Chapter 5 — Exercises

Section A — Building the curves

A1. A small market for hand-knitted scarves has the following demand schedule:

(a) Plot the demand curve. (b) What is the slope of the curve (in price per scarf for each additional scarf demanded)? (c) Is this curve consistent with the law of demand?

A2. The supply schedule for the same market:

(a) Plot the supply curve on the same axes as A1. (b) What is the equilibrium price and quantity? (c) Is the equilibrium consistent with both the demand schedule and the supply schedule?

A3. At a price of $25, what is the quantity demanded? The quantity supplied? Is there a shortage or a surplus? What will happen to the price?

A4. At a price of $55, what is the quantity demanded? The quantity supplied? Is there a shortage or a surplus? What will happen to the price?

Section B — Movement along vs. shift of

B1. For each of the following events, identify whether it causes a movement along the demand curve or a shift of the demand curve. If it shifts the curve, in which direction? - (a) The price of beef rises, and consumers buy less beef. - (b) The price of chicken (a substitute for beef) rises, and consumers buy more beef. - (c) Median household income rises, and consumers buy more steak (a normal good). - (d) The cattle industry runs an advertising campaign promoting beef consumption. - (e) Health authorities recommend reducing red meat consumption. - (f) Buyers expect the price of beef to fall next month.

B2. For each event, identify whether it causes a movement along the supply curve or a shift of the supply curve, and in which direction. - (a) The price of beef rises, and ranchers raise more cattle. - (b) Cattle feed (an input) becomes much more expensive. - (c) A new technology halves the cost of cattle vaccinations. - (d) Drought reduces grazing land. - (e) The government imposes a $2 tax per pound of beef sold. - (f) Two large beef producers exit the industry.

Section C — Predicting changes

C1. For each scenario, use supply and demand to predict the change in equilibrium price and quantity. - (a) The market for coffee. A frost destroys 30% of the Brazilian coffee harvest. - (b) The market for tablets. A new study shows that tablet use improves children's reading skills. - (c) The market for taxis in San Francisco. Uber and Lyft enter the market. - (d) The market for new cars. The federal government imposes a $5,000 tax on every new car sold. - (e) The market for organic vegetables. A national news story raises concerns about pesticides on conventional vegetables.

C2. Predict the effects of multiple simultaneous changes: - (a) Suppose income rises and the price of an important input falls. What happens to equilibrium price and quantity? - (b) Suppose income rises and the number of producers falls. What happens? - (c) Suppose tastes shift toward the good and a major producer exits. What happens?

In which of these cases is the change in equilibrium price unambiguous? The change in equilibrium quantity?

C3. The Millbrook housing case from §5.5: redo the analysis with different assumptions. Suppose enrollment rose by 1,500 (instead of 800), the new dorm had 1,000 beds (instead of 400), and the apartment complex didn't close. What would you predict for rents and quantity?

Section D — The Millbrook example

D1. Suppose the Walden County government raises property taxes on rental units by $200/month per unit. Predict the effect on the supply of off-campus apartments. Predict the effect on equilibrium rent and quantity. Who pays the new tax — landlords, renters, or both?

D2. Suppose MSU announces it will build 800 new dorm beds, opening in two years. How does this affect the demand for off-campus apartments today (in expectation), and how does it affect the demand for off-campus apartments two years from now?

D3. Suppose the Federal Reserve raises interest rates from 5% to 7%. Trace the effects through the Millbrook housing market. What happens to landlord financing costs? What happens to the supply curve? What happens to equilibrium rent?

D4. Suppose the Walden County government passes a zoning reform that allows new apartment buildings to be built more easily. This won't change the housing market today (it takes years for new buildings to be built), but it will change it over the next 5–10 years. What kind of shift would the model predict, and over what time horizon?

Section E — Ambiguous cases

E1. Suppose demand shifts right and supply shifts right at the same time. What happens to equilibrium price? Equilibrium quantity? Are both changes determinate? If not, what additional information would you need?

E2. Suppose demand shifts left and supply shifts left at the same time. Same questions.

E3. Suppose demand shifts right and supply shifts left. Same questions.

E4. Suppose demand shifts left and supply shifts right. Same questions.

E5. Make a summary table of the four cases. In which cases is the price change unambiguous? In which is the quantity change unambiguous?

Section F — Data lookup

F1. Open FRED. Find data on the median sales price of houses in the United States (MSPUS). View the chart since 1965. Describe the long-term trend. Now look at the period 2006–2012. What does the chart show? Now 2020–2023. What does the chart show?

F2. Look up the U.S. average rent index (from FRED or the BLS, e.g., CUSR0000SEHA for the rent of primary residence). View the chart since 1980. Describe the long-term trend. How does it compare to the headline CPI?

F3. Look up the U.S. existing home sales (EXHOSLUSM495S). What does the chart show in recent years? Combine this with the price data: are prices and quantities moving in the same direction or opposite directions? What does the model predict about whether the cause is a demand shift or a supply shift?

Section G — Policy debate (Economist vs. Layperson)

G1. "Rent is rising in our city because greedy landlords are raising prices." Apply supply-and-demand analysis to evaluate this claim. What might actually be causing rents to rise? What questions would you need to answer to give a confident analysis?

G2. "If we want to reduce gasoline consumption, we should impose price controls on gas." Use supply and demand to evaluate this proposal. What would you predict happens? Is there a better way to achieve the goal?

G3. "The government should subsidize milk to make it more affordable for families." Trace the effect of a milk subsidy through the model. What happens to the equilibrium price (the price consumers pay)? What happens to the price farmers receive? What happens to the quantity? Who benefits, and who pays?

Section H — Conceptual / reflection

H1. Why is "movement along the demand curve" different from "shift of the demand curve"? Why does the distinction matter?

H2. The chapter argues that supply and demand is "the most powerful model in economics." Do you agree, after reading this chapter? What kinds of questions does the model answer well? What kinds does it not answer?

H3. The model assumes many buyers and many sellers, none of whom can individually affect the price. What happens to the model when one seller (or one buyer) is large enough to affect the price? Can you think of a real market where this might be the case?

H4. Pick a market you participate in (your favorite restaurant, your gym, your apartment, your usual coffee shop). Use supply and demand to analyze it. Who are the buyers and sellers? What might shift demand? What might shift supply? Has anything changed recently that you can analyze using the model?

Selected answers and detailed walkthroughs in appendices/answers-to-selected.md.