Solution Manual for Microeconomics 6th Edition Chapters 2 20 by Perloff

PART THREE Solutions

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Chapter 2 Supply and Demand Solutions to Textbook Questions 1. Let’s say the U.S. domestic supply curve intersected the vertical axis at a price p’ (above p ). The total supply curve would be the same as the foreign supply curve from a price of zero to p’, both before and after the quota is imposed. Above the price p’, the total supply curve would be the combined foreign and domestic quantity. 2. The statement “Talk is cheap because supply supply exceeds demand” makes sense if we interpret it to mean that the quantity supplied of talk exceeds the quantity demanded at a price of zero. Imagine a downward-sloping demand curve that hits the horizontal, quantity axis to the left of where the upward-sloping supply curve hits the axis. (The correct aphorism is “Talk is cheap until you hire a lawyer.”) 3. a.

We know that the town consumes 9000 gallons per day at no cost, thus there is a point on the demand curve at p = 0, q = 9,000. By the “Law of Demand” the demand curve is weakly downward sloping (except in certain circumstances). Thus (since we assume there is no negative demand), a linear demand curve would be along the horizontal axis, where p = 0.

b. The supply curve is drawn along the horizontal axis from the point where q = 0 until q = 10,000. To the right of where q = 10,000, the supply curve is upward sloping. c. Quantity supplied and demanded reach an equilibrium at any point under q = 10,000, where p = 0. 4. See Figure 2.1. There is no price at which producers are willing to supply chocolate-covered cockroaches that is low enough for consumers to buy. Since the supply and demand curves never intersect at a positive price, there is no equilibrium.

Figure 2.1

© 2012 Pearson Education, Inc. Publishing as Addison-Wesley


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5. The increased outsourcing to India caused the the demand curve to shift to the right, resulting in a higher wage rate, and in a higher number of Indians employed, assuming a typical linear upward-sloping supply curve, as shown in Figure 2.2.

Figure 2.2

6. When Japan discovered the Star Link, foreign demand for U.S. corn fell. fell. In the short run, total U.S. production was essentially unchanged. Because of the ban on exports, corn that would have been sold in Japan and elsewhere was sold in the United States, causing the U.S. supply curve to shift to the right. See Figure 2.3.

Figure 2.3



200

Perloff • Microeconomics, Microeconomics, Sixth Edition

7. If the orange juice juice supply curve is the horizontal sum of the supply curves of U.S. and Brazilian firms, the damage to the U.S. orange crop would shift the total market supply curve to the left. Prices would increase, U.S. firms would sell less, and Brazilian firms would sell more juice at the new higher prices. (See Figure 2.4.)

Figure 2.4

8. Audio-PowerPoint answer by James Dearden is also available (2A Malaysian Farming). Suppose the original equilibrium price and quantity are P1 and Q1, respectively. A drop in production shifts the supply curve up to the left. Suppose the new equilibrium price and quantity are P2 and Q2. It is obvious that we will have Q2 < Q1 and P2> P1. A price control at P1 after the supply curve has shifted creates excess demand, Q1 – Q3, where Q3 and Q1 are the quantities supplied (on the new supply curve) and demanded at price P1. A price ceiling will cause shortages leading to no availability of vegetables, and perhaps long lines or other forms of rationing. It may lead to the creation of a black market, in which the prices as high as P2 could be charged. (See Figure 2.5.)

Figure 2.5

9. In the short run, the demand curve for newspaper advertising will will shift to the left. Ad rates will fall. Over time, the supply of newspaper advertising may decrease if marginally profitable newspapers are driven from the market by the reduced profits that result from lower advertising prices.



Chapter 2

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10. 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. 11. An increase in demand due to higher quality professionals will shift the the demand curve to the the right, further raising prices. The equilibrium quantity could be more, less, or the same as before the licensing restriction, depending on whether the supply or the demand effect is greatest. However, it will be more than the quantity would be with only the licensing change in place. 12. A ban has no effect if foreigners supply nothing at the pre-ban equilibrium price. Thus, if imports occur only at prices above those actually observed, a ban has no practical effect. 13. When the ban on legal imports went into effect, the demand for imports in the United United States fell to zero. Given that the United States represents 60% of the market, it would have caused a dramatic drop in prices. If the drop in prices made caviar harvesting unprofitable and fishermen turned to other activities, it would help the fish population. If a black market developed, price and quantity sold would not drop as much as with a totally effective ban. If exporters simply shipped the caviar to other countries, but at lower prices, it could make problems with the sturgeon population even worse as exporters increase output to maintain income levels. 14. After the quota was reimposed, the equilibrium price would increase and quantity decrease as shown shown in Figure 2.6 below.

