billion.

c.

If there is a price floor of $30 per crate, producers are willing and able to sell
180 million crates per year. If government is willing to purchase all of the surplus
kumquats, producers will earn revenue equal to $5,400 million or $5.4 billion.

GE273.U3.ProblemSet1-Instructor
Problem 3.14, page 123 award up to 100 points
a.

Equilibrium rent is equal to $800 and equilibrium quantity is equal to 300,000

apartments. The graph is shown below.

In equilibrium, will there be any renters who are unable to find an apartment to rent, assuming
they are willing to pay the equilibrium price? No, quantity demanded is 300,000
In equilibrium, will there be any landlords who are unable to find a renter for their apartment,
assuming they are willing to charge the equilibrium price? No, quantity supplied is 300,000
b)

Suppose the government sets a ceiling on rents of $600 per month. Based on the
table shown on page 123, the quantity demanded is equal to 350,000 apartments and the
quantity supplied is equal to 250,000 apartments when the rent is $600 per month. Will
there be any renters who are unable to find an apartment for $600 per month? Yes, there
are only 250,000 apartments, so 100,000 renters will be unable to locate an apartment.
Discuss whether or not a black market is likely to develop. Yes, renters who cannot find
an apartment will probably offer more than $600. If landlords accept more, they will be
violating the government price regulation.

GE273.U3.ProblemSet1-Instructor
c)

Unit 3, Project Part 1 Report: Entrepreneur Edward

Entrepreneur Edward is planning to open a business selling ice cream. He knows that the
price of ice cream is determined by the forces of supply and demand, but he wants a report
outlining five specific events that can be expected to cause the equilibrium price of ice cream
to increase. This analysis must be consistent with the economic theory of demand and
supply, so do some research on the theory first. Briefly describe each event and indicate
whether it causes price to rise due to a demand shift or due to a supply shift.
Award up to 20 points for each correct event leading to an increase in the equilibrium price of ice
cream. Correct responses must relate to events that shift demand to the right and/or events that
shift supply to the right. Although there is some scope for thinking creatively, the events selected
by students should relate to those listed on page 68 (variables that shift market demand) and/or
page 75 (variables that shift market supply).