Macroeconomics 10th Edition Colander Solutions Manual 1

Macroeconomics 10th
Edition Colander
Solutions Manual
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CHAPTER 4: SUPPLY AND DEMAND

Questions and Exercises
1. The law of demand states that quantity demanded falls as price increases; or that
quantity demanded rises as price falls. Price is inversely related to quantity
demanded because as price rises, consumers substitute other goods whose price
has not risen.
2. a.
Price Market
Demand
2 64
4 56
6 44
8 36
10 28
12 20
14 12
1
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16 8
b. See the accompanying graph of the table.
c. At the market price of $4, the total market demand is 56. If the price rises to $8,
the total market demand will fall to 36.
d. All of the curves will shift to the right by 50 percent. [(Note: The top part of
John's demand curve will not shift to the right (an additional 50% of zero is still
zero).]
3. Four shift factors of demand are income, price of other goods, tastes, and
expectations. A fifth shift factor is taxes and subsidies to consumers. As income
rises, demand increases. As the prices of other substitute goods rise, demand
increases. As tastes change to favor a particular good, the demand for that good
increases. If people expect the price of a good to fall in the future, demand will
fall now. Taxes reduce demand, while subsidies increase it.
4. A change in the price causes a movement along the demand curve to a new point
on the same curve. A shift in the demand curve means that the quantities will be
different at all prices; the entire curve shifts.
5. The law of supply states that quantity supplied rises as price increases or,
alternatively, that quantity supplied falls as price decreases. Price is directly
related to quantity supplied because, as price rises, people and firms rearrange
their activities to supply more of that good in order to take advantage of the
higher price.
2
6. Saying that supply increases means that the curve has shifted to the right, which is
not the result of a price change. The correct statement is that, normally, as price
rises, the quantity supplied increases, other things constant.
7. A shift in supply is the graphical representation of the effect of anything other

than price on supply, and these shift factors shift the entire supply curve. Shift
factors of supply include the price of inputs, technological advances, changes in
expectations, and taxes and subsidies. As the price of inputs increase, the supply
curve shifts to the left. As technological advances are made that reduce the cost of
production, the supply curve shifts to the right. If a supplier expects the price of
her good to rise, she may decrease supply now to save and sell later. Other
expectational effects are also possible. Taxes paid by suppliers shift the supply
curve to the left. Subsidies given to producers shift the supply curve to the
right.
8. When adding two supply curves, sum

horizontally the two individual supply
curves, as in the accompanying diagram. S3
is the market supply curve.
9. a. The market demand and market supply

curves are shown in the accompanying graph.
b. At a price of $30, quantity demanded is 35

and quantity supplied is 15. Excess demand is
20. At a price of $60, quantity demanded is 5
and quantity supplied is 45. Excess supply is
40.
c. Equilibrium price is $40. Equilibrium quantity

is 25.
3
10. In the accompanying graph, the demand curve has
shifted to the left, causing a decrease in the
market price and the market quantity.
11. The price of airline tickets rises during the summer

months because demand for airline travel increases as
more people take vacations. This change in consumer
tastes causes a shift of the demand curve to the right.
The equilibrium price increases as does the
equilibrium quantity as is shown in the accompanying
graph.
12. Sales volume increases (equilibrium quantity rises)

when the government suspends the tax on sales by
retailers because the price to demanders falls and
hence equilibrium quantity demanded rises. This
occurs because the supply curve shifts to the right
because suppliers do not have to pay taxes on their
sales (cost of production declines).
13. Increased security measures imposed by government

will increase the cost of providing air travel. This will
shift the supply curve to the left, increase equilibrium
price to P1 and decrease equilibrium quantity to Q1 as
shown in the accompanying graph. They also might
reduce demand (the hassles of the increased security
and the additional time it takes to travel), further
decreasing equilibrium quantity and offsetting the rise
in price, in this case to P2.
Some students might argue that increased security will increase demand because
consumers will feel more comfortable flying (they don't have to worry about
terrorists as much). If demand increased, the price would go up even higher and
the equilibrium quantity would also increase.
4
14. Customers will flock to stores demanding that funky “economics professor” look,
creating excess demand (the demand curve shifts right). This excess demand will
soon catch the attention of suppliers, and prices will be pushed upward.
Eventually a new equilibrium is reached at an increased price and quantity.
15. As substitutes for bottled water—clean tap water—decrease, demand for bottled
water increases enormously, and there will be upward pressure on prices. Social
and political forces will, however, likely work in the opposite direction—against
“profiteering” from people’s misery.
16. Since OPEC is a dominant producer of oil, increasing

oil production (not as a result of a price change) will
shift the supply of oil out to the right. The price of oil will
decline as shown in the accompanying graph.
17. The results for each part are shown in the

accompanying graphs.
a. The bad weather causes a decrease in supply. This is

shown by a shift in supply from S0 to S1. Equilibrium
price rises from P0 to P1 while equilibrium quantity
falls from Q0 to Q1.
b. The medical report causes a decrease in demand. This

is shown by a shift in demand from D0 to D1.
Equilibrium price falls from P0 to P1 and equilibrium
quantity falls from Q0 to Q1.
5
c. The innovation causes an increase in supply. This is
shown as a shift in supply from S0 to S1. Equilibrium
price falls from P0 to P1 while equilibrium quantity
rises from Q0 to Q1.
d. The drop in income causes a decrease in demand.

