CHAPTER 3DEMAND AND SUPPLY

MULTIPLE CHOICE
1. If demand increases while supply decreases for a particular good:
a. its equilibrium price will increase while the quantity of the good produced and sold could
increase, decrease, or remain constant.
b. the quantity of the good produced and sold will decrease while its equilibrium price could
increase, decrease, or remain constant.
c. the quantity of the good produced and sold will increase while its equilibrium price could
increase, decrease or remain constant.
d. its equilibrium price will decrease while the quantity of the good produced and sold could
increase, decrease, or remain constant.

2. Surplus is a condition of:

a. excess supply.
b. a deficiency in supply.
c. market equilibrium.
d. excess demand.

3. The quantity of product X supplied can be expected to rise with a fall in:
a. prices of competing products.
b. price of X.
c. energy-saving technical change.
d. input prices.

4. Derived demand is directly determined by:

a. utility.
b. the profitability of using inputs to produce output.
c. the ability to satisfy consumer desires.
d. personal consumption.

5. A demand curve expresses the relation between the quantity demanded and:
a. income.
b. advertising.
c. price.
d. all of the above.

6. Change in the quantity supplied reflects a:

a. change in price.
b. switch from one supply curve to another.
c. change in one or more nonprice variables.
d. shift in supply.

Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance.
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7. Holding all else equal, an unnecessary increase in federally-mandated auto safety requirements leads
to a decrease in:
a. auto demand.
b. the quantity of autos supplied.
c. auto supply.
d. the quantity of autos demanded.

8. Holding all else equal, an increase in mandatory payments by employers for universal health care
coverage for workers would lead to a decrease in the:
a. supply of workers.
b. the quantity supplied of workers.
c. the quantity demanded of workers.
d. demand for workers.

9. The effect on sales of an increase in price is a decrease in:

a. the quantity demanded.
b. demand.
c. supply.
d. the quantity supplied.

10. Utility is measured by:

a. wealth.
b. price.
c. value or worth.
d. income.

11. Demand is the total quantity of a good or service that customers:

a. are willing to purchase.
b. are able to purchase.
c. are willing and able to purchase.
d. need.

12. Demand for consumption goods and services is:

a. derived demand.
b. direct demand.
c. product demand.
d. utility.

13. The demand function for a product states the relation between the aggregate quantity demanded and:
a. all factors that influence demand.
b. the aggregate quantity supplied.
c. consumer utility.
d. the market price, holding all the other factors that influence demand constant.
Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance.
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14. Change in the quantity demanded is caused by a change in:

a. advertising.
b. wage rates.
c. raw material costs.
d. price.

15. Change in the quantity supplied is caused by a change in:

a. income.
b. weather.
c. energy costs.
d. price.

16. The supply of a product does not depend on:

a. raw material costs.
b. wage rates.
c. consumer incomes.
d. technology.

17. If the production of two goods is complementary a decrease in the price of one will:
a. increase supply of the other.
b. increase the quantity supplied of the other.
c. decrease the price of the other.
d. decrease supply of the other.

18. Oil refiners can vary the mix of gasoline versus diesel fuel derived from a barrel of oil. If the price of
diesel fuel increases relative to the price of gasoline:
a. supply of gasoline will shift to the right.
b. supply of gasoline will shift to the left.
c. supply of both diesel fuel and gasoline will shift, but in opposite directions.
d. supply of diesel fuel will shift to the right.

19. The supply curve expresses the relation between the aggregate quantity supplied and:
a. price, holding constant the effects of all other variables.
b. aggregate quantity demanded, holding constant the effects of all other variables.
c. profit, holding constant the effects of all other variables.
d. each factor that affects supply.

20. The equilibrium market price of a service is the:

a. price that buyers are willing and able to pay.
b. price where shortages exceed surpluses.
c. price that maximizes profit for sellers.
d. price where the quantity demanded equals the quantity supplied.
Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance.
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21. If the market price is higher than the equilibrium price a:

a. shortage exists and the equilibrium price will rise until it equals the market price and the
shortage is eliminated.
b. surplus exists and the market price will fall until it equals the equilibrium price and the
surplus is eliminated.
c. surplus exists and the equilibrium price will rise until it equals the market price and the
surplus is eliminated.
d. shortage exists and the market price will fall until it equals the equilibrium price and the
shortage is eliminated.

