1. Do you agree or disagree with each of the following statements?

Briefly explain your answers

and illustrate each with supply and demand curves.
a. The price of a good rises, causing the demand for another good to fall. Therefore, the two
goods are substitutes.
b. A shift in supply causes the price of a good to fall. The shift must have been an increase in
supply.
c. During 2009, incomes fell sharply for many Americans. This change would likely lead to a
decrease in the prices of both normal and inferior goods.
d. Two normal goods cannot be substitutes for each other.
e. If demand increases and supply increases at the same time, price will clearly rise.
f. The price of good A falls. This causes an increase in the price of good B. Therefore, goods A
and B are complements.
2. Illustrate the following with supply and demand curves:
a. With increased access to wireless technology and lighter weight, the demand for laptop
computers has increased substantially. Laptops have also become easier and cheaper to produce
as new technology has come online. Despite the shift of demand, prices have fallen.
b. Cranberry production in Massachusetts totaled 2.37 million barrels in 2008, a 56 percent
increase from the 1.52 million barrels produced in 2007. Demand increased by even more than
supply, pushing 2008 prices to $56.70 per barrel from $49.80 in 2007.
c. During the high-tech boom in the late 1990s, San Jose office space was in very high demand
and rents were very high. With the national recession that began in March 2001, however, the
market for office space in San Jose (Silicon Valley) was hit very hard, with rents per square foot
falling. In 2005, the employment numbers from San Jose were rising slowly and rents began to
rise again. Assume for simplicity that no new office space was built during the period.
d. Before economic reforms were implemented in the countries of Eastern Europe, regulation
held the price of bread substantially below equilibrium. When reforms were implemented, prices
were deregulated and the price of bread rose dramatically. As a result, the quantity of bread
demanded fell and the quantity of bread supplied rose sharply.
e. The steel industry has been lobbying for high taxes on imported steel. Russia, Brazil, and
Japan have been producing and selling steel on world markets at $610 per metric ton, well below
what equilibrium would be in the United States with no imports. If no imported steel was
permitted into the country, the equilibrium price would be $970 per metric ton. Show supply and
demand curves for the United States, assuming no imports; then show what the graph would look
like if U.S. buyers could purchase all the steel that they wanted from world markets at $610 per
metric ton; show the quantity of imported steel
3. . The following sets of statements contain common errors. Identify and explain each error:
a. Demand increases, causing prices to rise. Higher prices cause demand to fall. Therefore, prices
fall back to their original levels.

b. The supply of meat in Russia increases, causing meat prices to fall. Lower prices always mean
that Russian households spend more on meat
4. For each of the following statements, draw a diagram that illustrates the likely effect on the
market for eggs. Indicate in each case the impact on equilibrium price and equilibrium quantity.
a. A surgeon general warns that high-cholesterol foods causes heart attacks.
b. The price of bacon, a complementary product, decreases.
c. An increase in the price of chicken feed occurs.
d. Caesar salads become trendy at dinner parties. (The dressing is made with raw eggs.)
e. A technological innovation reduces egg breakage during packing.
5. Suppose the demand and supply curves for eggs in the United States are given by the
following equations:
Qd =1002 P
Qs=10+ 40 P
where of dozens of eggs Americans would like to buy each year; of dozens of eggs U.S. farms
would like to sell each year; and per dozen of eggs.
a. Fill in the following table:
Price of egg
(per dozen)

Quantity demanded (
Qd

Quantity supplied (

Qs

$ 0.5
$ 1.0
$ 1.5
$ 2.0
$2.5
b. Use the information in the table to find the equilibrium price and quantity.
c. Graph the demand and supply curves and identify the equilibrium price and quantity.

6.

Suppose the market demand for pizza is given by

pizza is given by

Qs=20 P100

Qd =3002 P

and the market supply for

where P = price (per pizza).

a. Graph the supply and demand schedules for pizza using $5 through $15 as the value of P.
b. In equilibrium, how many pizzas would be sold and at
what price?

c. What would happen if suppliers set the price of pizza at $15? Explain the market adjustment
process.
d. Suppose the price of hamburgers, a substitute for pizza, doubles. This leads to a doubling of
the demand for pizza.
(At each price, consumers demand twice as much pizza as before.) Write the equation for the
new market demand for pizza.
e. Find the new equilibrium price and quantity of pizza
7. The following table represents the market for disposable digital cameras. Plot this data on a
supply and demand graph and identify the equilibrium price and quantity. Explain what would
happen if the market price is set at $30, and show this on the graph. Explain what would happen
if the market price is set at $15, and show this on the graph.
Price

