CHAPTER 3 ANSWERS

1.1 A demand schedule is a table showing the relationship between the price of a
product and the
quantity of the product demanded. A demand curve is a curve that shows the relat
ionship between the
price of a product and the quantity of the product demanded.
1.2 Ceteris paribus means “everything else equal”—that is, holding everything el
se constant when
examining the relationship between two variables.
1.3 A “change in demand” refers to a shift of the demand curve, while a “change
in quantity
demanded” refers to a movement along the demand curve.
1.4 The law of demand states that, holding everything else constant, when the pr
ice of a product falls,
the quantity demanded of the product will increase (and when the price of a prod
uct rises, the quantity
demanded of the product will decrease).
The main variables that will cause a demand curve to shift
include:
1) changes in the prices of a related good—substitutes or complements
2) changes in income
3) changes in tastes
4) changes in population or demographics
5) changes in expected future prices.

An example of substitute goods is Coke and Pepsi, and an example of complementar

y goods is hot dogs
and hot dog buns. An example of a normal good may be a name brand product, like
Coca Cola. An
example of an inferior good may be a store branded product, like Sam’s Choice Co
la. An example of
changes in tastes would be organic produce becoming more popular. An example of
changes in
population or demographics would be as the number of people over the age of 65 i
ncreases, demand for
health care services will increase. An example of changes in expected future pri
ces would be if the prices
of hybrid vehicles are expected to come down in the future, then today’s demand
will decrease.

Problems and Applications

1.5 a. substitutes
b. complements
c. complements
d. probably unrelated
1.6 As more energy drinks became available, the prices of these products began t
o fall.
As the price of Red Bull and other energy drinks fall due to increased competiti
on, the substitution effect will cause the quantity demanded to increase, becaus
e these drinks will now be less expensive relative to other goods that are subst
itutes, such as soda and coffee.
The income effect will also cause the quantity of energy drinks demanded to incr
ease, because the decrease in price will increase consumers’ purchasing power.
Based on a fixed amount of income, consumers can now afford to purchase more of
the lower priced
energy drinks. When there is an increase in the quantity demanded of a product,
there is a movement to the right along the product’s demand curve. If advertisin
g increases consumers’ tastes for energy drinks in general, then the demand curv
e for Red Bull will shift to the right, as an increase in consumers’ tastes for
energy drinks will increase the demand for all energy drinks, including Red Bull
.

a. The demand curve for Big Macs will shift to the left from D2 to D1.
b. There will be a movement down the demand curve for Big Macs.
c. The demand curve for Big Macs will shift to the left (assuming that Big Macs
and fries are
complements) from D2 to D1.
d. The demand curve for Big Macs will shift to the right from D1 to D2.
e. The demand curve for Big Mac’s will shift. If the Big Mac is considered a nor
mal good, the
demand curve will shift to the right from D1 to D2. If the Big Mac is considered
an inferior
good, the demand curve will shift to the left from D2 to D1.
1.8 If the article is accurate, candy is an inferior good. Rising unemployment r
esults in lower income
levels. With an inferior good, demand is inversely related to income, so the inc
rease in demand for candy
when income is decreasing makes candy an inferior good. Candy may give people ad
ded (and instant)
satisfaction in the face of a recession, as opposed to healthier foods, such as
fruits and vegetables, that
they may consume during better economic times.
1.9 a. Music downloads, SAT test prep services, text messaging services
b. Diapers, developmental toys, child care services
c. English language courses, prepaid phone cards, foreign-language newspapers
1.10 The data do not indicate that the demand curve for Priuses is upward slopin
g. It is likely that
factors such as income, fuel prices, and the prices of other hybrid vehicles hav
e changed during these
three years. Therefore, the data are likely to represent points from three diffe
rent demand curves.
1.11 The accuracy of the forecast of energy drink sales depends on how much sati
sfaction consumers
receive from consuming the products, the price of substitute products, and the i
ncome levels of the
consumers. The forecasts of energy drink sales are likely to be less accurate th
an those of cola drinks
because energy drinks are relatively new products in the market, so the response
of consumers to them is
more difficult to predict.
3.2
Review Questions
2.1 A supply schedule is a table that shows the relationship between the price o
f a product and the
quantity of the product supplied. A supply curve is a curve that shows the relat
ionship between the price
of a product and the quantity of the product supplied.
2.2 The law of supply states that, holding everything else constant, an increase
in price causes an
increase in the quantity supplied (and a decrease in price causes a decrease in
the quantity supplied). The
main variables that will cause a supply curve to shift include:
1) changes in the prices of inputs used to make
the product
2) technological changes
3) changes in the prices of substitutes in production (other things that
the producers could be making
4) changes in expected future prices
5) changes in the number of firms in the market.
Some examples: If the price of hybrid engines increases, the supply of hybrid ve
hicles will
decrease. If technology with respect to producing iPhones improves, the supply o
f iPhones will increase.
If Sony is producing both plasma and DLP flat screen televisions, and the price
of DLP televisions increases, supply of plasma televisions will decrease. If Toy
ota believes that the price of the Prius hybrid will be increasing in the future
, it will decrease today’s supply and increase it in the future. As more firms e
nter the flat-screen television market, the supply of flat-screen televisions wi
ll increase.
Problems and Applications
2.3 a. Change in quantity supplied: A movement up the supply curve.
b. Change in supply: The supply curve shifts to the right.
c. Change in supply: The supply curve shifts to the left.
2.4 Not necessarily. Firms may have different costs of producing energy drinks a
nd, therefore, supply
different quantities at the same price.
2.5 The increase in supply is likely to be larger the longer the time period bei
ng considered. Over
time, new firms can enter the market and existing firms can better adjust their
mix of products by
increasing the quantity they supply of the good whose price has increased.
3.3
Market Equilibrium: Putting Demand and Supply Together
Review Questions
3.1 Market equilibrium is the situation in which the quantity demanded equals th
e quantity supplied.
3.2 If the current price is above equilibrium, the quantity supplied will be gre
ater than the quantity
demanded, and there will be a surplus. A surplus causes the market price to fall
toward equilibrium. If
the current price is below equilibrium, the quantity demanded will be greater th
an the quantity supplied,
and there will be a shortage. A shortage causes the market price to rise toward
equilibrium.
Problems and Applications
3.3 You should disagree. If there is a shortage, firms will raise the prices the
y charge. The quantity
supplied will increase, the quantity demanded will decrease, and equilibrium wil
l be reached at a higher
price.
3.4 Begin by drawing two demand curves. Label one “Demand for diamonds” and the
other
“Demand for water.” Make sure that the water demand curve is much farther to the
right than the
diamond demand curve. Based on the demand curves you have just drawn, think abou
t how it might be
possible for the market price of water to be lower than the market price for dia
monds. The only way this
can be true is if the supply of water is much greater than the supply of diamond
s. Draw on your graph a
supply curve for water and a supply curve for diamonds that will result in an eq
uilibrium price of
diamonds that is much higher than the equilibrium price of water.
3.5 Begin by drawing two supply curves. Label one “Supply of Mantle autographs”
and the other
“Supply of Ford autographs.” Make sure that the Mantle supply curve is much fart
her to the right than the
Ford supply curve. Based on the supply curves you have just drawn, think about h
ow it might be possible
for the market price of Ford autographs to be lower than the market price for Ma
ntle autographs. The only
way this can be true is if the demand for Mantle autographs is much greater than
the demand for Ford
autographs. Draw on your graph a demand curve for Mantle autographs and a demand
curve for Ford
autographs that will result in an equilibrium price of Mantle autographs that is
higher than the equilibrium
price of Ford autographs.

