Practice Questions and Answers from Lesson I-4: Demand and Supply

Practice Questions and Answers from Lesson I-4: Demand and Supply


Practice Questions and Answers from Lesson I-4: Demand and Supply

The following questions practice these skills:
 Describe when demand or supply increases (shifts right) or decreases (shifts left).
 Identify a competitive equilibrium of demand and supply.
 Describe the equilibrium shifts when demand or supply increases or decreases.
 Describe how prices or gross substitutes or gross complements shift demand.
 Describe how input costs or production costs shift supply.
 Aggregate individual demand into market demand.
 Describe how effective price ceilings cause shortages.
 Compute some special demand curves and some special supply curves from verbal descripti

Question: A survey indicated that chocolate is Americans’ favorite ice cream flavor. For
following, indicate the possible effects on demand, supply, or both as well as
equilibrium price and quantity of chocolate ice cream.
a. A severe drought in the Midwest causes dairy farmers to reduce the number of milk-pro
in their herds by a third. These dairy farmers supply cream
that is used to manufacture chocolate ice cream.
b. A new report by the American Medical Association reveals that chocolate does, in fact,
significant health benefits.
c. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream
d. New technology for mixing and freezing ice cream lowers manufacturers’ costs of prod
chocolate ice cream.

Answer to Question:
a. By reducing their herds, dairy farmers reduce the supply of cream, a leftward shift of the
for cream. As a result, the market price of cream rises, raising the cost of producing a unit
ice cream. This results in a leftward shift of the supply curve for chocolate ice cream as ic
producers reduce the quantity of chocolate ice cream supplied at any given price. Ultimate
to a rise in the equilibrium price and a fall in the equilibrium quantity.
b. Consumers will now demand more chocolate ice cream at any given price, represented
rightward shift of the demand curve. As a result, both equilibrium
price and quantity rise.
c. The price of a substitute (vanilla ice cream) has fallen, leading consumers to substitute
chocolate ice cream. The demand for chocolate ice cream decreases, represented by a lef
the demand curve. Both equilibrium price and quantity fall.
d. Because the cost of producing ice cream falls, manufacturers are willing to supply more
chocolate ice cream at any given price. This is represented by a rightward shift of the supp
results in a fall in the equilibrium price and a rise in the equilibrium quantity.

Question: Show in a diagram the effect on the demand curve, the supply curve, the equi
and the equilibrium quantity of each of the following events.
a. The market for newspapers in your town
Case 1: The salaries of journalists go up.
Case 2: There is a big news event in your town, which is reported in the
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,Practice Questions and Answers from Lesson I-4: Demand and Supply


newspapers.
b. The market for St. Louis Rams cotton T-shirts
Case 1: The Rams win the Super Bowl.
Case 2: The price of cotton increases.
c. The market for bagels
Case 1: People realize how fattening bagels are.
Case 2: People have less time to make themselves a cooked breakfast.
a. The market for the Krugman and Wells economics textbook
Case 1: Your professor makes it required reading for all of his or her students.
Case 2: Printing costs for textbooks are lowered by the use of synthetic paper.

Answer to Question:
a. Case 1: Journalists are an input in the production of newspapers; an increase in their s
cause newspaper publishers to reduce the quantity supplied at any given price. This repre
leftward shift of the supply curve from S1 to S2 and results in a rise in the equilibrium price
the equilibrium quantity as the equilibrium changes from E1 to E2.




Case 2: Townspeople will wish to purchase more newspapers at any given price. This rep
rightward shift of the demand curve from D1 to D2 and leads to a rise in both the equilibrium
quantity as the equilibrium changes from E1 to E2.




b. Case 1: Fans will demand more St. Louis Rams memorabilia at any given price. This re
rightward shift of the demand curve from D1 to D2 and leads to a rise in both the equilibrium
quantity as the equilibrium changes from E1 to E2.




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, Practice Questions and Answers from Lesson I-4: Demand and Supply




Case 2: Cotton is an input into T-shirts; an increase in its price will cause T-shirt manufac
reduce the quantity supplied at any given price, representing a leftward shift of the supply c
to S2. This leads to a rise in the equilibrium price and a fall in the equilibrium quantity as th
changes from E1 to E2.




c. Case 1: Consumers will demand fewer bagels at any given price. This represents a lef
the demand curve from D1 to D2 and leads to a fall in both the equilibrium price and quanti
equilibrium changes from E1 to E2.




Case 2: Consumers will demand more bagels (a substitute for cooked breakfasts) at any
This represents a rightward shift of the demand curve from D1 to D2 and leads to a rise in
equilibrium price and quantity as the equilibrium changes from E1 to E2.




d.. Case 1: A greater quantity of textbooks will be demanded at any given price, re

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