22. The equilibrium market price and quantity of beef would increase if:
a. consumers increasingly view beef as unhealthy.
b. the price of cattle feed decreased.
c. consumer income increased.
d. herd sizes fell following a severe drought.

23. The equilibrium market price of lead pencils would decrease and the quantity of pencils produced and
sold would increase if:
a. the price of graphite (pencil lead) decreased.
b. pencil workers obtained higher wages.
c. the price of word processors decreased.
d. the price of pens, a substitute for pencils, increased.

24. If demand and supply both increase, the:

a. equilibrium price will decrease while the quantity produced and sold could increase,
decrease or remain constant.
b. quantity produced and sold will increase while the equilibrium price could increase,
decrease, or remain constant.
c. quantity produced and sold will decrease while the equilibrium market price could
increase, decrease, or remain constant.
d. equilibrium price will increase while the quantity produced and sold could increase,
decrease, or remain constant.

25. Holding all else equal, if supply increases, the:

a. equilibrium price will decrease while the quantity produced and sold could increase,
decrease or remain constant.
b. quantity produced and sold will increase while the equilibrium price could increase,
decrease, or remain constant.
c. equilibrium price will increase while the quantity produced and sold could increase,
decrease or remain constant.
d. none of these.

Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance.
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PROBLEM
1. Demand and Supply Curves. The following relations describe demand and supply conditions in the
lumber/forest products industry:
QD = 75,000 - 10,000P

(Demand)

QS = -15,000 + 50,000P

(Supply)

where Q is quantity measured in thousands of board feet (one square foot of lumber, one inch thick)
and P is price in dollars.
A. Complete the following table:

Price
(1)
$3.00
2.50
2.00
1.50
1.00

Quantity
Supplied
(2)

Quantity
Demanded
(3)

Surplus (+) or
Shortage (-)
(4) = (2) - (3)

2. Demand and Supply Curves. The following relations describe demand and supply conditions in the
wheat industry:
QD = 5,500 - 1,000P

(Demand)

QS = -4,500 + 1,500P

(Supply)

where Q is quantity measured in millions of bushels and P is price in dollars.

A. Complete the following table:

Price
(1)
$4.50
4.25
4.00
3.75
3.50

Quantity
Supplied
(2)

Quantity
Demanded
(3)

Surplus (+) or
Shortage (-)
(4) = (2) - (3)

3. Demand and Supply Curves. The following relations describe demand and supply conditions in the
milk industry:
QD = 315,000 - 250,000P

(Demand)

QS = -165,000 + 550,000P

(Supply)

Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance.
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where Q is quantity measured in millions of gallons and P is price in dollars.

A. Complete the following table:

Price
(1)
$0.90
0.80
0.70
0.60
0.50

Quantity
Supplied
(2)

Quantity
Demanded
(3)

Surplus (+) or
Shortage (-)
(4) = (2) - (3)

4. Demand and Supply Curves. The following relations describe demand and supply conditions in the
oil industry:
QD = 525,000 - 7,500P

(Demand)

QS = -150,000 + 15,000P

(Supply)

where Q is quantity measured in millions of barrels and P is price in dollars.

A. Complete the following table:

Price
(1)
$35
30
25
20
15

Quantity
Supplied
(2)

Quantity
Demanded
(3)

Surplus (+) or
Shortage (-)
(4) = (2) - (3)

5. Demand Analysis. The demand for automobiles is often described as highly cyclical, and very
sensitive to automobile prices and interest rates. Given these characteristics, describe the effect of each
of the following in terms of whether it would increase or decrease the quantity demanded or the
demand for automobiles. Moreover, when price is expressed as a function of quantity, indicate whether
the effect of each of the following is an upward or downward movement along a given demand curve
or instead involves an outward or inward shift in the relevant demand curve for autos. Explain your
answers.
A. A decrease in auto prices
B.

A fall in interest rates

C.

A rise in interest rates

D. A severe economic recession

Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance.
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E.

