Answer exercise 2.

1
1. If the price of chicken has risen but the price of beef has not, the quantity of chicken
demanded will fall as demanders substitute beef for chicken.
2. The law of supply states that, other things equal as the price of a good goes up, the quantity
supplied goes up and as the price of a good goes down, the quantity supplied goes down. Price
and quantity supplied are directly related.
3. Income is a shift factor of demand. An increase in income increases the number of
automobiles demanded at each price. Therefore demand has shifted to the right.
4. If there are more firms demanding fax machines, the demand will increase, not the supply. A
change in price causes a change in quantity supplied, not a change in supply. Lower costs cause
supply to increase. If prices are expected to rise, the current supply will fall as suppliers store
machines for future sale at the higher price.
5. To find the quantity supplied at a price of $1, extend a horizontal line from $1 to the supply
curve and drop a vertical line down to the quantity axis. It will intersect it at 0. This is the
quantity that will be associated with a price of $1 on a supply table.
6. The law of demand states that more of a good will be demanded the lower its price, other
things constant, and less of a good will be demanded the higher its price, other things constant.
That is, there is an inverse relationship between price and quantity demanded. The relationship is
between quantities demanded, not demand.
7. The law of supply states that, other things equal as the price of a good goes up, the quantity
supplied goes up and as the price of a good goes down, the quantity supplied goes down. This is
shown graphically by a curve that slopes upward.
8. A change in price causes a movement along the demand curve. When price falls, the
movement is downward and to the right.
9. Anything that affects demand other than price will result in a shift in demand. In this case
price has not changed. At each price, more of your restaurant services would be demanded;
demand would increase.
10. A change in quantity demanded is caused by a change in price only. NOTE: Remember that a
change in anything besides price that affects demand shifts the demand curve.
11. five examples: income, tastes, expectations, population and price of related goods
13. A decline in income will shift the demand curve to the right.
I.

Draw the axes and the demand curve. Label it D 0.

II.
III.

Draw another demand curve to the left of D 0, label it D1.

At every price level, less is demanded. For example, at price P 0, originally
Q0 is demanded. After the decline in income, Q 1 is demanded at price P0.

NOTE: Including an arrow that goes from D0 to D1 will make it clear that this demonstrates a
shift in demand.

15.

17. A tax will shift the supply curve up by the amount of the tax. At every price level, less is
supplied. For example, at price P0, originally Q0 is supplied. After the tax, Q1 is supplied at price
P0.