Managerial Economics and Strategy 3rd Edition by Jeffrey M Perloff Solution manual
CHAPTER 2
SUPPLY AND DEMAND
SOLUTIONS TO END-OF-CHAPTER QUESTIONS
Demand
1.1 When the price of coffee changes, the change in the quantity demanded reflects a movement along the demand curve. When other variables that affect demand change, the entire demand curve shifts. For example, when income changes, this causes coffee demand to shift.
1.2 = 0.1.
An increase in Y shifts the demand curve to the right, from D1 to D2.
1.3 The relationship between the quantity of coffee ( ) and the price of sugar ( ) is defined by the coefficient on the term in the equation. Since this coefficient is negative (it’s value is −0.3), an increase in the price of sugar ( ) will decrease the quantity of coffee. This is the definition of a complementary good. More specifically, if the price of sugar goes up by $1.00 per pound, then the demand for coffee will fall by 300,000 tons.
1.4 The market demand curve is the sum of the quantity demanded by individual consumers at a given price. Graphically, the market demand curve is the horizontal sum of individual demand curves.
1.5 a. The inverse demand curve for other town residents is p = 200 − 0.5Qr.
At a price of $300, college students demand 100 units of firewood, and other residents demand no firewood. Other residents will demand zero units of firewood if the price is greater than or equal to $200.
The market demand curve is the horizontal sum of individual demand curves, as illustrated below.
s
Supply
2.1 The effect of a change in pf on Q is
= −20pf
= −20(1.10)
= −22 units.
Thus, an increase in the price of fertilizer will shift the avocado supply curve to the left by 22 units at every price (i.e., a parallel shift to the left).
2.2 When the price of avocados changes, the change in the quantity supplied reflects a movement along the supply curve. When costs or other variables that affect supply change, the entire supply curve shifts. For example, the price of fertilizer represents a key factor of avocado production, which affects the cost of avocado production, shifting the avocado supply curve. This is because avocado prices are measured on a graph axis. Other factors that affect supply are not measured by a graph axis.
2.3 Given the supply function,
Q = 58 + 15p–20pf,
The effect of a change in p on Q is
= 15p.
To change quantity by 60, price would need to change by
60 = 15p
p = $4.00.
2.4 The market supply curve is the sum of the quantity supplied by individual producers at a given price. Graphically, the market supply curve is the horizontal sum of individual supply curves.
Market Equilibrium
3.1 The supply curve is upward sloping and intersects the vertical price axis at $6. The demand curve is downward sloping and intersects the vertical price axis at $4. When all market participants are able to buy or sell as much as they want, we say that the market is in equilibrium: a situation in which no participant wants to change its behavior. Graphically, a market equilibrium occurs where supply equals demand. An equilibrium does not occur at a positive quantity because supply does not equal demand at any price.
3.2 The equilibrium price is p = $300, and the equilibrium quantity is Q = 2000.
3.3 Given that ps = $0.20, pc = $5, and Y = $55,000 (note Y is measured in thousands, so the value to use here is 55), the demand for coffee can be rewritten as
Q = 14 − p
and the supply of coffee can be rewritten as
Q = 8.6 + 0.5p.
When all market participants are able to buy or sell as much as they want, we say that the market is in equilibrium: a situation in which no participant wants to change its behavior. Graphically, a market equilibrium occurs where supply equals demand. Thus, the equilibrium price is
D = S
14 − p = 8.6 + 0.5p
5.4 = 1.5p
p = $3.60.
Find the equilibrium quantity by substituting this price into either the supply or demand function. For example, using the supply function, the equilibrium quantity is
Q = 8.6 + 0.5p
Q = 8.6 + 0.5(3.60)
Q = 8.6 + 1.8
Q = 10.4 units.
3.4 If Y = $55,000, ps = 0.20, pc = $5, and p = 4, the quantity demanded is Q = 8.56 − 4 − 0.3(0.2) + 0.1(55) = 10. The quantity supplied is Q = 9.6 + 0.5(4) − 0.2(5) = 10.6. There is an excess supply equal to 10.6 − 10.0 = 0.6 in this case. Because of the excess supply, firms unable to sell at the price of $4 would lower their prices, forcing the market price down. Price would fall until the equilibrium price was reached.