A robust economic expansion

6. Demand Analysis. The demand for refrigerators is often described as cyclical, and very sensitive to
refrigerator prices and interest rates. Given these characteristics, describe the effect of each of the
following in terms of whether it would increase or decrease the quantity demanded or the demand for
refrigerators. Moreover, when price is expressed as a function of quantity, indicate whether the effect
of each of the following is an upward or downward movement along a given demand curve or instead
involves an outward or inward shift in the relevant demand curve for refrigerators. Explain your
answers.
A. An increase in refrigerator prices
B.

A fall in interest rates

C.

A rise in interest rates

D. A severe economic recession

E.

A robust economic expansion

7. Demand Analysis. The demand for high-definition television sets (HDTV) is often described as
highly cyclical, and very sensitive to HDTV prices and interest rates. Given these characteristics,
describe the effect of each of the following in terms of whether it would increase or decrease the
quantity demanded or the demand of HDTVs. Moreover, when price is expressed as a function of
quantity, indicate whether the effect of each of the following is an upward or downward movement
along a given demand curve or instead involves an outward or inward shift in the relevant demand
curve for HDTVs. Explain your answers.
A. A decrease in HDTV prices
B.

A fall in interest rates

C.

A rise in interest rates

D. A severe economic recession

E.

A robust economic expansion

8. Comparative Statics. Demand and supply conditions in the market for unskilled labor are important
concerns to business and government decision makers. Consider the case of a federally mandated
minimum wage set above the equilibrium or market clearing wage level. Some of the following factors
have the potential to influence the demand or quantity demanded of unskilled labor. Influences on the
supply or quantity supplied may also result. Holding all else equal, describe these influences as
increasing or decreasing, and indicate the direction of the resulting movement along or shift in the
relevant curve(s).
Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance.
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A. An increase in the popularity of self-service gas stations, car washes, and so on.
B.

A fall in welfare benefits

C.

An increase in the minimum wage

D. A rise in interest rates

E.

A decrease in the quality of secondary education

9. Comparative Statics. Demand and supply conditions in the steel market are important concerns to
business and government decision makers. Some of the following factors have the potential to
influence the demand or quantity demanded of raw steel. Influences on the supply or quantity supplied
may also result. Holding all else equal, describe these influences as increasing or decreasing, and
indicate the direction of the resulting movement along or shift in the relevant curve(s).
A. Increases in the U. S. Department of Transportation's mileage requirements for car fleets.
B.

Public outcry at the poor condition of the nation's interstate freeway system.

C.

New alloys that increase steel's tensile strength are created.

D. A severe recession.
E.

A new technology reduces the production cost of raw steel by one-third.

10. Comparative Statics. Demand and supply conditions in the market for utility-generated electric
power are important concerns to business and government decision makers. Some of the following
factors have the potential to influence the demand or quantity demanded of electric power. Influences
on the supply or quantity supplied may also result. Holding all else equal, describe these influences as
increasing or decreasing, and indicate the direction of the resulting movement along or shift in the
relevant curve(s).
A. An increase in the strategic desirability for large manufacturers to co-generate (or
self-generate) power.
B.

Congress mandates reduced emissions from coal combustion.

C.

Environmentalist groups spark a conservation effort nationwide.

D. A health study finds a positive correlation between number of hours under a heat lamp and
reduced risk of cancer.
E.

An advance in solar technology creates very efficient collection devices, allowing for cheap
and efficient roof-top solar energy.

Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance.
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11. Comparative Statics. Coupon Promotions, Inc., is a coupon book publisher with markets in several
southwestern states. CPI coupon books are either sold directly to the public, sold through religious and
other charitable organizations, or given away as promotional items. Operating experience during the
past year suggests the following demand function for its coupon books:
Q = 10,000 - 5,000P + 0.02Pop + 0.4I + 0.6A
where Q is quantity, P is price ($), Pop is population, I is disposable income per capita ($), and A is
advertising expenditures ($).
A. Determine the demand curve faced by CPI in a typical market where P = $5, Pop =
1,000,000 persons, I = $35,000 and A = $10,000. Show the demand curve with quantity
expressed as a function of price, and price expressed as a function of quantity.
B.

Calculate the quantity demanded at prices of $5, $2.50, and $0.

C.

Calculate the prices necessary to sell 10,000, 25,000, and 50,000 units.

