84 PART II HOW MARKETS WORK

PROBLEMS AND APPLICATIONS

1. Explain each of the following statements using c. All colleges require morning exercise in
supply-and-demand diagrams. appropriate attire.
a. "When raining season starts in Malaysia, the price of d. New knitting machines are invented.
vegetables rises in supermarkets throughout the 7. Ketchup is a complement (as well as a condiment) for
country." hot dogs. If the price of hot dogs rises, what happens
b. "When the travel restrictions in Malaysia uplifted, in the market for ketchup? For tomatoes? For tomato
the price of hotel rooms in Port Dickson rises." juice? For orange juice?
c. "When a war breaks out in the Middle East, the
price of gasoline rises and the price of a used Volvo 8. The market for pizza has the following demand and
car falls." supply schedules:
2. "An increase in the demand for notebooks raises the Price Quantity Demanded Quantity Supplied
quantity of notebooks demanded but not the quantity
supplied." Is this statement true or false? Explain. $4 135 pizzas 26 pizzas
3. Consider the market for minivans. For each of the 5 104 53
events listed here, identify which of the determinants 6 81 81
of demand or supply are affected. Also indicate 7 68 98
whether demand or supply increases or decreases.
Then draw a diagram to show the effect on the price 8 53 110
and quantity of minivans. 9 39 121
a. People decide to have more children.
b. A strike by steelworkers raises steel prices. a. Graph the demand and supply curves. What are
c. Engineers develop new automated machinery for the equilibrium price and quantity in this market?
the production of minivans. b. If the actual price in this market were above the
d. The price of sports utility vehicles rises. equilibrium price, what would drive the market
e. A stock market crash lowers people's wealth. toward the equilibrium?
c. If the actual price in this market were below the
4. Consider the markets for film streaming services, TV equilibrium price, what would drive the market
screens, and tickets at movie theaters. toward the equilibrium?
a. For each pair, identify whether they are
complements or substitutes: 9. Consider the following events: Scientists reveal that
• Film streaming and TV screens eating oranges decreases the risk of diabetes, and
• Film streaming and movie tickets at the same time, farmers use a new fertilizer that
• TV screens and movie tickets makes orange trees produce more oranges. Illustrate
b. Suppose a technological advance reduces the cost and explain what effect these changes have on the
of manufacturing TV screens. Draw a diagram to equilibrium price and quantity of oranges.
show what happens in the market for TV screens. 10. Because bagels and cream cheese are often eaten
c. Draw two more diagrams to show how the change together, they are complements.
in the market for TV screens affects the markets for a. We observe that both the equilibrium price of
film streaming and movie tickets. cream cheese and the equilibrium quantity of
5. Over the past 40 years, technological advances have bagels have risen. What could be responsible for
reduced the cost of computer chips. How do you think this pattern: a fall in the price of flour or a fall
this has affected the market for computers?For in the price of milk? Illustrate and explain your
computer software? For typewriters? answer.
b. Suppose instead that the equilibrium price of
6. Using supply-and-demand diagrams, show the effects cream cheese has risen but the equilibrium
of the following events on the market for sweatshirts. quantity of bagels has fallen. What could be
a. A hurricane in South Carolina damages the cotton responsible for this pattern: a rise in the price of
crop. flour or a rise in the price of milk? Illustrate and
b. The price of leather jackets falls. explain your answer.

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