Figure 2.6

15. The quota causes the supply curve to become steeper at the price where foreign imports are impacted by the quota, above which foreign imports cannot be increased and the foreign supply curve becomes vertical. Below that price, the supply curve is unaffected. If the demand curve intersects the supply curve at a price below the kink, the equilibrium is unaffected, and the quota does not bind. If the quota is binding (the demand curve intersects supply above the kink), the equilibrium price will be higher and the quantity will be lower than without the the quota. (See Figure 2.6, Question 14.)



202


16. The quota on foreign-trained physicians would would alter the supply curve. In Figure 2.7 below, the unregulated supply curve, S , becomes more inelastic once the quota on foreign doctors is reached. 1 The new supply curve, S , results in higher prices for medical services due to higher salaries for physicians if the demand curve intersects the supply curve above the “kink.” In that case, American physicians are better off with the quota because of the increase in wages. Consumers are harmed because of the increase in price and decrease in quantity. If demand intersects supply below the kink, a quota will have no effect on equilibrium supply and demand.

Figure 2.7

17. An effective ceiling on interest rates causes a shortage of funds. At the price ceiling, ceiling, the quantity s d * supplied ( q ) is less than the equilibrium quantity ( q ) and the quantity demanded ( q ) is more than the equilibrium quantity ( q*). This is why states with usury laws have lower levels of consumer credit s d s available compared to states without these laws ( q < q*), and there is a shortage of funds ( q − q ). (See Figure 2.8.)

Figure 2.8



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18. See Figure 2.9. Although Although the increase in supply (from the export ban) and the decrease in demand (the prohibition of government ministries from purchasing beef) worked to lower the equilibrium 2 price to P , the increase in demand from higher incomes (in the figure, returning demand to its 1 3 original curve D ) worked against these actions, keeping the price of beef high at P . “Voluntary” 2 price controls would create a price ceiling, for example returning to P , resulting in a supply shortage 1 3 at Q and excess demand at Q . This would likely fail or lead to a black market.

Figure 2.9

19. Assume the market is initially initially at both short-run and long-run equilibrium ( P1, Q1). Suppose a rent control (a price ceiling below equilibrium) is enforced. It will immediately create an excess demand (Q D − QS )—an increase in quantity demanded/a decrease in quantity supplied. As the time passes, because of the low rents, landlords convert apartments and houses to other uses and the supply of apartments for rent decreases—a change in supply. With the stock of apartments reduced, the short2 run supply curve shifts up to S . Now, if the rent control is lifted the prices jump to P2 > P1; that is, they will be higher than the original equilibrium. This higher price is a signal to landlords to increase the supply of apartments. (See Figure 2.10.)

Figure 2.10



204


20. The law would create a price ceiling (at 110% of the pre-emergency price). Because the supply curve shifts substantially to the left during the em ergency, the price control will create a shortage: A smaller quantity will be supplied at the ceiling price than will be demanded. 1

2

21. When Japan banned U.S. imports, the supply supply curve of beef in in Japan shifted to the left from S to S in panel (a) of the figure. (The figure shows a parallel shift, for the sake of simplicity.) Presumably, the Japanese demand curve, D, was unaffected as Japanese consumers had no increased risk of consuming tainted meat. Thus, the shift of the supply curve caused the equilibrium to move along the demand curve from e1 to e2. The equilibrium price rose from p1 to p2 and the equilibrium quantity fell from Q1 to Q2. U.S. beef consumers’ fear of mad cow disease caused their demand curve in panel (b) of the 1 2 figure to shift slightly to the left from D to D . In the short run, total U.S. production was essentially unchanged. Because of the ban on exports, beef that would have been sold in Japan and elsewhere 1 2 was sold in the United States, causing the U.S. supply curve to shift to the right from S to S . As a 1 1 2 2 result, the U.S. equilibrium changed from e1 (where S intersects D ) to e2 (where S intersects D ). The U.S. price fell 15% from p1 to p2 = 0.85 p1, while the quantity rose 43% from Q1 to Q2 = 1.43Q1. Note: Depending

on exactly how the U.S. supply and demand curves had shifted, it would have been 2 possible for the U.S. price and quantity to have both fallen. For example, if D had shifted far enough 2 left, it could have intersected S to the left of Q1, so that the equilibrium quantity would have fallen.

22. If the demand curve had had shifted to the the left more than the the supply curve shifted shifted to the right, right, then the equilibrium quantity would have fallen. Under no circumstances could the equilibrium price increase, given the direction of the shifts, because the leftward shift in demand and the rightward shift in supply work together to lower the equilibrium price.



