ECO 3108 - Tutorial 2: The Basics of Supply and Demand

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Student ID: ____________________ Date: __________

PART A

1) Which of the following is NOT an application of supply and demand analysis?

A) Understanding changing world economic conditions and their effects on prices
B) Evaluating the effects of government price controls on the agricultural industry
C) Determining how taxes affect aggregate consumption spending patterns
D) all of the above
E) none of the above

2) Plastic and steel are substitutes in the production of body panels for certain
automobiles. If the price of plastic increases, with other things remaining the same,
we would expect:
A) the price of steel to fall.
B) the demand curve for steel to shift to the right.
C) the demand curve for plastic to shift to the left.
D) nothing to happen to steel because it is only a substitute for plastic.
E) the demand curve for steel to shift to the left.

3) Which of the following would cause a shift to the right of the supply curve for
gasoline?
I. A large increase in the price of public transportation.
II. A large decrease in the price of automobiles.
III.A large reduction in the costs of producing gasoline.
A) I only
B) II only
C) III only
D) II and III only

4) Due to the recent increase in the price of natural gas, the quantity of coal demanded
by electric power generation plants has increased. Based on this information, coal and
natural gas are:
A) complements.
B) substitutes.
C) independent goods.
D) none of the above

5) As long as the actual market price exceeds the equilibrium market price, there will
be:
A) downward pressure on the market price.
B) upward pressure on the market price.
C) no purchases made.

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 ECO 3108 - Tutorial 2: The Basics of Supply and Demand

D) Both A and C are correct.

E) Both B and C are correct.
6) Refer to Scenario 2.1. What is the equilibrium price of books?
Scenario 2.1:

The demand for books is: Qd = 120 - P

The supply of books is: Qs = 5P

A) 5
B) 10
C) 15
D) 20
E) none of the above

7) Refer to Scenario 2.1. What is the equilibrium quantity of books sold?

A) 25
B) 50
C) 75
D) 100
E) none of the above

8) Refer to Scenario 2.1. If P = $15, which of the following is true?

A) There is a surplus equal to 30.
B) There is a shortage equal to 30.
C) There is a surplus, but it is impossible to determine how large.
D) There is a shortage, but it is impossible to determine how large.

9) Refer to Scenario 2.1. If P = $15, which of the following is true?

A) Quantity supplied is greater than quantity demanded.
B) Quantity supplied is less than quantity demanded.
C) Quantity supplied equals quantity demanded.
D) There is a surplus.

10) Refer to Scenario 2.1. If P = $25, which of the following is true?

A) There is a surplus equal to 30.
B) There is a shortage equal to 30.
C) There is a shortage, but it is impossible to determine how large.
D) There is a surplus, but it is impossible to determine how large.

11) Refer to Scenario 2.1. If P = $25, which of the following is true?

A) Quantity supplied is greater than quantity demanded.
B) Quantity supplied is less than quantity demanded.
C) Quantity supplied equals quantity demanded.
D) There is a shortage.
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 ECO 3108 - Tutorial 2: The Basics of Supply and Demand

12) The income elasticity of demand is the

A) absolute change in quantity demanded resulting from a one unit increase in income.
B) percent change in quantity demanded resulting from the absolute increase in
income.
C) percent change in quantity demanded resulting from a one percent increase in
income.
D) percent change in income resulting from a one percent increase in quantity
demanded.
E) percent change in income resulting from a one percent increase in price.

PART B

13) Use supply and demand curves to illustrate how each of the following events would
affect the price of butter and the quantity of butter bought and sold:
(a) An increase in the price of margarine.
(b) An increase in the price of milk.
(c) A decrease in average income levels.

14) The inverse demand curve for product X is given by:

PX = 25 - 0.005Q + 0.15PY,

where PX represents price in dollars per unit, Q represents rate of sales in

pounds per week, and PY represents selling price of another product Y in dollars
per unit. The inverse supply curve of product X is given by: PX = 5 + 0.004Q.

(a) Determine the equilibrium price and sales of X. Let PY = $10.

(b) Determine whether X and Y are substitutes or complements.

15) The daily demand for hotel rooms on Redang Island in Terengganu is given by
the equation QD = 250,000 – 375P. The daily supply of hotel rooms on
Manhattan Island is given by the equation QS = 15,000 + 212.5P.

(a) Diagram these demand and supply curves in price and quantity space.
(b) What is the equilibrium price and quantity of hotel rooms on Redang Island?

16) The following equations are referring to the demand and supply curves for the

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 ECO 3108 - Tutorial 2: The Basics of Supply and Demand

domestic market for cocoa in country XYZ where QD and QS refers to quantity
demanded and quantity supplied for cocoa, respectively, P is price and I is average
income measured in thousands of dollars.

QD = 300 – 2P + 4I
QS = 3P – 50

(a) If I = 25, calculate the equilibrium price and quantity for cocoa.
(b) If I = 50, calculate the equilibrium price and quantity for cocoa.
(c) Draw a graph to illustrate your answers.

17) Harding Enterprises has developed a new product called the XYZ. The market
demand for this product is given as follows:

Q = 240 - 4P

(a) At what price is the price elasticity of demand equal to zero?

(b) At what price is demand infinitely elastic?
(c) At what price is the price elasticity of demand equal to one?
(d) If the shillelagh is priced at $40, what is the point price elasticity of demand?

18) Suppose that a small market Major League Baseball team currently charges $12
for a ticket. At this price, they are able to sell 12,000 tickets to each game. If
they raise ticket prices to $15, they would sell 11,053 tickets to each game.
What is the price elasticity of demand at $12? If the demand curve is linear,
what is the algebraic expression for demand?

19) Suppose that the short-run world demand and supply elasticities for crude oil are
-0.076 and 0.088, respectively. The current price per barrel is $30 and the
short-run equilibrium quantity is 23.84 billion barrels per year. Derive the linear
demand and supply equations.

20) Suppose that the long-run world demand and supply elasticities of crude oil are -
0.906 and 0.515, respectively. The current long-run equilibrium price is $30 per
barrel and the equilibrium quantity is 16.88 billion barrels per year. Derive the
linear long-run demand and supply equations. Next, suppose the long-run
supply curve you derived above consists of competitive supply and OPEC supply.
If the long-run competitive supply equation is: S C = 7.78 + 0.29P, what must be
OPEC's level of production in this long-run equilibrium?

21) The U.S. Department of Agriculture is interested in analyzing the domestic

market for corn. The USDA's staff economists estimate the following equations

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 ECO 3108 - Tutorial 2: The Basics of Supply and Demand

for the demand and supply curves:

Qd = 1,600 - 125P
Qs = 440 + 165P

Quantities are measured in millions of bushels; prices are measured in dollars per
bushel.

(a) Calculate the equilibrium price and quantity that will prevail under a completely
free market.
(b) Calculate the price elasticities of supply and demand at the equilibrium values.
(c) The government currently has a $4.50 bushel support price in place. What
impact will this support price have on the market? Will the government be
forced to purchase corn under a program that requires them to buy up any
surpluses? If so, how much?

22) American Mining Company is interested in obtaining quick estimates of the

supply and demand curves for coal. The firm's research department informs you
that the elasticity of supply is approximately 1.7, the elasticity of demand is
approximately -0.85, and the current price and quantity are $41 and 1,206,
respectively. Price is measured in dollars per ton, quantity the number of tons
per week.

(a) Estimate linear supply and demand curves at the current price and quantity.
(b) What impact would a 10% increase in demand have on the equilibrium price and
quantity?
(c) If the government refused to let American raise the price when demand
increased in (b) above, what shortage is created?