330896403-Solution-Manual-for-Microeconomics-5th-Edition-by-David-Besanko.pdf

Besanko & Braeutigam – Microeconomics, 5th edition, International Student Version Solutions ManualChapter 2 Supply and Demand Analysis Solutions to Problems 2.1 Explain why a situation of excess demand will result in an increase in the market price. Why will a situation of excess supply result in a decrease in the market price? Excess demand occurs when price falls below the equilibrium price. In this situation, consumers are demanding a higher quantity than is being made available by suppliers. This creates pressure for the price to increase – sellers can ask for higher prices and still find buyers, and buyers offer higher prices to secure the units they want. As the price increases, quantity demanded will fall as quantity supplied increases returning the market to equilibrium. Excess supply occurs when price is above the equilibrium price. Suppliers have made available more units than consumers are willing to purchase at the high price. This creates pressure for the price to decrease – buyers can get away with paying less because sellers are happy to find a buyer at all, and sellers are willing to sell for less wanting to make sure they find a buyer. As the price decreases, the quantity demanded will go up while at the same time the quantity supplied will decrease, returning the market to equilibrium. 2.2 Suppose we observe that the price of soybeans goes up, while the quantity of soybeans sold goes up as well. Use supply and demand curves to illustrate two possible explanations for this pattern of price and quantity changes. Any factor increasing demand and leaving the remainder of the market unchanged will increase both market price and quantity sold. If demand were to increase at the same time as supply changed, both market price and quantity sold could increase if the change in demand is large relative to the change in supply (in either direction). FOR MORE OF THIS COURSE AND ANY OTHER COURSES, TEST BANKS, FINAL EXAMS, AND SOLUTION MANUALS CONTACT US AT [email protected] Copyright © 2015 John Wiley & Sons, Inc. Chapter 2 - 1 implying a relatively high percent change in quantity demanded for the product.2 . 5th edition. substitutes are not as easily found and the percent change in quantity Copyright © 2015 John Wiley & Sons. International Student Version Solutions Manual 2. such as Dannon. if prices for the entire product category change. within a product category changes (say it increases) then it is easy for a consumer to switch to another brand. Explain why the price elasticity of demand for an entire product category (such as yogurt) is likely to be less negative than the price elasticity of demand for a typical brand (such as Dannon) within that product category. On the other hand. Chapter 2 .Besanko & Braeutigam – Microeconomics.3. If the prices for a particular product. Inc. 5th edition. The demand and supply curves for coffee are given by Qd = 500 − 4P and Qs = -100 + 2P. the beer quantity demanded falls for all levels of price (demand shifts left). International Student Version Solutions Manual demanded for the category will be relatively lower. b) When income rises.1I.Besanko & Braeutigam – Microeconomics. c) Now: Qd = 700 − 2P − 100 + 0. and I is average consumer income.600 – 2P  P = 800 – 0. The demand for beer in Japan is given by the following equation: Qd = 700 − 2P − PN + 0. where P is the price of cranberries expressed in euros per barrel and quantity is in thousands of barrels per year. a) When the price of nuts goes up. Chapter 2 . a) What happens to the demand for beer when the price of nuts goes up? Are beer and nuts demand substitutes or demand complements? b) What happens to the demand for beer when average consumer income rises? c) Graph the demand curve for beer when PN = 100 and I = 10. 2. a) Plot the supply and demand curves on a graph and show where the equilibrium occurs. This implies the elasticity for the entire product category will be higher (less negative) than the elasticity for a single product. determine the market equilibrium price and quantity of cranberries. b) Using algebra.5. quantity demanded increases for all levels of price (demand shifts rightward).4.5 Qd P 800 Q 1600 2.000 = 1. a) Copyright © 2015 John Wiley & Sons. where P is the price of beer. Inc.1*10. 000.3 . PN is the price of nuts. Beer and nuts are demand complements. 55 2. International Student Version Solutions Manual d) 500  4 P  100  2 P 600  6 P 100  P Plugging P  100 back into either the supply or demand equation yields Q  100 .55 2. P denotes the price of one bagel in dollars. Chapter 2 .45 0.176 –0.Besanko & Braeutigam – Microeconomics.P b) At what price is demand inelastic? c) At what price is demand elastic? P 0.035 –0. In this equation. P Q d 300  100  P P  3 This demand curve is linear. The inverse demand function is P = 3 – 1/100 Qd P $3 300 Q d Observe that for price $1.50 0.P   100   .50 d Q εQ. 2.10 0.2 –0.50 the elasticity of demand is equal to Copyright © 2015 John Wiley & Sons.6.50 d Q 290 255 250 245 50 εQ. a) Fill in the following table: P 0.4 .10 0.50 0.P –0. Suppose that demand for bagels in the local store is given by equation Qd = 300 - 100P.225 –5 We can find elasticities of demand using the following formula Q d P P P  Q.45 0. Inc. 5th edition. while decreasing the quantity of corn sold by producers. cherry prices have risen. 