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23. See Figure 2.12. The increase in Australian beef exports to Japan decreases Australia’s domestic supply of beef, which increases the domestic equilibrium price and decreases the domestic equilibrium quantity.

Figure 2.12

24. Both the demand and supply of guns guns have increased; that is, demand shifted up to the right and supply shifted down to the right. However, the results suggest that the increase in demand was greater than the increase in supply and this led to an increase in both equilibrium price and quantity. 25. Audio-PowerPoint answer by James Dearden is also available (2B Brazilian Soybeans). a. World demand decreased (China’s decrease in imports) and world supply supply increased (the increase in supply from the United States’ bumper crop was greater than the decrease in supply from Asian soy rust). The rightward shift of world supply and the leftward shift of world demand both work to lower the world price of soybeans. b. In this case, since supply increased and demand decreased (the shifts were in opposite directions), the price is unambiguously lower. In general, however, we have to know the magnitude of the shifts in addition to their direction to predict accurately the effect on price and quantity. 26. Audio-PowerPoint answer by James Dearden Dearden is also available (2C Beachfront Rental Market). a. The demand for beachfront properties decreases (shifts to the left) because of the recession, which causes incomes to decrease (assuming homes are normal goods). The supply, however, might increase (shift to the right) as more owners of beach homes are willing to rent their homes to supplement their incomes, which declined due to the recession. b. When the demand demand curve shifts to the left and the supply curve shifts to the right, the price will will unambiguously drop, although the quantity exchanged can increase, remain the same, or decrease, depending on the magnitude of the shifts.

Solutions to Textbook Problems 27. The demand curve for pork is Q = 171 − 20 p + 20 pb + 3 pc + 2Y , where quantity is measured in millions of kg per year and income is measured in thousands of dollars per year. Holding other variables constant we find: ∆Q = 2∆Y . That is, a $1000 increase in income ( Y = 1) causes the quantity demanded to increase by 2 million kg per year, and a $100 increase in income ( Y = 0.10) causes the quantity demanded to increase by one-tenth as much, or 0.2 million kg per year.



206


28. The demand curve for pork in Canada is Q = 171 − 20 p + 20 pb = 3 pc + 2Y .

We can write the following, assuming the only change is in the price of beef: ∆Q = 20∆Pb ∆Q = (20)(1.2) = 48.

Therefore, the quantity demanded for pork increases with increased beef prices ( ∆Q / ∆ pb) > 0. This means that the demand for pork shifts to the right. 29. The inverse demand function is p = 14.30 − 0.05Q. We know that ∆ p = −0.05∆Q. If ∆Q = −2 (a red-uction of 2 million kg of pork per year), ∆ p = −0.05 × −2 = 0.1. Thus, a 10 cent per kg increase in price will result in a 2 million kg drop in demand. 30. Q = Q1 + Q2

= (120 −

p) + (60 −

1

2

p) = 180 − 1.5 p.

31. We have: Q1 = 120 − p, =

0,

Q2 = 120 − 2 p, =

0,

for p ≤ 120 for p > 120 for p ≤ 60 for p > 60.

Thus, the demand function is: Q = Q1 + Q2 = 240 − 3 p, = 120 − p, =

0,

for p ≤ 60 for 60 < p ≤ 120 for p > 120.

For graphing purposes we need the inverse demand function: p = 80 − (1/3) Q, = 120 −

Q,

for

60 ≤ Q ≤ 240

for

Q ≤ 60.

See Figure 2.13. Line ad is is the demand function for college students, and Line ed is is the demand function for other town residents. Line abc is the total demand function.

Figure 2.13 © 2012 Pearson Education, Inc. Publishing as Addison-Wesley


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32. The total demand function is Q = Qs + Ql = 15.6 p−

0.563

−0.296

+ 16 p

.

33. Supply: Q = 178 + 40 p − 60 ph. Replacing ph with $3 per kg gives us a supply function Q = 178 + 40 p − 60 × $3 = 40 p − 2. That is, the slope of the supply curve does not change from Equation 2.7, but the whole supply curve shifts to the left. 34. The world supply is: Q = Qa + Qr = (a + c) + (b + e) p p.