Quantity demanded (
Qd

Quantity supplied (

$5
$ 10
$ 15
$ 20
$25
$ 30
$ 35

15
13
11
9
7
5
3

0
3
6
9
12
15
18

Qs

8. Use the following diagram to calculate total consumer surplus at a price of $8 and production
of 6 million meals per day. For the same equilibrium, calculate total producer surplus. Assuming
price remained at $8 but production was cut to 3 million meals per day, calculate producer
surplus and consumer surplus. Calculate the deadweight loss from underproduction

9. Suppose the market demand for burritos is given by Qd = 40 5P and the market supply for
burritos is given by Qs = 10P 20, where P = price (per burrito).
a. Graph the supply and demand schedules for burritos.
b. What is the equilibrium price and equilibrium quantity?
c. Calculate consumer surplus and producer surplus, and identify these on the graph.

10. The following graph represents the market for DVDs.

a. Find the values of consumer surplus and producer surplus when the market is in
equilibrium, and identify these areas on the graph.
b. If underproduction occurs in this market, and only 9 million DVDs are produced, what
happens to the amounts of consumer surplus and producer surplus? What is the value of
the deadweight loss? Identify these areas on the graph.
c. If overproduction occurs in this market, and 27 million DVDs are produced, what
happens to the amounts of consumer surplus and producer surplus? Is there a deadweight
loss with overproduction? If so, what is its value? Identify these areas on the graph..
11. The following graph represents the market for wheat. The equilibrium price is $20 per
bushel and the equilibrium quantity is 14 million bushels.

a. Explain what will happen if the government establishes a price ceiling of $10 per bushel
of wheat in this market? What if the price ceiling was set at $30?
b. Explain what will happen if the government establishes a price floor of $30 per bushel
of wheat in this market. What if the price floor was set at $10?
12. Suppose that a simple society has an economy with only one resource, labor. Labor can
be used to produce only two commoditiesX, a necessity good (food), and Y, a luxury
good (music and merriment). Suppose that the labor force consists of 100 workers. One
laborer can produce either 5 units of necessity per month (by hunting and gathering) or 10
units of luxury per month (by writing songs, playing the guitar,
dancing, and so on).
a. On a graph, draw the economys ppf. Where does the ppf intersect the Y-axis? Where does
it intersect the X-axis? What meaning do those points have?
b. Suppose the economy produced at a point inside the ppf. Give at least two reasons why
this could occur. What could be done to move the economy to a point on the ppf?
c. Suppose you succeeded in lifting your economy to a point on its ppf. What point would
you choose? How might your small society decide the point at which it wanted
to be?
d. Once you have chosen a point on the ppf, you still need to decide how your societys
production will be divided. If you were a dictator, how would you decide? What

would happen if you left product distribution to the free market?

13. Match each diagram in Figure 1 with its description here. Assume that the economy is
producing or attempting to produce at point A and that most members of society like meat
and not fish. Some descriptions apply to more than one diagram, and some diagrams have
more than one description.
a. Inefficient production of meat and fish
b. Productive efficiency
c. An inefficient mix of output
d. Technological advances in the production of meat and fish
e. The law of increasing opportunity cost
f. An impossible combination of meat and fish

14. A nation with fixed quantities of resources is able to produce any of the following
combinations of bread and ovens:
LOAVES OF BREAD (MILLIONS)

OVENS (THOUSANDS)