5th edition.8.5  Q . but in such a way that the overall effect is to increase the equilibrium price and decrease the equilibrium quantity. 2. while the quantity of cherries purchased has also risen. This would not contradict what was learned regarding downward sloping demand curves.50. the quantity of corn sold by producers decreased. Inc. increasing both equilibrium price and quantity. This is shown in the figure below. You have decided to study the market for fresh picked cherries.5  3 For all prices below $1. 2. This would have the effect of increasing the equilibrium price of corn. These cases are also shown in the figure below. Another possibility is that. Chapter 2 . and the demand curves for could have also shifted. You learn that over the last 10 years. Suppose that.P   1 . the price of corn increased. Copyright © 2015 John Wiley & Sons.7.Besanko & Braeutigam – Microeconomics. This seems puzzling because you learned in microeconomics that an increase in price usually decreases the quantity demanded. the supply curve for corn could have shifted leftward. over a period of six months. alternatively. Yet. What might explain this seemingly strange pattern of prices and consumption levels? This could occur as a result of the demand curve shifting to the right. International Student Version Solutions Manual 1. farmers may have experienced something that shifted the supply curve for corn leftward (such as a flooding or a drought). the demand is inelastic. 1. For example. the demand is elastic.5 . why not? This does not contradict the law of supply.50. while for all prices above $1. Does this contradict the law of supply? If not. demand curve also shifts leftward Price (dollars per bushel) S2 S1 D2 D1 Quantity (bushels per year) Supply curve shifts leftward. there is an inverse relationship between price and quantity demanded. i. Explain why a good with a positive price elasticity of demand must violate the law of demand.9. Chapter 2 . demand curve shifts rightward 2. 5th edition. that an increase in price decreases quantity and vice versa. it must be that an increase in the price Copyright © 2015 John Wiley & Sons. International Student Version Solutions Manual Price (dollars per bushel) S2 S1 D2 D1 Quantity (bushels per year) Supply curve shifts leftward.Besanko & Braeutigam – Microeconomics. The law of demand states that. Inc.e.6 . If a good has a positive price elasticity of demand. holding other factors fixed. Therefore. calculate and illustrate the effect on the equilibrium in the aluminum market. Chapter 2 . suppose that the U. In both the demand and supply functions.50P + 10I. raising the equilibrium price and increasing the equilibrium quantity. a) Sketch a graph of demand and supply curves that shows the effect of an increase in rainfall on the equilibrium price and quantity of aluminum. Average income is an important determinant of the demand for automobiles and other products that use aluminium. and hence is a determinant of the demand for aluminium itself. quantity is measured in millions of kilograms per year. supply of aluminium (when P ≥ 8) is given by the equation Qs = -400 + 50P. Further.7 . b) Copyright © 2015 John Wiley & Sons. If I falls to 5.S.Besanko & Braeutigam – Microeconomics. such a good violates the law of demand.10. b) Calculate and illustrate the market equilibrium price of aluminum when I = 10. 2. a) An increase in income will increase demand. 5th edition. Suppose that the demand for aluminium in the United States is given by the equation Qd = 500 . International Student Version Solutions Manual of that good leads to an increase in the quantity demanded. where P is the price of aluminium expressed in dollars per kilogram and I is the average income per person in the United States (in thousands of dollars per year). Inc. International Student Version Solutions Manual When I = 10 we have QD = 500 . Over that range of prices. At this price.11. How much steel will be demanded in 2011? What is the price elasticity of demand. More generally. and PA = 100. where P is the price and Q is the number of units of ice cream that she buys. reducing both the equilibrium price and quantity. From equation (2.8 . Y = 40.50P + 100 = Qs = -400 + 50P at equilibrium. As income drops. or that her demand for ice cream is quite elastic (Q. it is because demand is elastic over that price range. Gina usually pays a price between $5 and $7 per gallon of ice cream. At this price. When income falls to 5 we have QD = 500 .50P + 50 = Qs = -400 + 50P or 950 = 100P or P* = 9. given market conditions in 2011? We are given that Y = 40. her monthly total expenditure on ice cream increases as the price decreases. using either the supply or demand equation we have Q* = 100. This supports the algebraic solution. Ps is the market price of steel. In 2011. and PA = 100.2(100) or QS = 140 – 2PS.5.Besanko & Braeutigam – Microeconomics. Suppose that the quantity of steel demanded in France is given by Q s = 100 – 2Ps + 0. recall that when price and total revenue (P*Q) move in opposite directions. 