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1、Chapter 2: The Basics of Supply and DemandCHAPTER 2 THE BASICS OF SUPPLY AND DEMANDQUESTIONS FOR REVIEW1. Suppose that unusually hot weather causes the demand curve for ice cream to shift to the right. Why will the price of ice cream rise to a new market-clearing level?Assume the supply curve is fix
2、ed. The unusually hot weather will cause a rightward shift in the demand curve, creating short-run excess demand at the current price. Consumers will begin to bid against each other for the ice cream, putting upward pressure on the price. The price of ice cream will rise until the quantity demanded
3、and the quantity supplied are equal.Figure 2.13. If a 3-percent increase in the price of corn flakes causes a 6-percent decline in the quantity demanded, what is the elasticity of demand?The elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in th
4、e price. The elasticity of demand for corn flakes is . This is equivalent to saying that a 1% increase in price leads to a 2% decrease in quantity demanded. This is in the elastic region of the demand curve, where the elasticity of demand exceeds -1.0.5. Explain why for many goods, the long-run pric
5、e elasticity of supply is larger than the short-run elasticity.The elasticity of supply is the percentage change in the quantity supplied divided by the percentage change in price. An increase in price induces an increase in the quantity supplied by firms. Some firms in some markets may respond quic
6、kly and cheaply to price changes. However, other firms may be constrained by their production capacity in the short run. The firms with short-run capacity constraints will have a short-run supply elasticity that is less elastic. However, in the long run all firms can increase their scale of producti
7、on and thus have a larger long-run price elasticity.7. Are the following statements true or false? Explain your answer.a.The elasticity of demand is the same as the slope of the demand curve.False. Elasticity of demand is the percentage change in quantity demanded for a given percentage change in th
8、e price of the product. The slope of the demand curve is the change in price for a given change in quantity demanded, measured in units of output. Though similar in definition, the units for each measure are different.b.The cross price elasticity will always be positive.False. The cross price elasti
9、city measures the percentage change in the quantity demanded of one product for a given percentage change in the price of another product. This elasticity will be positive for substitutes (an increase in the price of hot dogs is likely to cause an increase in the quantity demanded of hamburgers) and
10、 negative for complements (an increase in the price of hot dogs is likely to cause a decrease in the quantity demanded of hot dog buns).c.The supply of apartments is more inelastic in the short run than the long run.True. In the short run it is difficult to change the supply of apartments in respons
11、e to a change in price. Increasing the supply requires constructing new apartment buildings, which can take a year or more. Since apartments are a durable good, in the long run a change in price will induce suppliers to create more apartments (if price increases) or delay construction (if price decr
12、eases).9. The city council of a small college town decides to regulate rents in order to reduce student living expenses. Suppose the average annual market-clearing rent for a two-bedroom apartment had been $700 per month, and rents are expected to increase to $900 within a year. The city council lim
13、its rents to their current $700 per month level.a.Draw a supply and demand graph to illustrate what will happen to the rental price of an apartment after the imposition of rent controls.The rental price will stay at the old equilibrium level of $700 per month. The expected increase to $900 per month
14、 may have been caused by an increase in demand. Given this is true, the price of $700 will be below the new equilibrium and there will be a shortage of apartments.b.Do you think this policy will benefit all students? Why or why not.It will benefit those students who get an apartment, though these st
15、udents may also find that the costs of searching for an apartment are higher given the shortage of apartments. Those students who do not get an apartment may face higher costs as a result of having to live outside of the college town. Their rent may be higher and the transportation costs will be hig
16、her.11. Suppose the demand curve for a product is given by Q=10-2P+Ps, where P is the price of the product and Ps is the price of a substitute good. The price of the substitute good is $2.00. a.Suppose P=$1.00. What is the price elasticity of demand? What is the cross-price elasticity of demand?First you need to find the quantity demanded at the price of $1.00. Q=10-2(1)+2=10. Price elasticity of
