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# checkpoint 4.3

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Demand and Supply
4
CHECKPOINTS
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Checkpoint 4.1
Problem 1
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Problem 2
Problem 3
Problem 4
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Checkpoint 4.2
Problem 1
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Checkpoint 4.3
Problem 1
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Problem 2
Problem 2
Problem 3
Problem 3
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Problem 4
Problem 4
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Problem 5
CHECKPOINT 4.1
Practice Problem 1
Explain the effects on the demand for cell phones of the
following events that occur one at a time:
вЂў The price of a cell phone falls.
вЂў The price of a cell phone is expected to fall next month.
вЂў The price of a call from a cell phone falls.
вЂў The price of a call from a land-line phone increases
вЂў The introduction of camera phones makes cell phones
more popular.
CHECKPOINT 4.1
Solution
A fall in the price of a cell phone increases the
quantity of cell phones demanded but has no effect
on the demand for cell phones.
An expected fall in the price of a cell phone next
month decreases the demand for cell phones today
as people wait for the lower price.
A fall in the price of a call from a cell phone
increases the demand for cell phones because a
cell phone call and a cell phone are complements.
CHECKPOINT 4.1
A rise in the price of a call from a land-line phone
increases the demand for cell phones because a
land-line phone and a cell phone are substitutes.
An increase in the popularity of a cell phone
increases the demand for cell phones.
CHECKPOINT 4.1
Study Plan Problem 1
In the market for cell phones, when the price of a cell
phone falls, the quantity of cell phones demanded
________ and the demand for cell phone ______.
A. is unchanged; increases
B. decreases; is unchanged
C. decrease; decreases
D. increases; is unchanged
E. increases; increases
CHECKPOINT 4.1
In the market for cell phones, when the price of a cell
phone is expected to fall next year, ________.
A. the demand for cell phones today decreases
B. the quantity of cell phones demanded today increases
C. the demand for cell phones today increases
D. the quantity of cell phones demanded today decreases
E. the quantity of cell phones demanded today increases
and the demand for cell phones today increases
CHECKPOINT 4.1
Practice Problem 2
Use a graph to illustrate the effect of each of the following
events:
вЂў The price of a cell phone falls
вЂў The price of a cell phone is expected to fall next month.
вЂў The price of a call from a cell phone falls.
вЂў The price of a call from a land-line phone increases
вЂў The introduction of camera phones makes cell phones
more popular
CHECKPOINT 4.1
Solution
The fall in the price of a cell
phone creates a movement
along the demand curve D.
CHECKPOINT 4.1
An increase in the demand for
cell phones is shown by the shift
of the demand curve rightward
from D0 to D1.
A decrease in the demand for
cell phones is shown by the shift
of the demand curve leftward
from D0 to D2.
CHECKPOINT 4.1
Practice Problem 3
Do the following events illustrate the law of demand?
вЂў The price of a cell phone falls
вЂў The price of a cell phone is expected to fall next
month.
вЂў The price of a call from a cell phone falls.
вЂў The price of a call from a land-line phone increases
вЂў The introduction of camera phones makes cell phones
more popular
CHECKPOINT 4.1
Solution
A fall in the price of a cell phone
(other things remaining the
same), illustrates the law of
demand.
The figure illustrates the law of
demand.
The other events change
demand and do not illustrate the
law of demand.
CHECKPOINT 4.1
Study Plan Problem
Which events illustrate the law of demand?
1.The price of a cell phone falls
2.The price of a cell phone is expected to fall next month.
3.The price of a call from a cell phone falls.
4.The price of a call from a land-line phone increases
A. Event 1
B. Events 2, 3, and 4
C. Event 2
D. Events 1, 2, 3, and 4
E. Events 1, 3, and 4
CHECKPOINT 4.1
Practice Problem 4
Passenger numbers down
International Air Transport Association reported that
passenger numbers fell by 11 percent last month. What
will be the impact of swine flu? Recovery of passenger
numbers depends on a rise in consumer confidence and a
fall in passenger numbers, airlines cut capacity.
Source: The Nation, April 29, 2009
Explain the effect of each event on the demand for air
travel.