35. Demand: Q = 171 − 20 p + 20 pb + 3 pc + 2Y Supply:

Q = 178 + 40 p − 60 ph p* = [−7 + 20 pb + 3 pc + 2Y + + 60 ph]/60 Q* = 178 − 40[−7 + 20 pb + 3 pc + 2Y + + 60 ph]/60

If ph = 1.5, pb = 4, pc = 3.33, and Y = 12.5 286 − 20 p = 88 + 40 p. p* = $3.3 Q* = 220 36. In equilibrium, the quantity demanded, Q = a − bp, equals the quantity supplied, Q = c + ep, so a − bp = c + ep.

By solving this equation for p, we find that the equilibrium price is: p = (a − c)/(b + e).

By substituting this expression for p into either the demand curve or the supply curve, we find that the equilibrium quantity is: Q = (ae + bc)/(b + e).

37. The demand for processed tomatoes is: ln(Q) = 2.6 − 0.2 ln( p) + 0.15 ln( pt ) or

Q D

= 13.46 P −0.2 Pt 0.15 .

When Pt = 110, Q D

= 13.46 P −0.2 (110 )0.15 = 27.24 P −0.2

To find the equilibrium, we equate the right sides of the original logarithmic supply and demand functions and using algebra, we find: 0.75 ln( p) = 2.4 + 0.15 ln( pt ) ln( p) = 3.2 + 0.2 ln( pt ) p = e3.2 * pt 0.2

= 24.53 pt 0.2 .

We then set pt = 110, solve for p = $62.80/ton. © 2012 Pearson Education, Inc. Publishing as Addison-Wesley


208


Or, we can find the supply function: ln(Q) = 0.2 + 0.55 ln( p) or

Q S = 1.22 P 0.55

Equating the right side of the supply and demand functions, we find: 1.22 P 0.55 P 0.75

= 27.24 P −0.2 = 22.33 

P = $62.80

Substituting the price in either the supply or the demand function yields a quantity at equilibrium of about 11.9 million tons. 38. The supply for processed tomatoes is: ln(Q) = 0.2 + 0.55ln( p) or Q

S

= 1.22P

0.55

.

The demand for processed tomatoes is: D

ln(Q) = 2.6 − 0.2 ln( p) + 0.15 ln( pt ) or Q Given our equilibrium condition, Q

S

=

−0.2

= 13.46P

Pt 0.15 .

D

Q and solving for P:

1.22P

0.55

= 13.46P

0.2 − 0.2

P

0.75

= 11.033 Pt 0.15

Pt 0.15

P* = 24.56 Pt 0.2

and Q* = 7.095 Pt 0.11 .

If the price of tomato paste falls by 10%, the new price will be Pt = 99. Therefore: 0.2

P* = 24.56(99) and Q* = 7.095(99)

0.11

or P* = 61.59 and Q* = 11.76.

39. The demand curve for pork in Canada is: Q = 171 − 20 p + 20 pb + 3 pc + 2Y .

Given pb = 4 and pc = 10/3 (data from page 16), we have: Q = 171 − 20 p + 80 + 10 + 2Y = 261 − 20 p + 2Y .

Therefore, the demand is: Q = 261 − 20P + 2Y .

The supply curve for pork in Canada is: Q = 178 + 40 p − 60 ph.



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Given Ph = 1.5, we have: Q = 178 + 40 p − 90 = 88 + 40 p.

Therefore, the supply is Q = 88 + 40 p.

The equilibrium occurs where D

S

Q = Q or 261 − 20 p + 2Y = 88 + 40 p,

solving for the endogenous variables: p* = (173/60) + (1/30) Y and Q* = (610/3) + (4/3)Y .

Therefore, ∆Q = (4/3)∆Y . 40. Because the temperature temperature enters the supply function with a positive constant, increases in temperature temperature will shift the supply curve rightward, increasing the equilibrium quantity at each price. To calculate the change in price at equilibrium, solve the equations simultaneously for price: D

Q

=

S

a − bP and Q = c + eP + ft .

Given our equilibrium condition: D

Q

=

S

Q,

we can solve for P: a − bP

=

c + eP + ft

or )/(b + e) and Q* = (cb + ae + bft )/( )/(b + e). P* = (a − c − ft )/( Therefore: /(b + ∆P* = [− f

e)]∆t and

/(b + ∆Q* = [bf

e)]∆t .

41. At $65 per ton, ton, calculate the firm’s supply curve: ln( Q) = 0.2 + (0.55) ln(65) = 2.5, Q = 12.18 million tons.

The demand for tomatoes is, ln(Q) = 2.6 − (0.2) ln(65) + (0.15) ln(110) = 2.47. Q = exp(2.47) = 11.82 million tons. Therefore, the government buys 12.18 −11.82 = 0.36 million tons.



Solution Manual for Microeconomics 6th Edition Chapters 2 20 by Perloff

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