12. Quantity Demanded. Gurgling Springs, Inc. is a bottler of natural spring water distributed throughout
the New England states. Five-gallon containers of GSI spring water are regionally promoted and
distributed through grocery chains. Operating experience during the past year suggests the following
demand function for its spring water:
Q = 250 - 100P + 0.0001Pop + 0.003I + 0.003A
where Q is quantity in thousands of five-gallon containers, P is price ($), Pop is population, I is
disposable income per capita ($), and A is advertising expenditures ($).
A. Determine the demand curve faced by CPI in a typical market where P = $4, Pop =
4,000,000 persons, I = $50,000 and A = $400,000. Show the demand curve with quantity
expressed as a function of price, and price expressed as a function of quantity.
B.

Calculate the quantity demanded at prices of $5, $4, and $3.

C.

Calculate the prices necessary to sell 1,250, 1,500, and 1,750 thousands of five gallon
containers.

13. Quantity Demanded. The Sharper Edge, Inc. is a leading retailer of Yingsu Knives, a set of kitchen
cutlery, which it markets on a nationwide basis. SEI knife sets are either sold directly to the public
through national television marketing programs, or given away as promotional items. Operating
experience during the past year suggests the following demand function for its knife sets:
Q = 4,000 - 4,000P + 10,000N + 0.25I + 0.4A
Where Q is quantity, P is the price ($), N is the average Nielson rating of television programs during
which SEI advertises Yingsu Knives, I is average disposable income per household ($), and A is
advertising expenditures ($).
A. Determine the demand curve faced by SEI in a typical market where P = $35, N = 18.5, I =
Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance.
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$44,000, and A = $500,000. Show the demand curve with quantity expressed as a function of
price, and price expressed as a function of quantity.
B.

Calculate the quantity demanded at prices of $40, $35, and $30.

C.

Calculate the prices necessary to sell 264,000, 292,000, and 320,000 sets of knives.

14. Demand Curve Analysis. Air California, Inc. is a regional airline providing service between Los
Angeles, California and Las Vegas, Nevada. An analysis of the monthly demand for service has
revealed the following demand relation:
Q = 45,000 - 250P - 300PC + 250BAI + 10,000S
Where Q is quantity measured by the number of passengers per month, P is the price ($), PC is a price
index for connecting flights (1982 = 100.), BAI is a business activity index (1982 = 100) and S, a
binary or dummy variable, equals 1 in summer months, zero otherwise.
A. Determine the demand curve facing the airline during the winter month of January if
P = $100, PC = 150, BAI = 200, and S = 0.
B.

Calculate the quantity demanded and total revenues during the summer month of July if all
price-related variables are as specified above.

15. Demand Curve Analysis. Badger Bus Company is a regional bus line providing service between
Milwaukee, Wisconsin and Chicago, Illinois. An analysis of the monthly demand for service has
revealed the following demand relation:
Q = 1,750 - 40P - 15PC + 30BAI - 1,700S
Where Q is quantity measured by the number of passengers per month, P is the price ($), PC is a price
index for connecting bus routes (1992 = 100.), BAI is a business activity index (1992 = 100) and S, a
binary or dummy variable, equals 1 in summer months, zero otherwise.
A. Determine the demand curve facing the bus service during the winter month of February if
P = $40, PC = 120, BAI = 175, and S = 0.
B.

Calculate the quantity demanded and total revenues during the summer month of August if
all price-related variables are as specified above.

16. Demand Curve Analysis. Pappa's Pizza, Ltd., provides delivery and carryout service to the city of
South Bend, Indiana. An analysis of the daily demand for pizzas has revealed the following demand
relation:
Q = 1,400 - 100P - 2PS + 0.01CSP + 750S

Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance.
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where Q is the quantity measured by the number of pizzas per day, P is the price ($), PS is a price
index for soda pop (1992 = 100), CSP is the college student population and S, a binary or dummy
variable, equals 1 on Friday, Saturday and Sunday, zero otherwise.
A. Determine the demand curve facing Pappa's Pizza on Tuesdays if P = $10, PS = 125, and
CSP = 35,000, and S = 0.
B.

Calculate the quantity demanded and total revenues on Fridays if all price-related variables
are as specified above.