3.6 No. It only means that those willing to pay the market price received the go
ods. They would have
been happier paying less. And there are likely to be consumers who want the good
but are not willing (or
able) to pay the market price. Similarly on the supply side, sellers would be ha
ppier to sell at a higher
price, and there may be sellers who are only willing to sell at a higher price a
nd, therefore, do not
participate in the market.
3.4 The Effect of Demand and Supply Shifts on Equilibrium
.
Review Questions
4.1 When the demand curve shifts to the right, the equilibrium price and equilib
rium quantity both
rise. The first graph that follows illustrates this case. When the supply curve
shifts to the left, the
equilibrium price rises, but the equilibrium quantity falls. The second graph th
at follows illustrates this
case.

4.2 If the demand curve shifts to the right more than the supply curve does, the
equilibrium price will
rise. Figure 3-11 (a) on page 84 of the text illustrates this case. If the suppl
y curve shifts to the right
more than the demand curve, the equilibrium price will fall. Figure 3-11 (b) on
page 84 of the text
illustrates this case.
Problems and Applications
4.3 a.
b.

c. If the EPA agreed to increase the amount of ethanol in gasoline, this would r
esult in less corn
available for tortilla production. The decrease in the supply of corn used to ma
ke tortillas
would cause the price of tortillas to increase.

4.4 a. Complements

4.5 Draw a demand and supply graph showing the market equilibrium in the winter,
label both the
demand and supply curves “winter,” and label the equilibrium price created by th
ese curves “winter.”
Add to your graph the demand curve for summer, making sure it is to the right of
the winter demand
curve. Look at the graph to see how the equilibrium price in the summer could be
lower than the
equilibrium price you have established for the winter.
The only way for this to happen is for the summer
supply curve to shift to the right by enough to cause the equilibrium price to b
e lower in the summer than
it is in the winter. The demand for watermelon does increase in the summer compa
red with the spring, but
the increase in the supply of watermelon in the summer is even greater, so the e
quilibrium price falls.
4.6 Draw a demand and supply graph showing the market equilibrium in the winter,
label both the
demand and supply curves “winter,” and label the equilibrium price created by th
ese curves “winter.”
Add to your graph the demand curve for summer, making sure it is to the right of
the winter demand
curve. Look at the graph to see how the equilibrium price in the summer could be
lower than the
equilibrium price you have established for the winter. The only way for this to
happen is for the summer
supply curve to shift to the right by enough to cause the equilibrium price to b
e lower in the summer than
it is in the winter. The demand for watermelon does increase in the summer compa
red with the spring, but
the increase in the supply of watermelon in the summer is even greater, so the e
quilibrium price falls.
4.6 Draw a demand and supply graph showing the market equilibrium before Labor D
ay. Label both
the demand and supply curves “Before Labor Day,” and label the equilibrium price
created by these
curves “Before Labor Day.” Add to your graph the demand curve for after Labor Da
y, making sure it is to
the left of the “Before Labor Day” demand curve, as the vacationers have gone ho
me. Add to your graph
the supply curve for after Labor Day, making sure it is to the right of the “Bef
ore Labor Day” curve, since
as conditions are good. Because demand has decreased and supply has increased (o
r perhaps stayed the
same, if the good fishing conditions are a continuation from the summer conditio
ns), the equilibrium price
will definitely go down in the fall.