5th edition. and PA is the market price of aluminum.12. This is the equation for the demand curve for steel in France. When the price of steel is 10. using either the supply or demand equation. or 1000 _ 100P or P* = 10. we have Q* = 75. This is equivalent to saying that demand is very sensitive to price changes.5(40) + 0. Chapter 2 .4) in the text. Ps = 10.2PA. 2. Inc. Copyright © 2015 John Wiley & Sons. the price elasticity of demand for steel when the price is 10 is given by 2. What does this imply about her price elasticity of demand for ice cream? Gina’s expenditure on ice-cream is P*Q.5Y + 0.P < –1) . demand shifts to the left. Y is real GDP in France. We know that P*Q increases as P decreases which can only mean that Q increases at a faster rate than the rate at which P decreases. the quantity of steel demanded is thus 120. where Qs is the quantity of steel demanded per year. and so substituting these values into the equation that determines the quantity demanded gives us QS = 100 – 2PS + 0. Q = 46. a metal used to make golf clubs. calculate the price elasticity of demand and the price elasticity of supply.. The market for taxi cab service is competitive. or –0. 10 c)  golf .9 . the demand for taxi service should increase (shift to the right). Substituting this value back. Consider the following demand and supply relationships in the market for golf balls: Qd = 90 − 2P − 2T and Qs = −9 + 5P − 2. There is a special lane for taxicabs. a) If R = 2 and T = 10. when the price of titanium goes up the demand for golf balls decreases. c) Solve for equilibrium taxi fare in a general case. and the price of petrol G. and R is the price of rubber.titanium  2( )  0. . when the average speed of a trip by Copyright © 2015 John Wiley & Sons.52. we get Demand : Q d  70  2 P Supply : Q s  14  5P In equilibrium. The demand for trips by taxi cabs depends on the taxi fare P. that is. a) When the price of petrol goes up. On the other hand. 70 – 2P = –14 + 5P.Besanko & Braeutigam – Microeconomics. a) How would you expect an increase in the price of petrol to shift the demand for transportation by taxi cabs? How would you expect an increase in the average speed of a trip by private automobile to shift the demand for transportation by taxi cabs? How would you expect an increase price of petrol to shift the demand for transportation by taxi cabs? b) Suppose the demand for trips by taxi is given by the equation Qd = 1000 + 50G . because private automobiles and taxis are substitutes. the average speed of a trip by private automobile on the highway E. Find equilibrium taxi fare. On a graph draw the supply and demand curves for trips by taxi when G = 4 and E =30. Inc. b) Elasticity of Demand = –2(12/46).4E - 400P. so taxis are always able to travel at 55 miles per hour. International Student Version Solutions Manual 2. The negative sign indicates that titanium and golf balls are 46 complements. The number of trips supplied by taxi cabs will depend on the taxi fare and the price of gasoline. 2.5R. it becomes more expensive to drive a private automobile. where T is the price of titanium. calculate the cross-price elasticity of demand for golf balls with respect to the price of titanium. Chapter 2 . when you do not know G and E. b) At the equilibrium values.30G + 100P. calculate the equilibrium price and quantity of golf balls.14.e. Show how the equilibrium taxi fare changes as G and E change. c) At the equilibrium values.30. i. Elasticity of Supply = 5(12/46) = 1. In Metropolis only taxicabs and privately owned automobiles are allowed to use the highway between the airport and downtown. 5th edition. What does the sign of this elasticity tell you about whether golf balls and titanium are substitutes or complements? a) Substituting the values of R and T. The supply of trips by taxi is given by the equation Qs = 200 .13.43. which implies that P = 12. For the following pairs of goods. Q = 280.70 $2 Qd 80 280 1080 Q c) In equilibrium Qd = Qs. 2. would you expect the cross-price elasticity of demand to be positive. We would expect the cross-price elasticity of demand to be positive.10 . b) Coca-cola and Pepsi are substitutes. On the supply side.Besanko & Braeutigam – Microeconomics. When we 1 P  200  E  20  G  . 5th edition. Chapter 2 . We would expect the cross-price elasticity of demand to be negative. a) Red umbrellas and black umbrellas b) Coca-Cola and Pepsi c) Strawberries and cream d) Chocolate chip cookies and milk e) Computers and software a) Assuming red and black umbrellas are substitutes. Copyright © 2015 John Wiley & Sons. commuters are more likely to use their cars instead of public transportation. 