17. Supply Curve Analysis. A review of industry-wide data for the domestic wine manufacturing
industry suggests the following industry supply function:
Q = -7,000,000 + 400,000P - 2,000,000PL - 1,500,000PK + 1,000,000W
where Q is cases supplied per year, P is the wholesale price per case ($), PL is the average price paid
for unskilled labor ($), PK is the average price of capital (in percent), and W is weather measured by
the average seasonal rainfall in growing areas (in inches).
A. Determine the industry supply curve for a recent year when P = $80, PL = $10, PK = 12%,
and W = 25 inches of rainfall. Show the industry supply curve with quantity expressed as a
function of price and price expressed as a function of quantity.
B.

Calculate the quantity supplied by the industry at prices of $50, $75 and $100 per case.

C.

Calculate the prices necessary to generate a supply of 10 million, 25 million, and 50 million
cases.

18. Supply Curve Analysis. A review of industry-wide data for the frozen grape juice manufacturing
industry suggests the following industry supply function:
Q = -3,000,000 + 500,000P - 800,000PL - 1,000,000PK + 300,000W
where Q is cases supplied per year, P is the wholesale price per case ($), PL is the average price paid
for unskilled labor ($), PK is the average price of capital (in percent), and W is weather measured by
the average seasonal temperature in growing areas (in fahrenheit).
A. Determine the industry supply curve for a recent year when P = $40, PL = $10, PK = 15%,
and W = 70 degrees Fahrenheit. Show the industry supply curve with quantity expressed as a
function of price and price expressed as a function of quantity.
B.

Calculate the quantity supplied by the industry at prices of $30, $40 and $50 per case.

C.

Calculate the prices necessary to generate a supply of 10 million, 25 million, and 40 million
cases.

Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance.
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19. Supply Curve Analysis. Computers.com is a leading Internet retailer of high-performance desktop
computers. Based on an analysis of monthly cost and output data, the company has estimated the
following relation between its marginal cost of production and monthly output:
MC = TC/Q = $100 + $0.005Q
A. Calculate the marginal cost of production at 100,000, 200,000, and 300,000 units of output.
B.

Express output as a function of marginal cost. Calculate the level of output at which MC =
$1,000, $1,500 and $2,000.

C.

Calculate the profit-maximizing level of output if prices are stable in the industry at $1,500
per unit and, therefore, P = MR = $1,500.

D. Again assuming prices are stable in the industry, derive the firm's supply curve. Express
price as a function of quantity and quantity as a function of price.

20. Supply Curve Analysis. Credible Switches, Inc., is a distributor of generic safety switches used in the
washing machines and dryers. Based on an analysis of monthly cost and output data, the company has
estimated the following relation between the marginal cost (wholesale cost plus distribution cost per
unit) and monthly output:
MC = TC/Q = $2 + $0.00001Q
A. Calculate marginal cost at 400,000, 500,000, and 600,000 units of output.
B.

Express output as a function of marginal cost. Calculate the level of output at which MC =
$5, $8, and $10.

C.

Calculate the profit-maximizing level of output if prices are stable in the industry at $8 per
switch and, therefore, P = MR = $8.

D. Again assuming prices are stable in the industry, derive CSI's supply curve for switches.
Express price as a function of quantity and quantity as a function of price.

21. Optimal Supply. Shake-n-Shing, Inc., is a supplier of wood shakes and shingles used in home
construction. Shakes and shingles are sold by the bundle. Based on an analysis of monthly cost and
output data, the company has estimated the following relation between its marginal costs and monthly
output:
MC = TC/Q = $50 + $0.00005Q
A. Calculate marginal cost at 500,000, 700,000, and 900,000 bundles of output.
B.

Express output as a function of marginal cost. Calculate the level of output at which MC =
$75, $100 and $125.

C.

Calculate the profit-maximizing level of output if prices are stable in the industry at $100 per
bundle, and, therefore, P = MR = $100.
Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance.
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D. Again assuming prices are stable in the industry, derive Shake-n-Shing's supply curve for
bundles of shakes and shingles. Express price as a function of quantity and quantity as a
function of price.

22. Industry Supply. Columbia Pharmaceuticals, Inc., and Princeton Medical, Ltd., supply a generic drug
equivalent of an antibiotic used to treat postoperative infections. Proprietary cost and output
information for each company reveal the following relations between marginal cost and output:
MCC = TCC/Q = $5 + $0.001QC

(Columbia)

MCP = TCP/Q = $6 + $0.00025QP

(Princeton)

The wholesale market for generic drugs is vigorously price-competitive, and neither firm is able to
charge a premium for its products. Thus, P = MR in this market.
A. Determine the supply curve for each firm. Express price as a function of quantity and
quantity as a function of price. (Hint: Set P = MR = MC to find each firm's supply curve.)
B.