SUPPLY AND DEMAND
SOLUTIONS TO END-OF-CHAPTER QUESTIONS
Demand
1.1 When the price of coffee changes, the change in the quantity demanded reflects a movement along the demand curve. When other variables that affect demand change, the entire demand curve shifts. For example, when income changes, this causes coffee demand to shift.
1.2 = 0.1.
An increase in Y shifts the demand curve to the right, from D1 to D2.
1.3 The relationship between the quantity of coffee ( ) and the price of sugar ( ) is defined by the coefficient on the term in the equation. Since this coefficient is negative (it’s value is −0.3), an increase in the price of sugar ( ) will decrease the quantity of coffee. This is the definition of a complementary good. More specifically, if the price of sugar goes up by $1.00 per pound, then the demand for coffee will fall by 300,000 tons.
1.4 The market demand curve is the sum of the quantity demanded by individual consumers at a given price. Graphically, the market demand curve is the horizontal sum of individual demand curves.
1.5 a. The inverse demand curve for other town residents is p = 200 − 0.5Qr.
At a price of $300, college students demand 100 units of firewood, and other residents demand no firewood. Other residents will demand zero units of firewood if the price is greater than or equal to $200.
The market demand curve is the horizontal sum of individual demand curves, as illustrated below.
s
Supply
2.1 The effect of a change in pf on Q is
= −20pf
= −20(1.10)
= −22 units.
Thus, an increase in the price of fertilizer will shift the avocado supply curve to the left by 22 units at every price (i.e., a parallel shift to the left).
2.2 When the price of avocados changes, the change in the quantity supplied reflects a movement along the supply curve. When costs or other variables that affect supply change, the entire supply curve shifts. For example, the price of fertilizer represents a key factor of avocado production, which affects the cost of avocado production, shifting the avocado supply curve. This is because avocado prices are measured on a graph axis. Other factors that affect supply are not measured by a graph axis.
2.3 Given the supply function,
Q = 58 + 15p–20pf,
The effect of a change in p on Q is
= 15p.
To change quantity by 60, price would need to change by
60 = 15p
p = $4.00.
2.4 The market supply curve is the sum of the quantity supplied by individual producers at a given price. Graphically, the market supply curve is the horizontal sum of individual supply curves.
Market Equilibrium
3.1 The supply curve is upward sloping and intersects the vertical price axis at $6. The demand curve is downward sloping and intersects the vertical price axis at $4. When all market participants are able to buy or sell as much as they want, we say that the market is in equilibrium: a situation in which no participant wants to change its behavior. Graphically, a market equilibrium occurs where supply equals demand. An equilibrium does not occur at a positive quantity because supply does not equal demand at any price.
3.2 The equilibrium price is p = $300, and the equilibrium quantity is Q = 2000.
3.3 Given that ps = $0.20, pc = $5, and Y = $55,000 (note Y is measured in thousands, so the value to use here is 55), the demand for coffee can be rewritten as
Q = 14 − p
and the supply of coffee can be rewritten as
Q = 8.6 + 0.5p.
When all market participants are able to buy or sell as much as they want, we say that the market is in equilibrium: a situation in which no participant wants to change its behavior. Graphically, a market equilibrium occurs where supply equals demand. Thus, the equilibrium price is
D = S
14 − p = 8.6 + 0.5p
5.4 = 1.5p
p = $3.60.
Find the equilibrium quantity by substituting this price into either the supply or demand function. For example, using the supply function, the equilibrium quantity is
Q = 8.6 + 0.5p
Q = 8.6 + 0.5(3.60)
Q = 8.6 + 1.8
Q = 10.4 units.
3.4 If Y = $55,000, ps = 0.20, pc = $5, and p = 4, the quantity demanded is Q = 8.56 − 4 − 0.3(0.2) + 0.1(55) = 10. The quantity supplied is Q = 9.6 + 0.5(4) − 0.2(5) = 10.6. There is an excess supply equal to 10.6 − 10.0 = 0.6 in this case. Because of the excess supply, firms unable to sell at the price of $4 would lower their prices, forcing the market price down. Price would fall until the equilibrium price was reached.