125 The equilibrium taxi fare goes up as petrol price increases and goes down when it private automobiles can travel faster. Q s  80  100  P. or zero? Briefly explain your answer. a higher price of petrol increases to cost of providing taxi service. International Student Version Solutions Manual automobile increases. the demand for taxi service should shift to the left. the supply curve for taxi service should shift to the left. We would expect the cross-price elasticity of demand to be negative. we would expect the cross-price elasticity of demand to be positive. Inc. c) Strawberries and cream are typically complements (people want to consume them together). b) Substituting G = 4 and E = 30 into equations for the supply and demand curves we have Q d  1080  400  P. d) Chocolate chip cookies and milk are typically complements (people want to consume them together). Solving equation Qd = Qs we have P = 2. negative. Supply and demand curves are graphed below.15. P Qs $2. b) The demand for eye examinations at the only optometrist in town. Suppose that the market for air travel between London and Corfu is served by just two airlines.Besanko & Braeutigam – Microeconomics. 5th edition.09  9700  b) Market demand is given by Qd  QUd  QAd .11 .000 − 100PE + 99PA (Easyjet’s demand) QdA = 10.16. Easyjet and Aegean. Inc. assuming that the airlines charge the same price?) QEd  10000  100(300)  99(300) a) QEd  9700 Using PE  300 and QEd  9700 gives  300   Q. For each of the following. International Student Version Solutions Manual e) Computers and software are complements (consumers want to use them together). This implies an elasticity equal to  300   Q. P  100    3. Chapter 2 . Qd  19400 . P  2    . as specified) to be greater in the long run or the short run.0309  19400  2.000 − 100PA + 99PE (Aegean’s demand) where PE is the price charged by Easyjet. Assuming the airlines charge the same price we have Q d  10000  100 PE  99 PA  10000  100 PA  99 PE Q d  20000  100 P  99 P  100 P  99 P Q d  20000  2 P When P  300 . and PA is the price charged by Aegean. what is the equation for the total demand for air travel between London and Corfu. What is the price elasticity of demand for Easyjet flights between London and Corfu? b) What is the market-level price elasticity of demand for air travel between London and Corfu when both airlines charge a price of £300? (Hint: Because Easyjet and Aegean are the only two airlines serving the London–Corfu market. discuss whether you expect the elasticity (of demand or of supply. c) The demand for cigarettes. An economist has studied this market and has estimated that the demand curves for round-trip tickets for each airline are as follows: QdE = 10.17. a) Suppose that both Aegean and Easyjet charge a price of £300 each for a round-trip ticket between London and Corfu. 2. a) The supply of seats in the local movie theater. We would expect the cross-price elasticity of demand to be negative. Copyright © 2015 John Wiley & Sons. by £1 per unit.Besanko & Braeutigam – Microeconomics. over a longer horizon. as shown in the figure below. Copyright © 2015 John Wiley & Sons. but cannot easily adjust the number of seats at short notice. This surge in demand ended in March 2013. In February 2013. If the demand increase and the resulting upward pressure on price is temporary. there is an unexpected temporary surge in the demand for notebook hard drives. b) More elastic in the short run as people can be relatively flexible about when to undergo an eye exam.18. c) More elastic in the long run. As a result of this. producers may be able to do very little to increase supply except to utilize their existing production facilities more intensively (perhaps by hiring some temporary labor). the industry would expand along the long-run supply curve LS. 5th edition. the price of notebook hard drives increased by $5 per megabyte by the end of February. and the price of notebook hard drives fell back to its level just before the temporary demand surge occurred. putting upward pressure on price. increasing the monthly demand for hard drives by 25 percent per month at any possible price. but in the long run the need for eye exams is fixed. the market experienced a shift in demand of exactly the same magnitude. 2. Chapter 2 . International Student Version Solutions Manual a) More elastic in the long run as the theatre owner can increase space or add another screen if the price remains high. existing firms can expand their plants. industry supply can increase in response to upward pressure on price in a number of ways: existing firms can produce more output in their existing facilities. the quantity supplied expands along the short-run supply curve SS. Cigarettes tend to be addictive and so smokers are less likely to be able to reduce their demand in response to short term fluctuations in price.12 . Thus. Later that year. but the increase is permanent. If the demand increase is permanent. the industry’s supply response when prices begin to rise is more flexible than it is over a shorter horizon. Inc. the price of notebook hard drives had increased. Yet. Nine months later. However if the price remains high for a long time they will consider giving up the habit as it becomes too expensive. Why? When demand surges temporarily. in August 2013. In both circumstances. If demand increases by the identical rate. and new firms can enter the industry and produce. a permanent increase in the demand for notebook computers occurs. the change in the equilibrium price appears to have been different. increasing the monthly demand for hard drives by 25 percent at any possible price. The long-run supply curve is likely to be more price elastic than the short-run supply curve. 