75
60
45
30
15
0

0
12
22
30
36
40

These figures assume that a certain number of previously produced ovens are available in the
current period for baking bread.
a. Using the data in the table, graph the ppf (with ovens on the vertical axis).
b. Does the principle of increasing opportunity cost hold in this nation? Explain briefly. (Hint:
What happens to the opportunity cost of breadmeasured in number of ovens as bread
production increases?)
c. If this country chooses to produce both ovens and bread, what will happen to the ppf over
time? Why?
Now suppose that a new technology is discovered that allows twice as many loaves of bread to
be baked in each existing oven.
d. Illustrate (on your original graph) the effect of this new technology on the ppf.
e. Suppose that before the new technology is introduced, the nation produces 22 ovens. After the
new technology is introduced, the nation produces 30 ovens. What is the effect of the new
technology on the production of bread? (Give the number of loaves before and after the change.)
15. Explain how each of the following situations would affect a nations production possibilities
curve.
a. A technological innovation allows the nation to more efficiently convert solar energy into
electricity.
b. A prolonged recession increases the number of unemployed workers in the nation.
c. A category 5 hurricane destroys over 40 percent of the nations productive capacity.
d. The quality of education in the nations colleges and universities improves greatly.
e. The nation passes a law requiring all employers to give their employees 16 weeks of paid
vacation each year. Prior to this law, employers were not legally required to give employees any
paid vacation time.
16.Which of the following statements are examples of positive economic analysis? Which are
examples of normative analysis?
a. The inheritance tax should be repealed because it is unfair.
b. Allowing Chile to join NAFTA would cause wine prices in the United States to drop.
c. The first priorities of the new regime in the Democratic Republic of Congo (DRC, formerly
Zaire) should be to rebuild schools and highways and to provide basic health care.
17. Explain whether each of the following is an example of a macroeconomic concern or a
microeconomic concern.
a. Ford Motor Company is contemplating increasing the production of full-size SUVs based on
projected future consumer demand.
b. Congress is debating the option of implementing a valueadded tax as a means to cut the
federal deficit.
c. The Federal Reserve announces it is increasing the discount rate in an attempt to slow the rate
of inflation.

d. The Bureau of Labor Statistics projects a 22.5 percent increase in the number or workers in
the healthcare industry from 2008 to 2018.
18. Harry enjoys tennis but wants a high grade in his economics course. The graphs
show his PPF for these two goods

If Harry becomes a tennis superstar with big earnings from tennis, what happens to
his PPF,
MB curve, and his efficient time allocation?
If Harry suddenly finds high grades in economics easier to attain, what happens to
his PPF, his MB
curve, and his efficient time allocation?
19. Suppose that Yucatans production possibilities are

Food (pounds per month)

Sunscreen ) (gallons per month

300
200
100
0

0
50
100
150
a. Draw a graph of Yucatans PPF and explain how your graph illustrates a
tradeoff.
b. If Yucatan produces 150 pounds of food per month, how much sunscreen
must it produce
if it achieves production efficiency?
c. What is Yucatans opportunity cost of producing 1 pound of food?
d. What is Yucatans opportunity cost of producing 1 gallon of sunscreen?
e. What is the relationship between your answers to parts (c) and (d)?

f. What feature of a PPFillustrates increasing opportunity cost? Explain why

Yucatans opportunity cost does or does not increase.

20. Dairies make low-fat milk from full-cream milk. In the process of making lowfat milk, the dairies produce cream, which is made into ice cream. In the market
for low-fat milk, the following events occur one at a time:
(i) The wage rate of dairy workers rises.
(ii) The price of cream rises.
(iii) The price of low-fat milk rises.
(iv) With the period of low rainfall extending, dairies raise their expected price of
low-fat
milk next year.
(v) With advice from health-care experts, dairy farmers decide to switch from
producing full-cream milk to growing vegetables.
(vi) A new technology lowers the cost of producing ice cream.

21. 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) (5 points) An unexpected temporary heat wave hits the East Coast. Show the
effect in the ice cream market in New England.
(b) (5 points) 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.
(c) (5 points) Show the effect of the situation described in (b) on the market for
Chinese textiles.
22. a. Suppose the government imposes a price cap on bottled water. Show the
effect in the bottled water market.
b. Suppose PA = 1, PT = 5, and there is a price ceiling on apple juice of P = 5.
What is J the excess demand for apple juice as a result? Draw a graph to
illustrate your answer.
23. Illustrate on demand and supply diagrams representing the automobile
market the effects on price and quantity of each of the following events, ceteris
paribus:
a. An increase in average household income.
b. A large increase in the price of public transit.
c. A large increase in the price of gasoline.

d. A decrease in the price of sheet metal.

e. An increase in the wage rate of auto workers
24. The market demand and supply curves for bushels of wheat are given by the
following equations. 1000P = 8000 Q 1000P = 2000 + 2Q where P is the
money price of one bushel of wheat and Q is the quantity of bushels of wheat.
a. Which is the demand curve?
b. If the market for bushels of wheat is a free market, at what price is a bushel
of wheat sold? What is the total expenditure by consumers at this price?
c. Suppose the government imposes an effective price ceiling of $4 on a bushel 2
of wheat. How many bushels are now sold?
d. Is there excess demand or supply at this price ceiling? How much is this
excess supply or demand?