1. Chapter 3 Supply and Demand
Q. 1, 3, 5, 7, 9, 11, 13, 15

2. Chapter 3, Problem 1
State whether the following pairs of goods are complement or substitutes. (If you think a pair is ambiguous in this respect, explain why.)
Tennis courts and squash courts
Squash racquets and squash balls
Ice cream and chocolate
Cloth diapers and paper diapers
Substitutes- goods that can be used / consumed interchangeably, i.e. Coca Cola and Pepsi
Complements- goods that have to be used / consumed at the same time, i.e. Computer hardware and software

3. Solution to Problem 1 (1) Tennis courts and squash courts
Substitutes- you cannot play tennis in a squash court and you cannot play squash court in a tennis court. Two kinds of sport venue
Squash racquets and squash balls
Complements- to play squash, you will need both
Ice cream and chocolate
Substitutes for some people who regard them as desert
Complement for some people who want to have chocolate (chips) on top of the ice cream
Cloth diapers and paper diapers
Substitutes- just different materials! We can use them interchangeably

4. Chapter 3, Problem 3
Indicate how you think each of the following would shift demand in the indicated market
Incomes of buyers in the market for Adirondack vacation increase
Buyers in the market for pizza read a study linking hamburger consumption to heart disease
Buyers in the market for CDs learn of an increase in the price of audiocassettes (a substitutes for CDs)
Buyers in the market for CDs learn of an increase in the price of CDs
Demand shifts up (right)- increase in demand at any given level of price
Demand shifts down (left)- decrease in demand at any given level of price

5. Solution to problem 3 (1)
Incomes of buyers in the market for Adirondack vacations increase
The demand curve will shift up (right)
Assume vacations are a normal good. Buyers will increase their consumption in vacations when their incomes increase.
Buyers in the market for pizza read a study linking hamburger consumption to heart disease
Pizza and hamburger are both junk food and can be consumed interchangeably. If a study shows proven connection between hamburger consumption and heart disease, people will consume less pizza for now. People will probably switch to consume pizza going forward.

6. Solution to problem 3 (2)
Buyers in the market for CDs learn of an increase in the price of audiocassettes.
The demand will shift up (right)
CDs and audiocassettes are substitutes . They both can be used to record and play music or soundtrack.
If price of audiocassettes increases, people will probably switch to CDs
Buyers in the market for CDs learn of an increase in the price of CDs
As price of CDs goes up, people will buy less
But the demand curve will not shift- why?
Change in Quantity Demanded versus Change in Demand

7. Solution to problem 3 (3) Change in Quantity Demanded Change in Demand
Endogenous factors affecting the demand
A demand graph consists of price on the Y-axis and quantity on the X-axis. Thus, price and quantity are endogenous factors
Change in an endogenous factor itself (price of CDs) will only cause movement along the demand curve
Change in Demand
Exogenous factors affecting the demand
Factors other then the endogenous factors (price and quantity) are going to shift the demand curve
Price of substitutes, price of complements, increase in wealth (exogenous factors)

8. Chapter 3, Problem 5
What will happen to the equilibrium price and quantity of oranges if the wage paid to orange pickers rises?

9. Solution to problem #5 (1)
Wage paid to orange pickers is actually one of the production costs of orange
If now the production cost increases, suppliers will find it less profitable and so they will begin producing less orange to the market
As a result, the supply of orange will decrease
Is it a change in supply or a change in quantity supplied?
Change in supply
Increase in wage paid is an outside factor affecting the supply curve. It will cause the supply curve shift up (left)

10. Solution to problem #5 (2)
Price of orange (P) S1 S0 P1 P0 D0
Quantity of orange (Q) Q1 Q0
Equilibrium is achieved where a demand curve and a supply curve intersect
Equilibrium price of orange increases and equilibrium quantity of orange decreases when the wage paid to orange pickers increases

11. Chapter 3, Problem 7
What will happen to the equilibrium price and quantity of fish if fish oils are fount to help prevent hear disease?

12. Solution to problem #7 (1)
If fish oil is found to help prevent heart disease, people will probably increase their consumption in fish so that they can be healthier
As a result, the demand for fish will increase
Is it a change in demand or a change of quantity demanded?
Change in demand
Increase in fish consumption is an outside factor affecting the demand curve. It will cause the demand curve shift up (right)

13. Solution to problem #7 (2)
Price of fish (P) S0 P1 P0 D1 D0
Quantity of fish (Q) Q0 Q1
Equilibrium is achieved where a demand curve and a supply curve intersect
Both the equilibrium price and quantity of fish increase when fish is found healthy

14. Chapter 3, Problem 9
Use supply and demand analysis to explain why hotel room rental rates near your campus during parents’ weekend and graduation weekend might differ from rates charged during the rest of the year.

15. Solution to problem #9 (1)
As many parents visit the campus and participate in their children’s activities during parents’ weekend and graduation weekend, there will be a higher demand for hotel rooms near the campus than other periods in the year
The demand for hotel rooms near the campus during the weekends during the special weekends will increase
Is it a change in demand or a change in quantity demanded?
Change in demand
Increase in demand for hotel rooms during the time is an outside factor affecting the demand curve. It will cause the demand curve shift up (right)

16. Solution to problem #9 (2)
Price of hotel rooms (P) S0 P1 P0 D1 D0
Quantity of hotel rooms (Q) Q0 Q1
Equilibrium is achieved where a demand curve and a supply curve intersect
Both the equilibrium price and quantity of hotel rooms increase when it is a special weekend for parents

17. Problem #11, Chapter 3
Suppose the current issue of the New York Times reports an outbreak of mad cow disease in Nebraska, as well as the discovery of a new breed of chicken that gains more weight than existing breeds that consume the same amount of food. How will these developments affect the equilibrium price and quantity of chickens sold in the United States?

