Q7. Label each of the following scen... [FREE SOLUTION]

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Chapter 3: Q7. (page 65)

Label each of the following scenarios with the set of symbols that best indicates the price change and quantity change that occur in the scenario. In some scenarios, it may not be possible from the information given to determine the direction of a particular price change or a particular quantity change. We will symbolize those cases as, respectively, 鈥淧?鈥� and 鈥淨?鈥� The four possible combinations of price and quantity changes are:
A. P鈫� Q? P? Q鈫�
B. P鈫慟? P? Q鈫�
c. On a hot day, both the demand for lemonade and the supply of lemonade increase.
d. On a cold day, both the demand for ice cream and the supply of ice cream decrease.
e. When Hawaii鈥檚 Mt. Kilauea erupts violently, tourists鈥� demand for sightseeing flights increases, but the supply of pilots willing to provide these dangerous flights decreases.
f. In a hot area of Arizona where a lot of electricity is generated with wind turbines, the demand for electricity falls on windy days as people switch off their air conditioners and enjoy the breeze. But at the same time, the amount of electricity supplied increases as the wind turbines spin faster.

Short Answer

Expert verified

c. P? Q鈫�

d. P? Q鈫�

e. P鈫慟?

f.P鈫� Q?

Step by step solution

Relative shifts of demand and supply curves in part (c)

An increase in the demand and supply of lemonade will shift the demand and supply curves to the right, which is depicted below:

The effect on price and quantity is explained below:

If the relative shift in the supply curve( $S_{1} t o S_{2}$ ) is less than the shift in the demand curve ( $D 1 t o D_{2}$ ), the equilibrium price will increase ( $P_{1} < P_{2}$ )
If this relative shift is nearly the same ( $S_{1} t o S_{3}$ ), the equilibrium price will be the same ( $P_{1} = P_{3}$ ).
If the said supply curve shift is more than the demand curve ( $S_{1} t o S_{4}$ ), equilibrium price will decrease ( $P_{4} < P_{1}$ ). Hence, the effect on price is unknown.

The effect on equilibrium quantity is clear, that is, it will increase ( $Q_{1} < Q_{2} < Q_{3} < Q_{4}$ ). Thus, the quantity will increase in any case, but the effect on the equilibrium price is unknown.

Relative shifts of demand and supply curves in part (d)

A decrease in demand and supply of ice cream will shift the demand and supply curves, respectively, to the left. This is shown in the diagram below:

The effect on price and quantity is explained below:

If the relative shift in the supply curve( $S_{1} t o S_{2}$ ) is less than the shift in the demand curve ( $D_{1} t o D_{2}$ ), the equilibrium price will decrease ( $P_{1} > P_{2}$ ).
If this relative shift is nearly the same ( $S 1 t o S_{3}$ ), the equilibrium price will be the same ( $P_{1} = P_{3}$ ).
If the said supply curve shift is more than the demand curve ( $S_{1} t o S_{4}$ ), equilibrium price will increase ( $P_{4} > P_{1}$ ). Hence, the effect on price is unknown.

The effect on equilibrium quantity is certain, that is, it is decreasing ( $Q_{1} > Q_{2} > Q_{3} > Q_{4}$ ), but the effect on the equilibrium price is unknown.

Relative shifts of demand and supply curves in part (e)

As shown in the diagram, an increase in tourists鈥� demands for sightseeing flights will shift the demand curve forward (from $D_{1} t o D_{2}$ ). A decrease in the supply of pilots for sightseeing flights will shift the supply curve backward.

The effect on price and quantity is explained below:

If the relative shift in the supply curve( $S_{1} t o S_{2}$ ) is less than the shift in the demand curve ( $D_{1} t o D_{2}$ ), the equilibrium quantity will increase ( $Q_{1} < Q_{2}$ ).
If this relative shift is nearly the same ( $S_{1} t o S_{3}$ ), the equilibrium quantity will be the same ( $Q_{1} = Q_{3}$ ).
If the said supply curve shift is more than the demand curve ( $S_{1} t o S_{4}$ ), equilibrium quantity will decrease ( $Q 4 < Q_{1}$ ). Hence, the effect on quantity is unknown.

Hence, the effect on quantity is unknown, while the price increase is certain ( $P_{1} < P_{2} < P_{3} < P_{4}$ ).

Relative shifts in part (f)

Consider the below diagram. The demand for electricity falls, which will shift the demand curve backward ( $D_{1} t o D_{2}$ ). An increase in the supply of electricity will shift the supply curve forward.

The effect on price and quantity is explained below:

If the relative shift in the supply curve( $S_{1} t o S_{2}$ ) is less than the shift in the demand curve ( $D_{1} t o D_{2}$ ), the equilibrium quantity will fall ( $Q_{1} > Q_{2}$ ).
If this relative shift is nearly the same ( $S_{1} t o S_{3}$ ), the equilibrium quantity will be the same ( $Q_{1} = Q_{3_{}}$ ).
If the said supply curve shift is more than the demand curve ( $S_{1} t o S_{4}$ ), the equilibrium quantity will increase ( $Q_{1} < Q_{4}$ ). Hence, the effect on quantity is unknown.