Calculate the quantity supplied by each firm at prices of $5, $7.50, and $10. What is the
minimum price necessary for each individual firm to supply output?

C.

Determine the industry supply curve when P < $6.

D. Determine the industry supply curve when P > $6. To check your answer, calculate quantity
at an industry price of $10 and compare your answer with part B.

23. Industry Supply. Stanford Plastics, Inc. and Cal-Tech Associates, Inc. supply a generic phone jack
that connects telephone cords to phone outlets. Proprietary cost and output information for each
company reveal the following relations between marginal cost and output:
MCS = TCS/Q = $1 + $0.00002QS

(Stanford)

MCC = TCC/Q = $1.50 + $0.000005QC

(Cal-Tech)

The wholesale market for modular phone jacks is vigorously price-competitive, and neither firm is
able to charge a premium for its products. Thus, P = MR in this market.
A. Determine the supply curve for each firm. Express price as a function of quantity and
quantity as a function of price. (Hint: Set P = MR = MC to find each firm's supply curve.)
B.

Calculate the quantity supplied by each firm at prices of $1, $1.50, and $2. What is the
minimum price necessary for each individual firm to supply output?

C.

Determine the industry supply curve when P < $1.50

D. Determine the industry supply curve when P > $1.50. To check your answer, calculate
quantity at an industry price of $2 and compare your answer with part B.

Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance.
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24. Market Equilibrium. Florida Orange Juice is a product of Florida's Orange Growers' Association.
Demand and supply of the product are both highly sensitive to changes in the weather. During hot
summer months, demand for orange juice and other beverages grows rapidly. On the other hand, hot
dry weather has an adverse effect on supply by reducing the size of the orange crop.
Demand and supply functions for Florida orange juice are as follows:
QD = 4,500,000 - 1,200,000P + 2,000,000PS + 1,500Y + 100,000T

(Demand)

QS = 8,000,000 + 2,400,000P - 500,000PL - 80,000PK - 120,000T

(Supply)

where P is the average price of Florida ($ per case), PS is the average retail price of canned soda ($ per
case), Y is income (GNP in $billions), T is the average daily high temperature (degrees), PL is the
average price of unskilled labor ($ per hour), and PK is the average cost of capital (in percent).
A. When quantity is expressed as a function of price, what are the Florida demand and supply
curves if P = $11, PS = $5, Y = $12,000 billion, T = 75 degrees, PL = $6, and PK = 12.5%.
B.

Calculate the surplus or shortage of Florida orange juice when P = $5, $10, and $15.

C.

Calculate the market equilibrium price-output combination.

25. Market Equilibrium. Various beverages are sold by roving vendors at Busch Stadium, home of the St.
Louis Cardinals. Demand and supply of the product are both highly sensitive to changes in the weather.
During hot summer months, demand for ice-cold beverages grows rapidly. On the other hand, hot dry
weather has an adverse effect on supply in that it taxes the stamina of the vendor carrying his or her
goods up and down many flights of stairs. The only competition to this service are the beverages that
can be purchased at kiosks located throughout the stadium.
Demand and supply functions for ice-cold beverages per game are as follows:
QD = 20,000 - 20,000P + 7,500PK + 0.8Y + 500T

(Demand)

QS = 1,000 + 12,000P - 900PL - 1,000PC - 200T

(Supply)

where P is the average price of ice-cold beverage ($ per beverage), PK is the average price of beverages
sold at the kiosks ($ per beverage), Y is disposable income per household for baseball fans, T is the
average daily high temperature (degrees), PL is the average price of unskilled labor ($ per hour), and
PC is the average cost of capital (in percent).
A. When quantity is expressed as a function of price, what are the ice-cold beverage demand
and supply curves if P = $5, PK = $4, Y = $62,500, T = 80 degrees, PL = $10, and PC = 12%.
B.

Calculate the surplus or shortage of ice-cold beverage when P = $4, $5, and $6.

C.

Calculate the market equilibrium price-output combination.

Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance.
- - 14 - -