Economics Name: ____________________

Mr. Joseph

Supply and Demand Problem Sets

Problem Set #1
1) For each of the following scenarios, use a supply and demand diagram to illustrate the effect of
the given shock on the equilibrium price and quantity in the specified competitive market.
Explain whether there is a shift in the demand curve, the supply curve, or neither.
a) An unexpected temporary heat wave hits the East Coast. Show the effect in the ice cream
market in New England.
b) The government introduces a tax on ice cream which is paid by producers. What is the effect
in the ice cream market?
c) China and Mexico are major producers of textiles. Workers in Mexico decide to go on
strike. Show the effect on the market for Mexican textiles.
d) Show the effect of the situation described in (c) on the market for Chinese textiles.
e) Suppose the government imposes a price cap on bottled water. Show the effect in the bottled
water market.

Problem Set #2
Multiple Choice
1. The relationship between quantity supplied and price is ______________ and the
relationship between quantity demanded and price is ______________.
a. direct, inverse
b. inverse, direct
c. inverse, inverse
d. direct, direct

2. A decrease in the price of cameras will:

a. cause the demand curve for film to become vertical.
b. shift the demand curve for film to the right
c. shift the demand curve for film to the left.
d. not affect the demand for film.

3. Assume the demand curve for coffee shifts to the right. This might be caused by:
a. a decline in income if coffee is an inferior good.
b. a decline in the price of tea if tea and coffee are substitute goods.
c. a change in consumer tastes which is unfavorable to coffee.
d. an increase in the price of sugar if sugar and coffee are complementary goods.
e. a decrease in population growth.

4. Which of the following statements is correct?

a. If demand increases and supply decreases, equilibrium price will fall.
b. If supply increases and demand decreases, equilibrium price will fall.
c. If demand decreases and supply increases, equilibrium price will rise.
d. If supply declines and demand remains constant, equilibrium price will fall.
5. There will be a surplus of wheat when:
a. price is below the equilibrium level.
b. the supply curve is downward sloping and the demand curve is upward sloping.
c. the demand and supply curves fail to intersect.
d. consumers want to buy less than producers offer for sale.

6. Which of the following is a characteristic of all modern economies?

a. the use of money as a medium of exchange.
b. consumer sovereignty
c. private ownership of property
d. freedom of enterprise

Graphing:
1. Show what happens to the US market for potatoes when the following events occur:

A. Farmers begin to use a genetically modified super-spud that is impervious to the

potato beetle.
B. The price of rice (a substitute) decreases.

Illustrate the effects on the graph and fill in the table with +, - , or ? Also, explain in a
few sentences what has happened.

Demand_____
Supply ______
Price ______
Quantity_____

2. Show what happens to the market for oil when the following events occur:

A. 50 million people decide to drive somewhere for summer vacation.

B. Saudi Arabia decides to reduce production by 2 million barrels a day.

Illustrate the effects on the graph and fill in the table with +, - , or ? Also, explain in a
few sentences what has happened.

Demand_____
Supply ______
Price ______
Quantity_____
Problem Set #3
1) Graphically represent the market for apples in New York State under each of the following
conditions (taken one at a time, not all together). Show what happens to the equilibrium price
and quantity. If more than one possibility exists, show them all.
a) The State mandates that fresh fruit be served in all school lunches.
b) Apple harvesters in the state receive a large wage increase.
c) The U.S. Agriculture Department imposes a minimum price on apples (called a price
support).
d) The U.S. Agriculture Department imposes a minimum price on oranges, which is higher
than the current equilibrium price on oranges. Analyze all the possible price and quantity
outcomes for the market of apples assuming apples are a normal good.

2) Let's model the market for cigarettes. Suppose that the market demand curve for cigarettes (in
billions of packs) is Q = 240-40P and that the market supply curve is Q= -60+60P.
a) Graph the supply and demand curves, to scale, at prices from $1 to $6 where Q is on the x-
axis and P is on the y-axis.
b) What are the equilibrium quantity and price in this market?
c) Suppose the government wants to curb smoking and decides to impose a $4/pack minimum
price on cigarettes. How many packs of cigarettes are traded in the market now? Calculate
any surplus or shortage.
d) Comment on the following statement: "Removal of the cigarette price support will result in
a decrease in price and hence an increase in demand."

3) The embargo imposed on Iraqi and Kuwaiti oil after Iraq's invasion of Kuwait in August, 1990
reduced the supply of oil by 4.3 million barrels a day.

The then President George Bush claimed on September 26 that there was no need for a surge in
oil prices, because additional production by Saudi Arabia and other countries had increased
supply and restored 2/3 of the daily production initially removed by the embargo. He
announced he would investigate.

Was Bush right or wrong? Did he need to investigate? Explain.

Multiple Choice
1) Which of the following will increase the demand for large automobiles?
a. A fall in the price of small automobiles.
b. A fall in the price of gasoline.
c. A fall in the price of large automobiles.
d. A fall in buyers' incomes.
e. A fall in consumer preferences for driving large automobiles.

2) A supply curve will shift with changes in:

a. technology.
b. income.
c. tastes.
d. number of buyers.
e. market price.
f. none of the above.
3) Which of the following would result in a change in the quantity demanded but not a change in
demand?
a. An increase in population.
b. A change in tastes.
c. An increase or decrease in the price of a substitute or complement.
d. A change in income.
e. A shift in the supply curve.

4) If there is both a decrease in demand and a decrease in supply for a good:

a. the quantity sold will necessarily fall.
b. both quantity sold and price will necessarily fall.
c. the price will necessarily rise.
d. the quantity sold will necessarily rise.
e. neither price nor quantity sold will be affected.

5) The market for roller-blades is unregulated and is presently characterized by excess supply. You
accurately predict that the
a. price of roller-blades will increase, the quantity supplied will fall, and the quantity
demanded will rise.
b. price of roller-blades will increase, the quantity supplied will rise, and the quantity
demanded will fall.
c. price of roller-blades will decrease, the quantity supplied will fall, and the quantity
demanded will rise.
d. price of roller-blades will decrease, the quantity supplied will rise, and the quantity
demanded will fall.
e. price of roller-blades will decrease, the supply will fall, and demand will rise.

Problem Set #4:

1) True or False: During the winter of 1997-1998, the northeastern United States experienced
warmer than usual conditions. The price of home heating oil was less than it was during the
previous winter, but people bought less home heating oil. This contradicts the Law of Demand.

2) Restricting imports tends to:

a) Shift the demand curve for the product to the left.
b) Shift the demand curve for the product to the right.
c) Shifts the supply curve left.
d) Increase the quantity supplied of a product.

3) If the US government were to ban imports of Canadian beef for reasons unrelated to health
concerns, what would be the effect on the price of beef in the United States? How would the
typical American’s diet change? What about the typical Canadian’s? What if the ban suggested
to consumers that there might be health risks associated with beef? (Illustrate using well labeled
graphs and a discussion)
Problem Set 1: MIT
Problem Set 2: Delaware
Problem Set 3: Cornell
Problem Set 4: NYU Stern School of Business