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Practice problems on supply and demand with answer key for Economics 101, The Economic Way of Thinking, Montana State University
Typology: Exercises
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Practice Homework Supply & Demand
Economics 101 The Economic Way of Thinking
Suppose the demand curve for MSU sweatshirts is given by:
Price Quantity Demanded per year
a. Graph this demand curve in Figure 1. Label the axes.
Figure 1
0
10
20
30
40
50
60
70
0 400800120016002000240028003200360040004400480052005600
Quantity
Price
D D' S S'
Suppose the supply curve for MSU sweatshirts is given by:
Price Quantity Supplied per year
b. Graph the supply for MSU sweatshirts in Figure 1.
c. At what price does equilibrium occur? $ 40. What quantity is traded at that price? 1600. At this equilibrium, how much in total dollars is spent on MSU sweatshirts? 160040 = $64,*
d. Suppose the price of cotton (a production input for sweatshirts) falls such that at each price, quantity supplied changes by 1200 units. Complete the column of the supply table labeled S'. Graph the new supply curve in Figure 1. Label it S'.
e. What is the new equilibrium price? $30 quantity? 2400. At this equilibrium, how much in total dollars is spent on MSU sweatshirts? 302400 = $72,000.*
f. Starting with the original demand and supply figures, suppose that the price of sweatpants ( a compliment consumption good to sweatshirts) falls. As a result, the quantity of MSU sweatshirts demanded changes by 1200 at each price. Complete column D' of the demand table. Graph the new demand curve in Figure 1. Label it D'.
g. What is the new equilibrium price? $50 quantity? 2000. At this equilibrium, how much in total dollars is spent on MSU sweatshirts? 502000 = $100,000.*
Quantity
Price
D
D'
P
P
Q1 Q
An increase in demand from D to D’ results in an increase in equilibrium price from P1 to P2 and an increase in equilibrium quantity traded from Q1 to Q2. Increases in the demand for milk could come from increases in consumers’ incomes (given that milk is a normal good), from increases in the prices of substitute goods (juice, for example), decreases in the price of compliment goods (Nestlie Quik, for example), as well as from changes in tastes and preferences (Got milk?) or expectations.
Quantity
Price
S
S'
Q1 Q
P
P
An increase in supply from S to S’ results in a decrease in equilibrium price from P1 to P2 and an increase in equilibrium quantity traded from Q1 to Q2. Increases in the supply for milk could come from increases in cost-saving technology used to produce milk (automated milking machines, for example), decreases in the costs of production (decreased transportation costs, for example), increases in the costs to produce alternative goods, as well as from changes in expectations.
Quantity
Price D
D'
P
P
Q2 Q
A decrease in demand from D to D’ results in a decrease in equilibrium price from P1 to P2 and a decrease in equilibrium quantity traded from Q1 to Q2. Decreases in demand could happen for any of the reasons listed in cell (1), but in the opposite direction (a decrease in incomes, for example, etc.)
Quantity
Price
S
S'
Q Q
P
P
A decrease in supply from S to S’ results in an increase in equilibrium price from P1 to P2 and a decrease in equilibrium quantity traded from Q1 to Q2. A decrease in supply could happen for the same reasons listed in cell (2), but in the opposite direction.
Homework 2 - Multiple Choice