120 8 Now we can solve for the second parameter of the linear demand curve 120  a  15(8)  a  240 . Copyright © 2015 John Wiley & Sons. demand curve shifts rightward 2.13 . b) Do you need the information on the price elasticity of demand to find the curve? Why? P a) In case of the linear demand Q = A . we know that  Q .bP.P  b  1 Q Using the values of P and Q given in the problem we have 8 120 1  b  b  15 . a) Find a linear demand curve that fits this information and draw it on a clearly labeled graph. Hence the linear demand curve is given by equation Qd = 240 – 15P.Besanko & Braeutigam – Microeconomics.19. At that price 120 people eat dinners at the restaurant every evening. International Student Version Solutions Manual 25 percent Price (dollars per megabyte) increase in SS quantity Increase in demanded price due at any to price temporary demand surge LS Increase in price due to D1 D2 permanent Quantity (megabytes worth of demand hard drives per month) surge Supply curve shifts leftward. 5th edition. Inc. The demand for dinners in the only restaurant in town has a unitary price elasticity of demand when the current average price of a dinner is $8. Chapter 2 . consider each demand curve in its “inverse” form: long run demand is P = 15 – 0. Although this will reduce quantity demanded in the short run by a little.14 . What does this tell you about the sensitivity of demand to price for this good? Discuss why this is the case. 5th edition. for instance a price of £10. Quantity demanded is equal in both the long and short runs at P = 10. Consider.5. and short run demand is P = 30 – 2Q. More formally. Thus. Information about elasticity of demand lets us determine exactly one of those.20. consider increasing the price to. Thus. which is closer to zero than that of the short run demand. First. International Student Version Solutions Manual P 16 EQ. £15. it would reduce quantity demanded all the way to zero in the long run. Chapter 2 . the slope of the long run demand is –0. Suppose that the market for trips is characterized by the following demand curves: in the long run: Q = 30 − 2P. say. The price for a trip from Newtown to Bitcity on the local commuter rail has been 10 pounds for a number of years. Copyright © 2015 John Wiley & Sons. long run demand is flatter. Inc. –2. However. consider the graph below: P 30 Short run demand 15 10 Long run demand Q 15 30 Again.Besanko & Braeutigam – Microeconomics. 2. Verify that the long-run demand curve is “flatter” than the short-run curve. in the short run: Q = 15 − P/2.5Q. we need second equation to solve for both parameters of the linear demand curve.P = -1 8 Q 120 240 b) There exist several linear demand curves for which the demand is equal to 120 at price of $8. long run demand is flatter and thus more sensitive to changes in price. Second. International Student Version Solutions Manual 2. Finally. In the second country.Besanko & Braeutigam – Microeconomics. Consider the demand curve for pomegranates in two countries. suppose that in both countries. while the price path for Country B is the one on in which there is more modest price variation over time. that due to inherent limitations of shipping options. but they are not considered by consumers to be particularly special or unique. we can infer that the demand for pomegranates is probably less sensitive to price in Country A (where pomegranates have few good substitutes) than it is in Copyright © 2015 John Wiley & Sons. Based on the information given. the red (dashed) line is the time path in the other country. there is no inter-country trade in pomegranates. 5th edition. For most of these dishes. households will purchase pomegranates if the price is right. Each country’s market for pomegranates is independent of the other countries. Inc. there is no feasible substitute for pomegranates. Suppose pomegranates are native to both countries. Suppose. Chapter 2 . The graph below shows the time paths of pomegranate prices over a 10-year period in each country (the blue (solid) line is the time path in one country.15 . In one country. and few popular dishes rely on pomegranates in their recipes. Here is why. further.) Based on the information provided. pomegranates are a critical part of the diet and are central to the preparation of many popular food recipes. droughts and other weather-related shocks periodically cause unexpected changes in supply conditions.21. which is the time path for each country? Price of Pomegranates Time The price path for Country A is the one in which there is substantial price variation over time. the change in the equilibrium price in country A will be larger than the change in the equilibrium price in country B. AND SOLUTION MANUALS CONTACT US AT WHISPERHILLS@GMAIL. International Student Version Solutions Manual country B.16 . TEST BANKS. FINAL EXAMS. FOR MORE OF THIS COURSE AND ANY OTHER COURSES. Inc.COM Copyright © 2015 John Wiley & Sons. 5th edition. Chapter 2 . For a given shift in the supply curve in each country.Besanko & Braeutigam – Microeconomics.