ECON 500 - Answers

Chapter 4 “Test Yourself” Questions 3 (a) The initial equilibrium price is $250 and the equilibrium quantity is 35 million, as shown in the diagram below. (b) If the quantity demanded falls by 8 million at each price, the new equilibrium price is $210 and quantity is 31 million. The equilibrium quantity falls by only 4 million (less than the shift of 8 million) because the price fell (from $250 to $210) inducing consumers to buy more bicycles (movement along the new demand curve, D1). (c) If the quantity supplied falls by 8 million at each price, the new equilibrium price is $300 and quantity is 31. The equilibrium quantity falls by only 4 million (less than the shift of 8 million) because the increase in price (from $250 to $300) induces producers to sell more bicycles (movement along the new supply curve, S1). (d) If the shifts in demand and supply occur simultaneously, the new equilibrium price is $250 and quantity is 27. 4 (a) The equilibrium price is $65 and the equilibrium quantity is 1,300. (b) If the college places a price ceiling of $55 on textbooks, then the quantity sold falls to 700. There is a shortage of 1,600 textbooks with this price ceiling. (c) The supply curve would shift outward. (6) The rising cost of materials to produce tapes shifts the supply curve inward, increasing the equilibrium price of tapes. This increases the demand for CDs, which are a substitute for tapes. P CDs P Tapes S1 S 1 S0 1 0 0 D1 D D0 Q Q “Discussion Questions” (3) If the government pays dairy farmers to slaughter cows, the supply of dairy cows decreases, shifting the supply of milk inward which reduces the milk surplus. If these slaughtered cows can be eaten, the supply of beef will shift out. P Milk Market P S0 Beef Market S1 S0 Pfloor S1 0 1 1 0 D Q D Q (7) Explanation (b) is more consistent with the data. If the principal change in the market had been an increase in the supply of female workers, then female wages would have fallen. The fact that they increased, while employment also increased, means that demand for female workers must have grown.