Practice Problems - Supply and Demand Questions

Not to be Turned In - For Your Own Study Use

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 books and magazines are substitutes.  Paper is used to make books.  What will happen in the book market if the price of magazines increases and at the same time the price of paper goes down?

    ANSWER:  The demand for books will increase, the supply of books will increase.  Q* will increase, P* is unknown.  Resources will move in.

2.  What will happen in the lemonade market if a new technology is introduced in the production of lemonade and at the same time the price of fruit punch decreases (assume fruit punch and lemonade are substitutes)?

    ANSWER:  The supply of lemonade will increase, the demand for lemonade will decrease.  P* will decrease, Q* in unknown.  Resource allocation is unknown.

3.  What will happen in the market for cats if the income of the population who buy cats increases and at the same time the price of dogs decreases?  Assume dogs are a substitute for cats and cats are a normal good.

    ANSWER:  The demand for cats will increase, the demand for cats decrease.  Both P* and Q* are unknown.  Resource allocation is unknown.

4.  What will happen in the market for golf clubs if the price of golf balls increases and at the same time the price of steel decreases?  Assume golf balls are a complement to golf clubs and steel is used to make golf clubs.

    ANSWER:  The demand for golf clubs will decrease, the supply of golf clubs will increase.  P* will decrease, Q* in unknown.  Resource allocation is unknown.

5.  What will happen in the market for stereos if the price of boom boxes goes up and at the same time the price of radios goes up?  Assume both boom boxes and radios are substitutes for stereos.

    ANSWER:  The demand for stereos will increase TWICE.  Both P* and Q* will increase.  Resources will move in.

6.  Assume Spam is an inferior good.  What will happen in the market for Spam if the income of the people who buy Spam goes down?

    ANSWER:  The demand for Spam will go up.  Both P* and Q* will increase.  Resources will move in.

7.  What will happen in the market for beef if the price of chicken increases and at the same time the price of cow hides decreases?  Assume beef and chicken are substitutes to consumers and beef and cow hides are complements in production.

    ANSWER:  The demand for beef will increase, the supply of beef will go down.  P* will increase, Q* is unknown.  Resource allocation is unknown.

8.  What will happen in the market for jean shirts when the price of jeans (pants) increases?  Assume jean shirts and jeans (pants) are substitutes in production.  

   ANSWER:  The supply of jean shirts will go down.  P* will increase, Q* will decrease.  Resources will move out.