Managerial Economics and Strategy 3rd Edition by Jeffrey M Perloff Solution manual
Shocks to the Equilibrium
4.1 a. The new equilibrium with the horizontal supply curve is where the new demand curve intersects the horizontal supply curve. The new equilibrium price is unchanged. See figure.
The new equilibrium with the vertical supply curve is where the new demand curve intersects the vertical supply curve. The new equilibrium price is higher. See figure.
The new equilibrium with the upward-sloping supply curve is where the new demand curve intersects the upward-sloping supply curve. The new equilibrium price is higher. See figure.
a. Health benefits from drinking coffee shift the demand curve for coffee to the right because more coffee is now demanded at each price. The new market equilibrium is where the original supply curve intersects the new coffee demand curve, at a higher price and larger quantity.
An increase in the usefulness of cocoa will increase demand for cocoa. This will drive up the equilibrium price of cocoa. Since cocoa and coffee are likely substitutes, this will increase the demand for coffee. The new market equilibrium is where the original supply curve intersects the new coffee demand curve, at a higher price and higher quantity.
A recession shifts the demand curve for coffee to the left because less coffee is now demanded at each price. The new market equilibrium is where the original supply curve intersects the new coffee demand curve, at a lower price and lower quantity.
New technologies increasing yields shift the supply curve for coffee to the right because more coffee is now supplied at each price. The new market equilibrium is where the original demand curve intersects the new avocado supply curve, at a lower price and higher quantity.
4.3 Outsourcing shifts the labor demand curve to the right because more Indian workers are demanded at each wage. The new market equilibrium is where the original supply curve intersects the new labor demand curve.
4.4 Given that pt = $0.80, the demand for avocados can be rewritten as
Q = 160 − 40p
and the supply of avocados can be rewritten as
Q = 50 + 15p.
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
160 − 40p = 50 + 15p
110 = 55p
p = $2.00.
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 = 50 + 15p
Q = 50 + 15(2.00)
Q = 50 + 30
Q = 80 units.
When the price of tomatoes increases to $1.35, the demand curve for avocados shifts out to
Q = 171 − 40p
The supply of avocados is unchanged. The new equilibrium is found where
D = S
171 − 40p = 50 + 15p
121 = 55p
p = $2.20.
The equilibrium quantity is found as before
Q = 50 + 15p
Q = 50 + 15(2.20)
Q = 50 + 33
Q = 83 units.
4.5 A leftward shift in the labor supply curve will drive up wages and reduce employment. The size of these effects will depend on the relative slopes of the supply and demand curves for labor.
4.6 The damage reduces the supply of oranges, increasing the equilibrium price and decreasing the equilibrium quantity of orange juice.
The demand for grapefruit juice increases as the price of orange juice increases because grapefruit juice is a substitute. As the demand for grapefruit juice increases, the equilibrium price and quantity of grapefruit juice increase.
4.7 The increased use of corn for producing ethanol will shift the demand curve for corn to the right. This increases the price of corn overall, reducing the consumption of corn as food.
4.8 Suppose supply is initially S1, but it decreases by a small amount to S2 after the BP oil spill. 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. The original market equilibrium is where the original demand curve intersects the original supply curve (e1). The new market equilibrium is where the original demand curve intersects the new supply curve (e2). When the supply curve shifts by a relatively small amount, the change in the equilibrium price is likely to be small.
4.9 Concerns about botulism caused the demand curve for baby formula to shift in. (A lower quantity was demanded at any given price.) This demand curve shift would put downward pressure on price and quantity. The removal of production permits caused the supply curve to shift in. (A lower quantity was supplied at any given price.) This supply curve shift would put upward pressure on price and downward pressure on quantity. Overall, the price could rise or fall depending on the relative size of the demand curve and supply curve shifts. However, quantity would have to fall.