4.7 Because demand is falling, and the exit of some smaller firms will cause sup
ply to fall, the
equilibrium quantity will definitely decrease. You cannot tell for certain if th
e new equilibrium price will
be higher or lower than the old equilibrium price. If the decrease in demand is
greater than the decrease in
supply, the new equilibrium price will be lower. If the decrease in demand is le
ss than the decrease in
supply (as is shown on the graph), the new equilibrium price will be higher

4.8 The decrease in the number of seats available shifts the supply curve to the
left. If demand for
airline seats decreases by a greater magnitude than the decrease in supply, both
the equilibrium price of
airfares and the equilibrium quantity of occupied airline seats will decrease, a
s is shown in the graph
below.
4.9 The student’s analysis is correct. The decrease in demand will decrease the
equilibrium price and
the equilibrium quantity. The increase in supply will decrease the equilibrium p
rice and increase the
equilibrium quantity. The equilibrium price, therefore, will definitely decrease
, but the equilibrium
quantity could increase or decrease, depending on which change is larger—the dec
rease in demand or the
increase in supply. The graph shows changes in demand and supply of equal magnit
ude, so the
equilibrium quantity does not change.

4.10

D2). Because Lichtenstein is deceased, the supply will not change, and is shown
as vertical because there
is a fixed number of his works in existence. An increase in demand will increase
equilibrium price. The
author lists Sherman as a “hold,” indicating that the value is stable. Any incre
ase in supply (S1 to S2)
would be matched by an equal increase in demand (D1 to D2), increasing the equil
ibrium quantity and not
changing the equilibrium price, so price remains stable. The author lists Dumas
as a sell, indicating a
decrease in demand (D1 to D2). Even if supply does increase, as is shown in the
above graph (S1 to S2), the
decrease in demand will be greater than any increase in supply, decreasing the e
quilibrium price. The
equilibrium quantity could increase, decrease, or remain the same (as is shown i
n the above graph),
depending on the magnitude of any supply change.
4.11 Refrigeration allowed for the storage of perishable products. This removed
some of the supply
during the peak season, shifting the supply curve to the left from S1 to S2 and
driving the price up from P1
to P2. During the off-season, the refrigerated supply could be offered for sale,
shifting right the relatively
small supply from S3 to S4 and causing the price to fall from P3 to P4.

4.12 a. True
b. False (it depends on whether demand shifts more than supply)
c. False (the price will definitely decrease)
4.13 The student’s reasoning is incorrect. He should have said: “Increased produ
ction leads to a lower
price, which increases the quantity demanded. There is a movement along the dema
nd curve, but the
demand curve does not shift.”
4.14 The student’s analysis is incorrect—the shift from D1 to D2 will not happen
. There will be a
movement along the demand curve, D1, due to the price change, but the demand cur
ve will not shift.
4.15 a. Scenario a. is shown in the first graph—demand 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 graph—demand for Pepsi falls when incomes
fall because
it is a normal good.
c. Scenario c. is shown in the third graph—an improvement in technology shifts t
he supply
curve to the right.
d. Scenario d. is shown in the second graph—a rise in an input’s price shifts th
e supply curve to
the left.
4.16 The shift to the left of the U.S. supply curve from SUS1 to SUS2 increases
the price from P1 to P2.
In the non-U.S. market, the demand rises from D1 to D2 because the price of a su
bstitute (Americangrown
cotton) had risen. This causes the movement along the non-U.S. supply curve show
n by the arrow.
(The prices of both types of cotton probably rose by about the same amount, if t
hey were close
substitutes.)

4.17
The rising costs will cause the supply curve to shift to the left, from S1 to S2
, while the
improvement in quality will cause the demand curve to shift to the right from D1
to D2. Because we don’t
know if demand shifts to the right more than supply shifts to the left, we don’t
know if the equilibrium
quantity purchased will increase or decrease. If the shift in the supply curve i
s greater, as shown in the
figure, the equilibrium quantity will fall. We do know that the equilibrium pric
e of childcare will rise as a
result of the regulation.

4.18
The graph with the vertical demand curve is more likely to represent the market
for the lifesaving
drug. If the price of this good rises, patients are unlikely to reduce the quant
ity they demand, but if
the price of the BMW rises, households will reduce the quantity they demand as t
hey switch to buying
other luxury cars.