Answer 1

Problem 1
1) 5 – P = -1 + P → P = 3, Q = 2
( D ): Q=5–P
2) Supply function BEFORE TAX:
( S ): Q = -1 + P
P=Q+1
P: dollars, Q: millions of units
Supply function AFTER TAX:
1) Find out equilibrium price and equilibrium
P=Q+1+1=Q+2→Q=P–2
quantity.
New equilirium:
2) If tax t = $ 1 / unit, determine new
equilibrium price and equilibrium quantity. 5 – P = P - 2 → P = 3.5 Q = 1.5

Problem 2 Problem 2
Demand for bread: P = 200 – 0.1Q 4) a) Suppose there is a large influx of people into
Supply of bread: P = - 50 + 0.4Q the town and the demand for bread increases such
P: cents, Q: number of loaves per day that bread buyers are now willing to pay 20c more
1) What is the equilibrium quantity traded of for each quantity available. Determine the new D
bread? equation and new equilibrium quantity traded of
2) What is the total revenue of bread suppliers per bread
day?
3) If the government imposes a tax: tax rate t = 10
cents/ loaf. How much do producers,
consumers have to pay tax?

Problem 2
Answer 2
4) b) Suppose that the demand curve is still P =
1) 200 – 0.1 Q = - 50 + 0.4 Q
200 – 0.1 Q. However, a new bread-making
technique becomes available that increases the Q = 500; P = 150
supply of bread. Suppliers are now willing to 2) Total revenue:
accept 50c less for each available quantity. TR = P.Q = $750
Determine the new S equation and new 3) New supply equation AFTER tax:
equilibrium quantity of bread traded
P’ = - 40 + 0.4Q
P’ = 152; Q’ = 480
Consumers pay 2c, producers pay 8c

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4) a)New demand equation: P’’ = 220 – 0.1Q
P’’ = 166 , Q’’ = 540
b)New supply equation: P’’’ = - 100 + 0.4Q
P’’’ = 140, Q’’’ = 600
Answer 3
1) P = 30; Q = 90
2) t = 5
Producers pay 3$/ unit
Consumers pay 2$/ unit
Problem 4
Use the S and D model to explain what happens to
the PE and the QE in the orange juice market in
each of the following cases:
3) There is a sudden inflow of cheap orange juice
imports from South America.
4) A major orange juice producer finds lead
contamination in some containers, and this
finding makes the nightly news.
Problem 3
(D) : P = 60 – 1/3 Q
(S) : P = ½ Q – 15
1) Equilibrium price? Equilibrium quantity?
2) Government imposes tax: $t / unit. New
equilibrium quantity is 84. Determine t?
How much do consumers pay tax? How much
do producers pay tax?
Problem 4
Use the S and D model to explain what happens to
the PE and the QE in the orange juice market in
each of the following cases:
1) The New England Journal of Medicine issues a
widely publicized report that says vitamin C
cures cancer, and orange juice is the best source
of vitamin C.
2) A freeze in Florida destroys half the orange crop.
Problem 5
For each of the following markets, indicate whether
the stated change causes a shift in the S curve, a
shift in the D curve, a movement along the S
curve, and/ or a movement along the D curve.
1) The housing market: Consumers’ incomes
increase.
2) The camera market: The price of film goes up.
3) The sugar market: There is a drought in the sugar
cane fields in Hawaii.
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4) The milk market: The price of milk increases, and
the amount of milk people are willing to buy
declines.
5) The fast food market: The number of fast food
restaurants in the area increases.
6) The video rental market: The number of
consumers in the area decreases.
7) The ice cream market: The price of frozen yogurt
falls.
Problem 7
“An increase in the demand for notebooks raises
the quantity of notebooks demanded but not
the quantity supplied.” Is this statement true or
false? Explain
Problem 9
Ketchup is a complement (as well as a
condiment) for hot dogs. If the price of hot dogs
rises, what happens to the market for ketchup?
For tomatoes? For tomato juice? For orange
juice?
Problem 6
Assuming that either S or D, but not both, change,
indicate the direction and change in either S or D
that must have occurred to produce the
following:
1) A decrease in the price and quantity of apple.
2) A decrease in the P of bananas with an increase
in the Q of bananas.
3) An increase in the P and Q of cars.
4) A decrease in the Q of computers with an
increase in the P.
Problem 8
Suppose that in the year 2015 the number of
births is temporarily high. How does this baby
boom affect the price of babysitting services in
2020 and 2030? (Hint: 5-year-olds need
babysitters, whereas 15-year-olds can be
babysitters.)
Problem 10
Consider the following events: Scientists reveal
that consumption of oranges decreases the risk
of diabetes, and at the same time, farmers use a
new fertilizer that makes orange trees more
productive. Illustrate and explain what effect
these changes have on the equilibrium price and
quantity of oranges
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 Problem 11 Problem 11
Price Qty demanded Qty supplied
Suppose that the price of basketball tickets at
your college is determined by market forces. $4 10,000 tickets 8,000 tickets
Currently, the demand and supply schedules are 8 8,000 8,000
as follows: 12 6,000 8,000
16 4,000 8,000
20 2,000 8,000

Problem 11
a. Draw the demand and supply curves. What is
unusual about this supply curve? Why might this
be true?
b. What are the equilibrium price and quantity
of tickets?