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Chapter 2: Q.5 (page 77)

Let鈥檚 think about the market for air travel. From August 2014 to January 2015, the price of jet fuel increased

roughly 47%. Using the four-step analysis, how do you think this fuel price increase affected the equilibrium price

and quantity of air travel?

Short Answer

Expert verified

price rise leads to fall in quantity demanded, demand curve shifts to left.

Step by step solution

01

Q5

THE RISE IN THE PRICE WOULD LEAD TO DECREASE IN QUANTITY DEMANDED, WHICH WOULD FURTHER SHIFT THE DEMAND CURVE TO LEFT. THE DEMAND CURVE WILL INTERSECT THE SUPPLY CURVE AT A POINT TO THE LEFT, WHICH WOULD LEAD TO A NEW EQUILIBRIUM TO THE LEFT OF THE LAST EQUILIBRIUM.

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Most popular questions from this chapter

The table below shows the retail price and sales for instant coffee and roasted coffee for two years.

  1. Using these data alone, estimate the short-run price elasticity of demand for roasted coffee. Derive a linear demand curve for roasted coffee.

  2. Now estimate the short-run price elasticity of demand for instant coffee. Derive a linear demand curve for instant coffee.

  3. Which coffee has the higher short-run price elasticity of demand? Why do you think this is the case?

Suppose the demand curve for a product is given byQ= 300 - 2P+ 4I, whereIis average income measured in thousands of dollars. The supply curve isQ= 3P- 50.

a. IfI= 25, find the market-clearing price and quantity for the product.

b. IfI= 50, find the market-clearing price and quantity for the product.

c. Draw a graph to illustrate your answers.
  1. In Example 2.8 (page 74), we discussed the recent decline in world demand for copper, due in part to China鈥檚 decreasing consumption. What would happen, however, if China鈥檚 demand were increasing?

  2. Using the original elasticities of demand and supply (i.e., ES = 1.5 and ED = -0.5), calculate the effect of a 20-percent increase in copper demand on the price of copper.

  3. Now calculate the effect of this increase in demand on the equilibrium quantity, Q*.

  4. As we discussed in Example 2.8, the U.S. production of copper declined between 2000 and 2003. Calculate the effect on the equilibrium price and quantity of both a 20-percent increase in copper demand(as you just did in part a) and of a 20-percent decline in copper supply.

Consider a competitive market for which the quantities demanded and supplied (per year) at various prices are given as follows:

PRICE

(DOLLARS)

DEMAND

(MILLIONS)

SUPPLY

(MILLIONS)

602214
802016
1001818
1201620

a. Calculate the price elasticity of demand when the price is \(80 and when the price is \)100.

b. Calculate the price elasticity of supply when the price is \(80 and when the price is \)100.

c. What are the equilibrium price and quantity?

d. Suppose the government sets a price ceiling of $80. Will there be a shortage, and if so, how large will it be?

Refer to Example 2.5 (page 59) on the market for wheat. In 1998, the total demand for U.S. wheat was Q = 3244 - 283P and the domestic supply was QS = 1944 + 207P. At the end of 1998, both Brazil and Indonesia opened their wheat markets to U.Sfarmers. Suppose that these new markets add 200 million bushels to U.S. wheat demand. What will be the free-market price of wheat and what quantity will be produced and sold by U.S. farmers?
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