NOTES

SECTION IV ANSWERS TO QUESTIONS

Warm-upquesrions: A (a). (d). (c). D (b). E (e). F (b). G (d). H (b). I (a). J (e). (e). L (a). M (e). N (c).0 (b). P(c).Q(b). R(d). S (e).

General quesdons: 1 (d). We expect supply curves to slope upward; hence an increase in demand vvill raise both price and quandty. 2 (e). This follows immediately from the law of demand. 3 (a). Since they are subsdtutes, a rise in the price of firewood will increase the demand for economics texts. 4 (c). A recession will tend to reduce consumer incomes and hence reduce demand. 5 (b). Ceteris paribus, the price of movies cannot fall given an increase in market demand. However, increase in market demand is quite consistent with some individual households reducing their attendance simultaneously. 6 (d). Denim is a major input into jean manufacture and so an increase in its price will reduce supply. 7 (s). We should be looking for anything that reduces demand. Here it is a fall in the price of substitute goods. 8 (c). Here we are looking for something other than an increase in demand. New producdon methods would increase supply. 9 (e). For grapefruit, demand is decreased but supply increased. Only a lower price is predictable. 10 (a). We have an increase in demand plus an increase in supply. Only an increased quantity is predictable. II (b). We have an increase in demand plus a reduction in supply. Only a higher price is predictable. 12 (b). We have a reduction in demand plus a reduction in supply, so only a decrease in quandty is predictable. 13 (d). We have a decrease in demand plus a reducdon in supply. Only a decreased quantity is predictable. 14 (e). We have a decrease in demand plus an increase in supply. Only a decreased price is predictable. 15 (d). If demand is inelasdc, a price rise will raise total revenue; increases in fees at other substitute, campuses will increase the demand for a UCSB education likewise increasing total revenue from tuition. 16 (a). From the definidon of elasticity, the elasticity of demand = 10 (V9) = 20, which is elastic. 17 (c). The points A and are elasuc. 18 (c). Total revenue will rise after a price rise only when elasdcit) is less than one, i.e. at pohits D and E. 19 (c). Multiplying price by quantity, we fmd that total revenue remains unchanged, so demand is unit elastic. 20 (c). Since Z is a normal good, a decline in incomes wU reduce demand. 21 (e). Susans total expenditure, not the quantity purchased, remains constant at all prices. 22

(c). Unlike salt itself, brands of salt have close substitutes, hence the demand curve of a brand will likely be elastic. 23 (d). We are moving along au inelastic portion of the demand curve, where a price fall reduces consumers expenditure. 24 (a). If the percentage change in consumers expenditure equals the percentage change in price, then the quandty demanded must have remained unchanged. 25 (d). The change in the price of natural rubber shifts the demand curve for synthetic rubber, a substitute; we are therefore moving along the supply curve for synthetic rubber 26 (d). From the definition of cross elasticity, it equals 3/10 or 0.3. 27 (d). See text. 28 (e). For a given decrease iu supply, the reduction in equilibrium quantity will always be greater for the more elasdc of any two demand curves. 29 (d). Here we have a measure of the elasticity of supply in year one, since the demand curve for tennis rackets has shifted. In year two we have a measure of the elasticit) of demand, since supply has increased. 30 (c). If Al spends a constant portion of his income on beer, his expenditure remains constant when we vary price, money income constant Hence, demand is unit elastic. The income elasticity is also equal to one: any percentage change in money income leads to an equal percentage change in quandty consumed when price is held constant. 31 (d). A loss of income increases the quantity of hamburger consumed and reduces that of avocados. Behavior suggests that hamburger is inferior and avocados normal. 32 (c). Assume tennis is a normal good; in (c) both are acting to change demand in opposite directions. 33 (e). By definidon of normality. 34 (b). X and Yare complements, so a fall in the price of Ywill shift the demand curve for X to the right. 35 (a). We have a leftward shift of the supply of coffee. Consequendy its price will rise and there will be a rightward shift of the demand for tea, a substitute for coffee. The price of both will rise. 36 (c). Decrease in demand and increase in supply. Both forces work together to reduce prices. 37 (b). Will increase demand for apples, a substitute for oranges. 38 (e). Only (a) will increase demand and hence tend to raise both price and output. 39 (c). A reduction in demand, so a fall in price and quantity. 40 (d). The tax will shift the supply to the left, so price will increase and quandty will fall. 41 (c). If unsure, refer to the argument in the text. 42 (c). This will shift the supply curve for apples, not the demand. 43 (c). We would expect an increased supply of autos, a fall in their price, and hence anJncreased demand for the complementary good, gas. 44 (d). The tax shifts the

