Even More Practice Problems on Supply and Demand

Answers in Red Below

Graphically and in words show what will happen to the market clearing price (P*), market clearing quantity (Q*) and resource allocation in each case.  Be sure to label your axes correctly and make it clear which way you are shifting your graphs.  Assume ceteris paribus.

1.  Assume pictures and picture frames are complements.  What will happen in the market for picture frames if the price of pictures decreased?

2.  Assume bananas are a normal good and bananas and pineapples are substitutes in production.  What will happen in the market for bananas if the income of people who buy bananas decreased and the price of pineapples increased?

3.  Assume Coke and Pepsi are substitutes.  Assume a new technology is introduced in the production of Coke.  Assume Coke is an inferior good.  What will happen in the market for Coke if the price of Pepsi increased, the new technology is introduced, and the income of people who buy Coke increased?

4.  Assume trucks and cars are substitutes in production.  Assume trucks and gasoline are complements.  What will happen in the truck market if the price of cars increases and the price of gasoline decreases?

5.  Assume books are a normal good.  Assume paper is used to make books.  Assume books and magazines are substitutes in production.  What will happen in the book market if the income of people who buy books decreased, the price of paper increased, and the price of magazines increased.

6.  Assume paint and paint brushes are complements and dye is used to make paint.  What will happen in the market for paint if the price of paint brushes increased and the price of dye decreased?

7.  Assume strawberries and strawberry jam are complements in production.  What will happen in the market for strawberries if the price of strawberry jam increased?

Answers:

1.  Demand will increase.  P* will increase and Q* will increase.  Resources will move in.

2.  Both demand and supply will decrease.  P* is unknown and Q* will decrease.  Resources will move out.

3.  Demand will increase and then decrease.  Supply will increase.  Both P* and Q* are unknown.  Resource allocation is unknown.

4.  Supply will decrease and demand will increase.  P* will increase and Q* is unknown.  Resource allocation is unknown.

5.  Demand will decrease, supply will decrease twice (two shifts left).  P* is unknown and Q* will decrease.  Resources will move out.

6.  Demand will decrease and supply will increase.  P* will decrease and Q* is unknown.  Resource allocation is unknown.

7.  Supply will increase.  P* will decrease and Q* will increase.  Resources will move in.