CHECKPOINT 4.1
Solution
If people are worried about coming into contact with swine
flu, they will cancel their travel plans.
The demand for air travel will decrease.
In the recovery, when consumer confidence and consumer
spending increase, the demand for air travel will increase.
The airlinesвЂ™ response to cut capacity does not influence
the demand for air travel.
CHECKPOINT 4.2
Practice Problem 1
What is the effect of each of the following events on the
supply of timber beams:
вЂў The wage rate of sawmill workers rises.
вЂў The price of sawdust rises.
вЂў The price of a timber beam rises.
вЂў The price of a timber beam is expected to rise next year.
вЂў Congress to introduce a new law that reduces the
amount of forest that can be cut for timber products.
вЂў A new technology lowers the cost of producing a beam.
CHECKPOINT 4.2
Solution
A rise in sawmill workersвЂ™ wage rates decreases the
supply of timber beams.
A rise in the price of sawdust increases the supply of
timber beams because sawdust and timber beams are
complements in production.
A rise in the price of a timber beam increases the quantity
of timber beams supplied but has no effect on the supply
of timber beams.
CHECKPOINT 4.2
An expected rise in the price of a timber beam decreases
the supply of timber beams as producers hold back and
wait for the higher price.
The new law that reduces the amount of forest that can be
cut for timber products decreases the supply of timber
beams.
A new technology that lowers the cost of producing timber
beams increases the supply of timber beams.
CHECKPOINT 4.2
Study Plan Problem
In the market for timber beams, when the wage rate paid
to sawmill workers rises, ______.
A. the quantity of timber beams supplied decreases
B. the supply of timber beams increases
C. the quantity of timber beams supplied increases
D. the supply of timber beams decreases
E. the quantity of timber beams supplied increases and
the supply of timber beams also increases
CHECKPOINT 4.2
Congress introduces a new law that reduces the amount
of forest that can be cut for timber products.
In the market for timber beams,
A. the supply of timber beams decreases.
B. the quantity of timber beams supplied increases and
the supply of timber beams also increases
C. the quantity of timber beams supplied decreases
D. the supply of timber beams increases.
E. the quantity of timber beams supplied increases
CHECKPOINT 4.2
Practice Problem 2
Use a graph to illustrate the effect of each of the following
events:
вЂў The wage rate of sawmill workers rises.
вЂў The price of sawdust rises.
вЂў The price of a timber beam rises.
вЂў The price of a timber beam is expected to rise next year.
вЂў Congress to introduce a new law that reduces the
amount of forest that can be cut for timber products.
вЂў A new technology lowers the cost of producing a beam.
CHECKPOINT 4.2
Solution
An increase in the supply of
timber beams as the shift of the
supply curve rightward from S0 to
S1 .
A decrease in the supply as the
shift of the supply curve leftward
from S0 to S2.
CHECKPOINT 4.2
A rise in the price of a timber
beam increases the quantity
supplied and creates a
movement along the supply
curve S.
CHECKPOINT 4.2
Practice Problem 3
Which events illustrate the law of supply?
вЂў The wage rate of sawmill workers rises.
вЂў The price of sawdust rises.
вЂў The price of a timber beam rises.
вЂў The price of a timber beam is expected to rise next
year.
вЂў Congress introduces a new law that reduces the
amount of forest that can be cut for timber products.
вЂў A new technology lowers the cost of producing a beam.
CHECKPOINT 4.2
Solution
A rise in the price of a timber beam
(other things remaining the same),
illustrates the law of supply.
The figure illustrates the law of
supply.
The other events change supply
and do not illustrate the law of
supply.
CHECKPOINT 4.2
Practice Problem 4
GM, UAW reach crucial cost-cutting pact
General Motors has made a deal with the United Auto
Workers to restructure the tasks that any worker can
perform. This restructuring, with no change in the wage
rate, will save GM \$1 billion in labor costs a year.
Source: The Wall Street Journal, May 22, 2009
Will this reduction of labor costs, with no change in the
wage rate, change GMвЂ™s supply of vehicles? Explain your
CHECKPOINT 4.2
Solution
The cut in labor costs with no change in the wage rate is
an increase in productivity.
