supply and demand

Topics: Supply and demand / Pages: 21 (4601 words) / Published: Jun 17th, 2014
Practice Questions and Answers from Lesson I-4: Demand and Supply
Practice Questions and Answers from Lesson I-4: Demand and Supply
The following questions practice these skills:
 Describe when demand or supply increases (shifts right) or decreases (shifts left).
 Identify a competitive equilibrium of demand and supply.
 Describe the equilibrium shifts when demand or supply increases or decreases.
 Describe how prices or gross substitutes or gross complements shift demand.
 Describe how input costs or production costs shift supply.
 Aggregate individual demand into market demand.
 Describe how effective price ceilings cause shortages.
 Compute some special demand curves and some special supply curves from verbal descriptions.
Question: A survey indicated that chocolate is Americans’ favorite ice cream flavor. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream.
a. A severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream.
b. A new report by the American Medical Association reveals that chocolate does, in fact, have significant health benefits.
c. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream.
d. New technology for mixing and freezing ice cream lowers manufacturers’ costs of producing chocolate ice cream.
Answer to Question:
a. By reducing their herds, dairy farmers reduce the supply of cream, a leftward shift of the supply curve for cream. As a result, the market price of cream rises, raising the cost of producing a unit of chocolate ice cream. This results in a leftward shift of the supply curve for chocolate ice cream as ice-cream producers reduce the quantity of chocolate ice cream supplied at any given price. Ultimately, this leads to a rise

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