supply curve back to its original position, so there is no moxement along the demand curve with which to estimate the elasticit). 45 (a). \ her income rises by 10%, her movie consumption rises by more than 10%. 46 (b). Price will fall and we will move along the demand curve. Lower consumer expenditure indicates demand is inelastic. 47 (a). See text. 48 (c). Here it is the demand curve which has shifted giving us informadon regarding supply. 49 (d). By defmition. 50 (a). Use total revenue test on these. 51 (e). The demand curve is the same, vertical in both cases. 52 (d). Verdcal demand. 53 (e). The supply curve will shift downward by the full amount of the subsidy, but this will result in a price fall of somewhat less than die subsidy. 54 (d). A fixed budget of $1,000,000 means that total expenditure is constant. Hence, unit elasdc. 55 (b). In diis case PQ= $1,000,000. But P = $50; solving for Q gives 20,000. Youll be using this quite a lot in unit elasdc problems. 56 (a). P = S20; TR = $1,000,000. 57 (d). Manufacturers will supply fewer -s as a result of lower price. 58 (b). Smaller quantity supplied results in higher prices. 59 (e). A price ceiling above the equilibrium price is without effect. 60 (a). A decrease in supply. 61 (a). First thing to do is draw the picture. Stardng from the market clearing point, the amount actually sold will be found by moving down the supply curve to a new and lesser quandty. We dont move along the demand curve here at all. If the supply elasticity is 1.5, we know that the 10% reducdon in price will cause a 15% reducdon in quandt) (15%/10% = 1.5). 62 (c). Again draw die picture. Two separate effects work together to cause unemployment under the minimum wage: the quantity demanded is less and the quandty supplied is greater The difference between the two is unemployment.

The increase in the minimum wage causes the quantity demanded to fall by 20% and the quantity supplied to rise by 15%, so the total unemployed will be about 35%. 63 (c). See text. 64 (d). Since the quesdon asks for the quantity demanded, were moving along the demand curve. If = 0.5, then the 3 0% price reducdon means a 5% quandty increase. 65 (b). Compared to what would otherwise be, the supply restriction causes us to move to the northwest along the demand curve, so elasdcity of demand is relevant. If the percentage decrease in quandty is 10%, the percentage increase in rental prices must be 12 V2% to make 0.8 (10% /12 1/2 %) • By the way, if Isla Vista property owners met and agreed to restrict the housing supply, they would be guilty of criminal and civil violadons of the antitrust laws. Oddly enough, renters have voted themselves a water policy which accomplishes exacdy the same result. 66 (c). Similar to #62. The more elastic the supply, the greater the increase in the quantity of workers supplied under the minimum wage. Similarly, the more elastic the demand, the smaller the quantity demanded. The greater the difference between these two, the greater the amount of unemployment. 67 (d). Both effects push price down, but, the quantity effects oppose each othen 68 (d). The demand curve shift causes a movement along the supply curve. 69 (c). Perfecdy inelastic, i.e., vertical curve. 70 (b). See text. 71 (a). Plug the percentage change in quantity into the formula and solve for the percent- i age change in price. 72 (b). Adjust the supply curve. 73 (e). Its $2. Consumers now pay $10 and they used j to pay $8, so their burden is $2. 74 (a). Producers used to receive $8, but now after the tax they get $6. 75 (a). Almost by definition.