An increase in productivity will increase GMвЂ™s supply of
vehicles.
CHECKPOINT 4.3
Practice Problem 1
The table shows the demand and supply schedules for
milk.
What is the equilibrium price and equilibrium quantity of
milk?
CHECKPOINT 4.3
Solution
The equilibrium price is the price
at which the quantity demanded
equals the quantity supplied.
The equilibrium price is \$1.50 a
carton.
The equilibrium quantity is 150
cartons a day.
CHECKPOINT 4.3
Practice Problem 2
The table shows the demand and supply schedules for
milk.
Describe the situation in the milk market if the price were
\$1.75 a carton and explain how the market reaches its new
equilibrium.
CHECKPOINT 4.3
Solution
At \$1.75 a carton, the quantity
demanded (125 cartons) is less
than the quantity supplied (170
cartons), so there is a surplus of
45 cartons a day.
The price begins to fall, and as it
does, the quantity demanded
increases, the quantity supplied
decreases, and the surplus
decreases.
The price will fall until the surplus is eliminated.
The price falls to \$1.50 a carton.
CHECKPOINT 4.3
Study Plan Problem
At \$1.75 a carton, a _____exists.
As the price _____, the quantity
demanded _____ and the quantity
supplied ____ .
A. shortage; rises; decreases;
increases
B. shortage; rises; increases;
decreases
C. surplus; falls; decreases; increases
D. surplus; falls; increases; decreases
CHECKPOINT 4.3
Practice Problem 3
The table shows the demand
and supply schedules for
milk.
A drought decreases the
quantity supplied by 45
cartons a day at each price.
What is the new market
equilibrium and how does
CHECKPOINT 4.3
Solution
The supply decreases by 45
cartons a day. At \$1.50 a carton,
the quantity demanded exceeds
the quantity supplied, so there is a
shortage of milk.
As the price begins to rise, the
quantity demanded decreases, the
quantity supplied increases, and
the shortage decreases.
The price will rise until the shortage is eliminated.
The price rises to \$1.75 a carton.
CHECKPOINT 4.3
Study Plan Problem
The quantity supplied decreases by
45 cartons a day at each price. At the
initial equilibrium price, there is a
________ of milk. The price _______
and the quantity demanded _______
as the market moves to its new
equilibrium.
A. surplus; rises; decreases
B. surplus; falls; increases
C. shortage; falls; decreases
D. shortage; falls; increases
E. shortage; rises; decreases
CHECKPOINT 4.3
Practice Problem 4
The table shows the demand
and supply schedules for
milk.
Milk becomes more popular
and better feeds increase
milk production.
How do these events
influence demand and
supply?
What is the new market
CHECKPOINT 4.3
Solution
When milk becomes more
popular, demand increases.
With better feeds, supply
increases.
If supply increases by more than
demand, a surplus arises at
\$1.50.
The price falls, and the quantity
increases.
CHECKPOINT 4.3
If demand increases by more
than supply, a shortage arises.
The price rises, and the quantity
increases.
If demand and supply increase
by the same amount, there is no
shortage or surplus and the price
does not change but the quantity
increases.
CHECKPOINT 4.3
Study Plan Problem
Milk becomes more popular and better feeds increase
milk production. If supply changes by more demand
changes, the equilibrium price of milk _____ and the
equilibrium quantity of milk _____.
A. falls; decreases
B. falls; increases
C. does not change; does not change
D. rises; increases
E. rises; decreases
CHECKPOINT 4.3
Practice Problem 5
SummerвЂ™s here. So are higher gas prices
The price of gasoline increased 15 percent in the past three
weeks, mainly because of refinery shutdowns in the United
States. As motorists increase their driving in the coming
months, the price is predicted to rise further.
Source: CNN Money, May 21, 2009
Explain why the price rose in the past 3 weeks and why it is
expected to rise in the coming months.
CHECKPOINT 4.3
Solution
The shutdown of the refineries decreased the supply of
gasoline. With no change in the demand, the price rose.
When motorists increase their driving in the summer, the
demand for gasoline increases. With no change in supply,
the equilibrium price will rise further.
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