This is shown by a shift in demand from D0 to D1.
Equilibrium price falls from P0 to P1 and equilibrium
quantity falls from Q0 to Q1.
18. a. I would expect wheat prices to decline since the supply of wheat is greater than
expected. Wheat commodity markets are very competitive, so the initial 30
percent increase in output was already reflected in the current price of wheat. It is
only the additional 10 percent increase that will push down the price of wheat.
b. This is graphically represented by a shift to the right

in the supply of wheat, as shown in the
accompanying graph. Equilibrium price falls from
P0 to P1 while equilibrium quantity rises from Q0 to
Q1.
19. a. The cars in Italy are most likely much smaller than in the United States. Italians
would be likely to want to conserve gasoline and thus demand smaller cars that
use less gasoline.
b. As in (a), Italians will want to conserve gasoline more and thus use public
transportation more than Americans use it.
c. As in (a) and (b), Italians will be more concerned with fuel efficiency in their
desire to conserve gasoline since it is relatively more expensive there.
6
d. Raising the price of gasoline in the United States to $5 per gallon will decrease
the size of cars driven in the U.S., increase U.S. use of public transportation, and
increase the fuel efficiency of cars purchased in the U.S.
20. a. The tax shifts the supply curve to the left in the market for
natural gas exports because it increases the cost of
supplying the natural gas to other countries. Therefore, in
the market for natural gas exports, equilibrium price rises
while equilibrium quantity falls.
b. As it becomes more expensive to sell natural gas to other

countries, more natural gas produced in Argentina will be
sold in Argentina, causing the domestic price to fall.
21. It suggests that the price is above the equilibrium price so

that the quantity supplied exceeds the quantity demanded,
as you can see in the accompanying graph. Including
social and political forces in the analysis will provide a
counter–pressure to the dynamic forces of supply and
demand. The result would be an equilibrium with
continual excess supply or excess demand. In this
example, there must be a social or political force exerting
upward pressure on the price, causing an excess supply of
taxis at the airport.
22. The fallacy of composition is the false assumption that what is true for a part will
also be true for the whole. It affects the supply/demand model by drawing our
attention to the possibility that supply and demand are interdependent. Feedback
effects must be taken into account to make the analysis complete. An
understanding of the fallacy of composition is of central relevance to
macroeconomics. In the aggregate, whenever firms produce (whenever they
supply), they create income (demand for their goods).
23. The greatest feedback effects are likely to occur in the markets that are the largest.
This is most likely to be true for housing and manufactured-goods markets.
24. a. Because the market for pencils is relatively small, supply/demand analysis would
be appropriate without modification. Also, there are no significant political or
social forces that would affect the analysis.
b. Because the labor market is very large, supply/demand analysis would not be
appropriate without modification. For example, an increase in labor supply will
7
likely lead to greater income and greater demand for goods, which will lead to an
increase in quantity of goods produced and therefore an increase in the demand
for labor. In this case there are significant feedback effects.
c. Aggregate markets such as savings and expenditures include feedback effects, so

supply/demand analysis would not be appropriate without modification.
d. The CD market is relatively small. Supply/demand analysis would be appropriate

without modification.
Questions from Alternative Perspectives
1. Austrian
It is difficult to estimate supply and demand curves without a market. Consumers

