EXERCISE 4: Supply and Demand basics
J. Wahl – Micro Principles
1. As a consultant to General Theatres, you are investigating the demand for movies. The
movie industry is perfectly competitive. A GT executive looks at your graph of the
typical individual's monthly demand curve and says, "This point -- 3 movies and $5 per
movie -- must mean that the average person must only be willing to spend $15 to see
three movies." How can you explain that he is wrong about what people are willing to
pay, yet that GT should charge no more than $5 per movie if it wants folks to see at least
3 movies a month?
2. Suppose a change in farming techniques causes the cost of producing yellow onions to
fall. How will this affect the demand curve for
a. Yellow onions?
b. White onions?
c. Hamburgers?
d. GQ magazine?
3. Suppose the economy enjoys great strides in productivity so that per capita real income
rises substantially. How will this affect the demand curve for
a. Porterhouse steaks?
b. Tuna helper?
4. Claire’s demand for ale is represented as q = 2-p, while Aaron’s is represented as q = 10-
2p. If these two are the only consumers of ale, what does the market demand curve look
like?
5. As an advisor to the Ole Store, you show the Store owners a graph of their weekly supply
curve of Ole Rolls. The owners look at the point (1000 rolls, $3 per roll) and exclaim, "I
had no idea that we had to get $3 a roll just to break even on 1000 rolls!" How do you
explain to them that they in fact will probably do better than break even at a price of $3
and sales of 1000 rolls, yet that they wouldn't want to charge less than $3 per roll if they
plan to sell 1000 rolls per week?
6. Suppose that the international sugar cartel falls apart. What will this do to the supply
curve of Ole Rolls?
7. You may have heard about the new Coca-Cola technology that will allow the company to
charge more for a vending-machine soda when the outside temperature is higher. What
are the underlying supply and demand issues that might prompt Coca-Cola to do such a
thing?
