Microeconomics Spring 2020

Demand, Supply and Market Equilibrium Problem Paper

Demand

1. The Internet was born in 1969. For the next 20 years, mainly scientists in universities and
research laboratories used it. But in the 1990s, the use of Internet service increased
dramatically and the price per hour of Internet service fell.

a. Are there any substitutes for Internet service? If so, provide an example.

b. Are there any complements of Internet service? If so, provide an example.

c. What are the main developments that brought about the dramatic increase in the quantity of
Internet service during the 1990s?

d. Which developments that you identified in part (c) shifted the demand curve for Internet
service rightward?

e. Which developments that you identified in part (c) increased the quantity
demanded of Internet service?

2. Answer and explain your answer for each of the events listed below.

a. What happens to the demand curve for turkeys in November?

b. What happens to the demand curve for fish in March/April?
c. What happens to the demand curve for gasoline if 20 percent of all new cars
are required to be electric powered?
d. What happens to the demand and the demand curve for beef if more people
decide to become vegetarians?
e. The price of a concert ticket increases. What is the effect on the demand
curve for concerts?
f. Because of concerns about terrorism, more firms want to buy metal
detectors. What happens to the demand for metal detectors?
g. More people decide to have a pet dog. What is the effect of this decision on
the demand for dog food?
Supply

3. In the market for SUVs, several events occur one at a time. Explain the influence of each
event on the quantity supplied of SUVs and the supply of SUVs. Illustrate the effects of
each event by either a movement along the supply curve or a shift in the supply curve and
say which event or events illustrates the law of supply in action. The events are:

a. The price of a truck rises.

b. The price of an SUV falls.

c. The price of an SUV is expected to fall next year.

d. An SUV engine defect requires a huge and costly manufacturer's recall to replace the
defective engines.

e. A new robot technology lowers the cost of producing SUVs.

4. Answer and explain your answer for each of the events listed below.

a. What happens to the supply curve of new homes if the wage rate paid to carpenters falls?

b. Companies can produce both cardigan sweaters and pullover sweaters. What happens to the
supply curve of cardigan sweaters if the price of a pullover sweater increases?

Market Equilibrium

5. Suppose a technological advance lowers the cost of producing computer memory chips.
What is the effect of this change on the demand for memory chips, the supply of memory
chips, the equilibrium price of memory chips, and the equilibrium quantity of memory
chips?
6. Suppose people read reports that eating oatmeal helps prevent heart disease. What is the
effect of this change on the equilibrium price of oatmeal and the equilibrium quantity of
oatmeal?

7. What happens to equilibrium price and the equilibrium quantity of each good described in
the situations described below? Illustrate your answers.

a. Sunnyvale is named the most livable city in Sunnyland. At the same time, the
wage rates of homebuilders, electricians, and plumbers in Sunnyvale
increase. Describe what happens to the new home market in Sunnyvale.
b. The price of airline fuel falls by 10 percent. At the same time, people’s
incomes increase and they prefer to fly to their vacation destinations.
Describe what happens to the market for airline travel.
c. Installation costs for small satellite TV dishes fall by 10 percent. At the same
time, network owners increase the cost of programming packages shown via
satellite TV dish systems. Describe what happens in the market for small
satellite TV dishes.

8. During 2004, orange growers in Florida experienced three hurricanes. As a result, the
amount of oranges harvested in Florida was smaller than usual. Orange growers in other
states experienced normal growing conditions. What was the effect of the smaller harvests
in Florida? How do you think the price of oranges and the quantity bought and sold
changed in early 2005? What do you predict happened to the price of frozen orange juice in
early 2005? Use graphs of the orange market and the frozen orange juice market to
illustrate your answers.

9. The USA Today reported that in 2007, more than 25 percent of the corn crop
could be used to produce ethanol, up from 20 percent in 2006 and 6 percent
in 2000. USA Today also reported that farmers are expected to switch to corn
from soybeans, wheat, and even cotton. One farmer, Leon Corzine of
Assumption, Ill., said he plans to devote 90 percent to corn and 10 percent to
soybeans in 2007. Four years ago he planted half corn and half soybeans.
Explain why farmers are switching to corn production and if most farmers
agree with Leon Corzine, how will the price of soybeans change.