Intro to Micro Chapter 2

Chapter 4: Problems and Applications 1, 2, 3 (page 87)

1. Explain each of the following statements using supply-and-demand diagrams.

a. “When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country.”

b. “When the weather turns warm in New England every summer, the price of hotel rooms in Caribbean resorts plummets.”

c. “When a war breaks out in the Middle East, the price of gasoline rises and the price of a used Cadillac falls.”

2. “An increase in the demand for notebooks raises the quantity of notebooks demanded but not the quantity supplied.” Is this statement true or false? Explain.

The statement, in general, is false. As the left hand side Figure shows, the increase in demand for notebooks results in an increased quantity supplied. If the supply curve was a vertical line, then the quantity demanded and the quantity supplied are unchanged, as shown in the right graph.

3. Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price and quantity of minivans.

a. People decide to have more children.

If people decide to have more children, they will want larger vehicles for hauling their kids around, so the demand for minivans will increase. Supply will not be affected. The result is a rise in both the price and the quantity sold.

b. A strike by steelworkers raises steel prices.

If a strike by steelworkers raises steel prices, the cost of producing a minivan rises and the supply of minivans decreases. Demand will not be affected. The result is a rise in the price of minivans and a decline in the quantity sold.

c. Engineers develop new automated machinery for the production of minivans.

The development of new automated machinery for the production of minivans...