18. Solution to problem #11 (1)
Beef and chicken are substitutes
If there is an outbreak of mad cow disease, people will generally switch from consuming beef to consuming chicken
As a result, the demand for chicken will increase
Is it a change in demand or a change in quantity demanded?
Change in demand
Increase in demand for chicken is an outside factor affecting the demand curve. It will cause the demand curve shift up (right)

19. Solution to problem #11 (2)
If there is a discovery of a new breed of chicken that gains more weight than existing breeds that consume the same amount of food, it will be more profitable for chicken suppliers
As a result, the supply of chicken will increase
Is it a change in supply or a change in quantity supplied?
Change in supply
Increase in supply of chicken is an outside factor affecting the supply curve. It will cause the supply curve shift down (right)

20. Solution to problem #11 (3)
Price of chicken (P) S0 S1 P1 P0 D1 D0
Quantity of chicken (Q) Q0 Q1
Equilibrium is achieved where a demand curve and a supply curve intersect
IF THE INCREASE OF DEMAND IS GREATER THAN THE INCREASE IN SUPPLY, both the equilibrium price and quantity of chicken increase

21. Solution to problem #11 (4)
Price of chicken (P) S0 S1 P0 P1 D1 D0
Quantity of chicken (Q) Q0 Q1
Equilibrium is achieved where a demand curve and a supply curve intersect
IF THE INCREASE OF DEMAND IS LESS THAN THE INCREASE IN SUPPLY, the equilibrium price will decrease and the equilibrium quantity will increase

22. Solution to problem #11 (5)
To summarize, the equilibrium quantity of chicken will definitely increase
The equilibrium price of chicken, however, is ambiguous
It depends on the relative change in demand and change in supply

23. Chapter 3, Problem 13
What will happen to the equilibrium price and quantity of apples if apples are discovered to help prevent colds and a fungus kills 10 percent of existing apple trees?

24. Solution to problem #13 (1)
If apples are discovered to help prevent colds, people will probably increase their consumption in apples so that they can be healthier
As a result, the demand for apples will increase
Is it a change in demand or a change in quantity demanded?
Change in demand
Increase in demand for apples is an outside factor affecting the demand curve. It will cause the demand curve shift up (right)

25. Solution to problem #13 (2)
If a fungus kills 10% of existing apple trees, there will be a decrease in supply of apples
As a result, the supply of apples will decrease
Is it a change in supply or a change in quantity supplied?
Change in supply
Decrease in supply for apples is an outside factor affecting the supply curve. It will cause the supply curve shift up (left)

26. Solution to problem #13 (3)
Price of apples (P) S1 S0 P1 P0 D1 D0
Quantity of apples (Q) Q0 Q1
Equilibrium is achieved where a demand curve and a supply curve intersect
IF THE INCREASE OF DEMAND IS GREATER THAN THE DECREASE IN SUPPLY, both the equilibrium price and quantity of apples increase

27. Solution to problem #13 (4)
Price of apples (P) S1 S0 P1 P0 D1 D0
Quantity of apples (Q) Q1 Q0
Equilibrium is achieved where a demand curve and a supply curve intersect
IF THE INCREASE OF DEMAND IS LESS THAN THE DECREASE IN SUPPLY, the equilibrium price will increase and the equilibrium quantity will decrease

28. Solution to problem #13 (5)
To summarize, the equilibrium price of apples will definitely increase
The equilibrium quantity of apples, however, is ambiguous
It depends on the relative change in demand and change in supply

29. Problem #15, Chapter 3
Twenty-five years ago, tofu was available only from small businesses operating in predominantly Asian sections of large cities. Today Tofu has become popular as a high-protein health good and is widely available in supermarkets throughout the United States. At the same time, tofu production has evolved to become factory-based using modern food-processing technologies. Draw a diagram with demand and supply curves depicting the market for tofu 25 years ago and the market for tofu today. Given the information above, what does the demand-supply model predict about changes in the volume of tofu sold in the United States between then and now? What does it predict about changes in the price of tofu?

30. Solution to problem #15 (1)
As tofu has been regarded as a healthy food, people will probably increase their consumption in tofu so that they can be healthier
As a result, the demand for tofu will increase
Is it a change in demand or a change in quantity demanded?
Change in demand
Increase in demand for tofu is an outside factor affecting the demand curve. It will cause the demand curve shift up (right)

31. Solution to problem #15 (2)
If there has been an advancement on the processing technology, it will be more profitable for tofu suppliers
As a result, the supply of tofu will increase
Is it a change in supply or a change in quantity supplied?
Change in supply
Increase in supply of tofu is an outside factor affecting the supply curve. It will cause the supply curve shift down (right)

32. Solution to problem #15 (3)
Price of tofu (P) S0 S1 P1 P0 D1 D0
Quantity of tofu (Q) Q0 Q1
Equilibrium is achieved where a demand curve and a supply curve intersect
IF THE INCREASE OF DEMAND IS GREATER THAN THE INCREASE IN SUPPLY, both the equilibrium price and quantity of tofu increase

33. Solution to problem #15 (4)
Price of tofu (P) S0 S1 P0 P1 D1 D0
Quantity of tofu (Q) Q0 Q1
Equilibrium is achieved where a demand curve and a supply curve intersect
IF THE INCREASE OF DEMAND IS LESS THAN THE INCREASE IN SUPPLY, the equilibrium price will decrease and the equilibrium quantity will increase

34. Solution to problem #15 (5)
To summarize, the equilibrium quantity of tofu will definitely increase
The equilibrium price of tofu, however, is ambiguous
It depends on the relative change in demand and change in supply