TUTORIAL EXERCISES

Question 1
Indicate and explain if the statement is true or false. Illustrate the situation.

"Because Coke and Pepsi are substitutes, a decrease in the price of Pepsi will cause the demand
for Coke to decrease. This initial shift in demand for Coke results in a lower price for Coke; this
lower price will cause the demand curve for Coke to shift to the left."

Correct Answer: “This initial shift in demand for Coke results in a lower price for Coke; this lower price
will cause the demand curve for Coke to shift to the left.”
- Demand curve for Coke shifting leftward is a change in demand but not a change in quantity
demanded.

Wrong Answer: According to statement above, it is true. Coke and Pepsi are the substitute goods for
each other as both of them can be used for the same purpose and satisfies the same basic want as
another product. Substitute goods can be taking the place/used in place of another item, which are
essentially similar in use. When two goods are substitutes, the more you buy of one, the less you will
buy of the other. Change in price of one product in pair of substitute goods can cause demand curve for
other good to shift. If price goes up for one thing, the other product will usually increase in quantity of
demand as people is rational enough to pay for the cheaper of the two. Conversely, if the prices go up
for Coke, consumers will also potentially substitute Coke for Pepsi, whose price is lower compared to
Coke. In this way, Pepsi would be the substitute good for Coke because the price of one affects the
quantity demanded of the other.

**For both complementary and substitute goods, the concepts envelope a constancy within the real
world. Both phenomena occur in relative with each other which helps to factor out the reasoning behind
why price dropping/rising affect other products that are similar or related the original.

Question 2
Explain and illustrate using demand and supply graphs for each of the following statements. Show and
explain the effects on the market equilibrium price and quantity.

a. An increase in the demand for lobster due to changes in consumer tastes, accompanied by a
decrease in the supply of lobster as a result bad weather reducing the number of fishermen
trapping lobster. (Assume supply has changed more than demand).

**The equilibrium price increase, however, the equilibrium quantity is uncertain, may increase,
decrease, or remain unchanged.
 Demand and Supply Curve
45
40 40 40
40
35
PRICE OF LOBSTER

30
25
20
20
15
10 10
10
5
0
10 20 30 40 50 60
QUANTITY OF LOBSTER

b. Studies have shown that smoking cigarettes can cause heart disease. Assume this is true and
unexpected favorable weather has increased the tobacco harvest in North Carolina. (Assume
demand has changed more than supply).

45
Demand and Supply Curve
40 40
40
35
PRICE OF CIGARETTES

30
25
20
20 20
15
10 10
10
5
0
5 10 15 20 25 30 35 40 45 50 55
QUANTITY OF CIGARETTES

Question 3
Using demand and supply graphs, illustrate and explain the effect of the following on the market for
newspapers. Draw separate graphs for each part. Be sure to label clearly in each graph the initial and
new equilibrium price and equilibrium quantity of newspapers.
(To eliminate the shortage: upward pressure the prices; To eliminate the surplus: downward pressure
the prices)

a. A rise in the price of rival newspapers.

 Demand and Supply Curve
70
Price of newspaper

50
40
30
20

Quantity of newspaper

When a rise in the price of rival newspaper, the market demand curve for newspaper shifted to the right
as the two newspaper are substitutes. The more consumers buy of one, the less they will buy of the
other. Figure above shows the effect of a demand curve shifting to the right, from D1 to D2. The shift
causes a shortage at the original equilibrium price. To eliminate the shortage, the equilibrium price rises
from P1 to P2, and the equilibrium quantity rises from Q1 to Q2. When the rightward shifting of demand
curve happens, both the equilibrium price and quantity will increase.

b. A rise in the cost of printing.

Demand and Supply Curve

50

40
Price of newspaper

30 30

20

Quantity of newspaper

The market supply curve for newspaper shifted to the left as a result of increasing in cost of production.
When the cost of printing increase, newspaper will be less profitable at every given price. Figure above
shows the effect of supply curve shifting from S1 to S2.

**When the supply curve shifts to the left, there will be a surplus at the original equilibrium price, P1.
The surplus is eliminated as the equilibrium falls to P2 and the equilibrium quantity rises from Q1 to Q2.
c. A subsidy given to newspaper producers.

Demand and Supply Curve

60

50 50
Price of newspaper

30

20

Quantity of newspaper

d. A major news story breaking.

Demand and Supply Curve

70
Price of newspaper

50
40
30
20

Quantity of newspaper

e. More people finding news information from the internet.

 Demand and Supply Curve
70
Price of newspaper

50
40
30
20

Quantity of newspaper

Question 4
Find the equilibrium price and equilibrium quantity for the questions below.
a. Let Qd stand for the quantity demanded, Qs stand for the quantity supplied, and P stand for
price. If Qd = 20 - 2P and Qs = 5 + 3P, find equilibrium price and equilibrium quantity.

20 – 2P = 5 + 3P
5P = 15
Equilibrium price = 3

If Qs = Qd: 20 – 2P
20 – 2(3)
Equilibrium quantity = 14

b. Let Qd stand for the quantity demanded, Qs stand for the quantity supplied, and P stand for
price. If Qd = 100 - 5P and Qs = 25 + 10P, find equilibrium price and equilibrium quantity.

100 – 5P = 25 + 10P
15P = 75
Equilibrium price = 5

If Qs = Qd: 100 – 5P
100 – 5(5)
Equilibrium quantity = 75

Question 5
Complete the table. Sketch the market diagram with relevant details.

Price Quantity Quantity Supplied Surplus/Shortage/

(dollars per unit) Demanded (units per day) Equilibrium
(units per day) (indicate the values
 of each)
15 50 35 15
16 48 38 10
17 46 41 5
18 44 44 -
19 42 47 5
20 40 50 10
21 38 53 15
22 36 56 20

Demand and Supply Curve

30

22 22
Price (dolaar per unit)

20 18

10

0
35 36 38 40 41 42 44 46 47 48 50 53 56
Quantity (Units per day)