3.12: Exercises for Chapter 3

EXERCISE 3.1

The supply and demand for concert tickets are given in the table below.

Price ($)	0	4	8	12	16	20	24	28	32	36	40
Quantity demanded	15	14	13	12	11	10	9	8	7	6	5
Quantity supplied	0	0	0	0	0	1	3	5	7	9	11

1. Plot the supply and demand curves to scale and establish the equilibrium price and quantity.
2. What is the excess supply or demand when price is $24? When price is $36?
3. Describe the market adjustments in price induced by these two prices.
4. Optional: The functions underlying the example in the table are linear and can be presented as P=18+2Q (supply) and P=60–4Q (demand). Solve the two equations for the equilibrium price and quantity values.

EXERCISE 3.2

Illustrate in a supply/demand diagram, by shifting the demand curve appropriately, the effect on the demand for flights between Calgary and Winnipeg as a result of:

1. Increasing the annual government subsidy to Via Rail.
2. Improving the Trans-Canada highway between the two cities.
3. The arrival of a new budget airline on the scene.

EXERCISE 3.3

A new trend in US high schools is the widespread use of chewing tobacco. A recent survey indicates that 15 percent of males in upper grades now use it – a figure not far below the use rate for cigarettes. This development came about in response to the widespread implementation by schools of regulations that forbade cigarette smoking on and around school property. Draw a supply-demand equilibrium for each of the cigarette and chewing tobacco markets before and after the introduction of the regulations.

EXERCISE 3.4

The following table describes the demand and supply conditions for labour.

Price ($) = wage rate	0	10	20	30	40	50	60	70	80	90	100	110	120	130	140	150	160	170
Quantity demanded	1020	960	900	840	780	720	660	600	540	480	420	360	300	240	180	120	60	0
Quantity supplied	0	0	0	0	0	0	30	60	90	120	150	180	210	240	270	300	330	360

1. Graph the functions and find the equilibrium price and quantity by equating demand and supply.
2. Suppose a price ceiling is established by the government at a price of $120. This price is below the equilibrium price that you have obtained in part (a). Calculate the amount that would be demanded and supplied and then calculate the excess demand.

EXERCISE 3.5

In Exercise 3.4, suppose that the supply and demand describe an agricultural market rather than a labour market, and the government implements a price floor of $140. This is greater than the equilibrium price.

1. Estimate the quantity supplied and the quantity demanded at this price, and calculate the excess supply.
2. Suppose the government instead chose to maintain a price of $140 by implementing a system of quotas. What quantity of quotas should the government make available to the suppliers?

EXERCISE 3.6

In Exercise 3.5, suppose that, at the minimum price, the government buys up all of the supply that is not demanded, and exports it at a price of $80 per unit. Compute the cost to the government of this operation.

EXERCISE 3.7

Let us sum two demand curves to obtain a 'market' demand curve. We will suppose there are just two buyers in the market. Each of the individual demand curves has a price intercept of $42. One has a quantity intercept of 126, the other 84.

1. Draw the demands either to scale or in an Excel spreadsheet, and label the intercepts on both the price and quantity axes.
2. Determine how much would be purchased in the market at prices $10, $20, and $30.
3. Optional: Since you know the intercepts of the market (total) demand curve, can you write an equation for it?

EXERCISE 3.8

In Exercise 3.7 the demand curves had the same price intercept. Suppose instead that the first demand curve has a price intercept of $36 and a quantity intercept of 126; the other individual has a demand curve defined by a price intercept of $42 and a quantity intercept of 84. Graph these curves and illustrate the market demand curve.

EXERCISE 3.9

Here is an example of a demand curve that is not linear:

Price ($)	4	3	2	1	0
Quantity demanded	25	100	225	400	625

1. Plot this demand curve to scale or in Excel.
2. If the supply function in this market is P=2, plot this function in the same diagram.
3. Determine the equilibrium quantity traded in this market.

EXERCISE 3.10

The football stadium of the University of the North West Territories has 30 seats. The demand curve for tickets has a price intercept of $36 and a quantity intercept of 72.

1. Draw the supply and demand curves to scale in a graph or in Excel. (This demand curve has the form .)
2. Determine the equilibrium admission price, and the amount of revenue generated from ticket sales for each game.
3. A local alumnus and benefactor offers to install 6 more seats at no cost to the University. Compute the price that would be charged with this new supply and compute the revenue that would accrue at this new equilibrium price. Should the University accept the offer to install the seats?
4. Redo the previous part of this question, assuming that the initial number of seats is 40, and the University has the option to increase capacity to 46 at no cost to itself. Should the University accept the offer in this case?

EXERCISE 3.11

Suppose farm workers in Mexico are successful in obtaining a substantial wage increase. Illustrate the effect of this on the price of lettuce in the Canadian winter, using a supply and demand diagram, on the assumption that all lettuce in Canada is imported during its winter.