have an incentive to overstate demand, while suppliers have an incentive to overstate
costs. Without the need to pay in a market, it is almost impossible to get individuals
to reveal their true preferences. Central planners tried many incentive schemes to get
around this problem and never completely succeeded. One thing that did abate this
problem was to allow grey markets—semi-legal markets where individuals’ true
supply and demand were revealed. Overall, the socialist experience suggests that
central planning for a large country cannot adequately reveal consumers’ preferences.
2. Religious
a. There is some truth to this saying; if people were only selfish, they would lose much
that makes them human.
b. Yes, there is a conflict, although how strong the conflict is a matter of debate. There
are different types of Christianity; some are more in conflict than others. Where
capitalism and Christianity most agree are in their views of human freedom; both see
it as central to their ideology.
c. No probably not, although, again, the answer is debatable. Markets would not work
well if people were purely selfless. In many ways if there were more than enough to
go around the society would simply not need markets. The market provides efficient
ways of allocating scarce resources when individuals are selfish or somewhat selfish.
3. Feminist
a. Women and men have not always been equally free to choose the amount of
education they receive. Established in 1833, Oberlin College was the first co-
educational college. Over time, women have gained much better access to education,
and better access has led to better educational attainment. By the 1880s, 30 percent
8
of all undergraduates in the United States were women. Today women receive 58
percent of all undergraduate degrees.
b. Women did not have the right to vote until 1920. Women today continue to face
difficulties in reaching the higher levels of administration in commercial enterprises
and studies have shown that they receive less compensation than men who are in
similar positions.
c. To the extent that women are not free to choose, they are not represented in the
analysis of supply and demand. The questions that economists consider, and therefore
the models economists use, are likely to have been affected by the fact that women
have less representation in the field of economics. Thus, if economists base their
conclusions on the models alone, they cannot be objective.
4. Institutionalist
You will want to examine the determinants of supply and demand, and the conditions
under which they may or may not hold. There is also the problem of interdependency.
Discussion of each should include problems of measurement since, ultimately,
science requires any and all propositions to be tested. Many of the ideas from which
economic analysis is derived are beyond direct systematic measurement. Thus,
economic analysis is, in many respects, a belief system: we act as if it were true
because we believe it to be true.
5. Post-Keynesian
a. Consumers follow rules of thumb for a variety of reasons, one being to save time.
Given that much of our consumption is repetitive (that is, buying the same brand of
soda, soap, toothpaste, and so on at the same grocery store), researchers have found
that much of our consumption is based on routine habits that give us satisfactory
outcomes that may or may not be optimal.
b. Our decisions to buy goods are usually based on past behavior—habits that have been
incorporated in our consumer behavior. This behavior could have come from family,
friends or advertisements and may affect our consumption more than the desire to
optimize. This analysis allows room for advertisements and social norms—in addition
to prices— to influence our consumption rather than price. This means that
economist’s claims that the market efficiently meet consumer’s desires is
questionable since, the market may be creating superficial desires rather than “true”
desires. It is, however, extraordinarily difficult to determine what are superficial and
what are true.
6. Radical
The hiring decisions of multinational corporations don’t appear to be very responsive

to wages and working conditions, suggesting that few jobs are likely to be lost to
better paying wages. In addition, labor demand is not fixed by public policy changes
and can be augmented by public spending and tax policies.
9
Issues to Ponder
1. It suggests that the job is being rationed, which means that the wage is above the
equilibrium wage.
2. a. It increased the demand for housing and increased housing prices. The demand
curve shifts out, while the supply curve remains constant.
b. It decreased the demand for housing and decreased housing prices. The demand
curve shifts in while the supply curve remains constant.
c. The price would increase more in San Francisco.
3. a. It would likely raise the value significantly – it was estimated that it would raise it
to $50,000 a sheet. Demand shifts to the right as people realize the oddity of the
stamp. Supply shifts to the left because of the recall.
b. It would probably lower the value of the stamps – it was estimated that it would
lower the price of the sheet to $100 a sheet. Graphically this would be shown with
the supply curve shifting back to the left, resulting in a lower price. The demand
curve could remain high, though it might shift back to the left.
c. They would likely sue to stop the additional sheets from being issued; they did
and they lost.
4. a. The number of punitive awards would decline because the incentive for plaintiffs
to pursue a case declines. The demand curve shifts down by the amount of the
tax, lowering the equilibrium price of punitive awards.
b. The number of pre-trial settlements would rise because the plaintiff would be
willing to accept a lower settlement that is not taxed and the defendant would get
to pay a lower punitive award. The tax leads to an increase in the supply of
settlements, without affecting the demand for settlements (because the tax is
paid by the plaintiff), which accounts for the increase in the quantity of
settlements.
5. A supply/demand analysis that includes only economic forces will likely be

incomplete because social and political forces will also impact equilibrium price
and quantity. One example is that the prediction that a disaster that leads to loss of
electricity will lead to higher prices for flashlights might be wrong if there are
10
laws that prohibit such price gouging during emergencies. Social and political
forces must be added to the supply/demand model.
11

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CHAPTER 4: SUPPLY AND DEMAND

b. See the accompanying graph of the table.

7. A shift in supply is the graphical representation of the effect of anything other

8. When adding two supply curves, sum

9. a. The market demand and market supply

b. At a price of $30, quantity demanded is 35

c. Equilibrium price is $40. Equilibrium quantity

11. The price of airline tickets rises during the summer

12. Sales volume increases (equilibrium quantity rises)

13. Increased security measures imposed by government

16. Since OPEC is a dominant producer of oil, increasing

17. The results for each part are shown in the

a. The bad weather causes a decrease in supply. This is

b. The medical report causes a decrease in demand. This

d. The drop in income causes a decrease in demand.

b. This is graphically represented by a shift to the right

b. As it becomes more expensive to sell natural gas to other

21. It suggests that the price is above the equilibrium price so

c. Aggregate markets such as savings and expenditures include feedback effects, so

d. The CD market is relatively small. Supply/demand analysis would be appropriate

Questions from Alternative Perspectives

It is difficult to estimate supply and demand curves without a market. Consumers

The hiring decisions of multinational corporations don’t appear to be very responsive

c. The price would increase more in San Francisco.

5. A supply/demand analysis that includes only economic forces will likely be

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