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Chapter 2: Q.5 (page 77)

Let’s think about the market for air travel. From August 2014 to January 2015, the price of jet fuel increased

roughly 47%. Using the four-step analysis, how do you think this fuel price increase affected the equilibrium price

and quantity of air travel?

Short Answer

Expert verified

price rise leads to fall in quantity demanded, demand curve shifts to left.

Step by step solution

01

Q5

THE RISE IN THE PRICE WOULD LEAD TO DECREASE IN QUANTITY DEMANDED, WHICH WOULD FURTHER SHIFT THE DEMAND CURVE TO LEFT. THE DEMAND CURVE WILL INTERSECT THE SUPPLY CURVE AT A POINT TO THE LEFT, WHICH WOULD LEAD TO A NEW EQUILIBRIUM TO THE LEFT OF THE LAST EQUILIBRIUM.

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Most popular questions from this chapter

A tariff is a tax on imported goods. Suppose the U.S. government cuts the tariff on imported flat screen

televisions. Using the four-step analysis, how do you think the tariff reduction will affect the equilibrium price and

quantity of flat screen TVs?

A vegetable fiber is traded in a competitive world market, and the world price is \(9 per pound. Unlimited quantities are available for import into the United States at this price. The U.S. domestic supply and demand for various price levels are shown as follows:

PRICEU.S. SUPPLY (MILLIONS)U.S. (DEMAND) (MILLIONS)
3234
6428
9622
12816
151010
18124

  1. What is the equation for demand? What is the equation for supply?

  2. At a price of \)9, what is the price elasticity of demand? What is it at a price of \(12?

  3. What is the price elasticity of supply at \)9? At $12?

  4. In a free market, what will be the U.S. price and level of fiber imports?

Much of the demand for U.S. agricultural output has come from other countries. In 1998, the total demand for wheat was Q = 3244 - 283P. Of this, total domestic demand was QD = 1700 - 107P, and domestic supply was QS = 1944 + 207P. Suppose the export demand for wheat falls by 40 percent.

  1. U.S. farmers are concerned about this drop in export demand. What happens to the free-market price of wheat in the United States? Do farmers have much reason to worry?

  2. Now suppose the U.S. government wants to buy enough wheat to raise the price to $3.50 per bushel. With the drop in export demand, how much wheat would the government have to buy? How much would this cost the government?

Example 2.9 (page 76) analyzes the world oil market. Using the data given in that example:

a. Show that the short-run demand and competitive supply curves are indeed given by

D = 36.75 - 0.035P

SC= 21.85 + 0.023P

b. Show that the long-run demand and competitive supply curves are indeed given by

D = 45.5 - 0.210P

SC= 16.1 + 0.138P

c. In Example 2.9 we examined the impact on price of a disruption of oil from Saudi Arabia. Suppose that instead of a decline in supply, OPEC production increases by 2 billion barrels per year (bb/yr) because the Saudis open large new oil fields. Calculate the effect of this increase in production on the price of oil in both the short run and the long run.

Does a price ceiling change the equilibrium price?
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