Question 4

The following events occur one at a time in the market for Caribbean cruises.
i.
ii.
iii.
iv.

Caribbean cruises become more popular.

The price of a Caribbean cruise rises.
The price of a cruise to Asia falls.
People expect the price of a Caribbean cruise to fall next season.

a) Explain the effect of each event on the demand for Caribbean cruises.
b) Use a graph to illustrate the effect of each event.
c) Does any event (or events) illustrate the law of demand?

a)
i.

ii.
iii.

iv.

b)

Explain the effect of each event on the demand for Caribbean cruises.
Caribbean cruises becoming more popular reflects a change in
preferences. The demand for cruise increases so the demand curve shifts
rightward.
The rising of price of Caribbean cruise decreases the quantity of cruises
demanded. There is a movement up along the demand curve.
Cruises to Asia are substitutes for cruises to the Caribbean (opposite
direction). The fall in the price of a cruise to Asia decreases the demand
for Caribbean cruises and the demand curve shifts leftward.
People expecting the price of a Caribbean to fall next season, so less
people would buy tickets for this season. The fall in the expected future
price decreases the demand today so the demand curve shifts leftward.
Use a graph to illustrate the effect of each event.
i.

Caribbean cruises
becoming more
popular reflects a
change in
preferences. The
demand increases
and the demand
curve shifts rightward
from D0 to D1.

iii. Cruises to Asia are

substitutes for cruises in the
Caribbean. The fall in the price
of a cruise to Asia decreases
the demand for Caribbean
cruises and the demand curve
shifts leftward from D0 to D2.
iv. People expecting the price of a Caribbean to fall next season
decreases the number of people who want to take a cruise this season.

The fall in the expected future price decreases the demand today so
the demand curve shifts
leftward, from D0 to D2

ii. The price of a cruise rising decreases

the quantity of cruises demanded. There is
a movement up along the demand curve
(illustrated by the arrow). This change
reflects the law of demand.

c) In given cases only the second will illustrate Law of Demand. Only the changes in
price can effect Law of Demand.

Question 5

Table 1 indicates how many thousands of containers of ice cream three different
companies are willing to produce at different prices.
a) Does this information reflect the law of supply? Why or why not?
According to The Law of Supply, other things remaining the same, if price
increase, the quantity supplied increase and if price decrease, the quantity
supplied decreases. The given case illustrates the law of supply because the
price per half gallon of ice cream decreased from 6 to 4, so quantity supplied
of Ben & Jerry`s decreased from 18 to 10, Haagen Daas from 30 to 20 and
Edy`s from 10 to 6.
b) What is the market supply of ice cream?

Market supply is a sum of the supplies of all sellers in the market.

Price(dollars per half
gallon)
6
5
4

Market supply
58
47
36

Question 6
Factories can use their resources to produce either DVDs or CDs. In the market for
DVDs, the following events occur one at a time:
i.
ii.
iii.
iv.
v.

The price of a CD falls.

A new robot technology lowers the cost of producing DVDs.
The price of a DVD falls.
The price of a DVD is expected to rise next year.
The wage rate paid to DVD factory workers increases.

a) Explain the effect of each event on the supply of DVDs.

b) Use a graph to illustrate the effect of each event.
c) Does any event (or events) illustrate the law of supply?

a)
i.
ii.

iii.
iv.
v.

CDs and DVDs are substitute products. When the price of a CD falls, the
supply of DVDs increases and the supply curve of DVDs shifts rightward.
The new robot technology lowers the cost of producing DVDs and makes
production cheaper and easier, so company increases the supply of DVDs.
The supply curve shifts rightward.
If the price of a DVD falls, the quantity of DVDs supplied decreases and there
is a movement down along the curve of DVDs.
If the price of a DVD is expected to rise next year, less people buy DVDs now
and supply decreases now. The supply curve of DVDs shifts leftward.
If the wage rate paid to DVD factory workers increases, the supply of DVDs
decreases because the price of a resource used to produce DVDs has risen.
The supply curve shifts leftward.

b)
i. CDs and DVDs are substitutes in production. When the price of a CD falls, the
supply of DVDs increases and the supply curve of DVDs shifts rightward from S0 to
S1.

ii. The new robot technology lowers the

cost of producing DVDs and increases
the supply of DVDs. The supply curve
shifts rightward from S0 to S1.
iv. If the price of a DVD is
expected to rise next year,
supply decreases now. The
supply curve of DVDs shifts
leftward from S0 to S2.
vi.

If the wage rate paid to DVD

factory workers increases, the
supply of DVDs decreases
because the price of a resource
used to produce DVDs has risen.
The supply curve shifts leftward
from S0 to S2.

iii.

When the price of a DVD

falls from PO to P1, the
quantity of DVDs supplied
decreases and there is a
movement down along the
supply curve of DVDs from
Q0 to Q1.

c) Only the third event illustrates the law of supply, because only there the
changes in price were involved.