Economics: Markets and Prices (G00A5a)
Exercises 1.4
Chapter 1.4: Market changes
Exercise 1.4.1
Because of terrorist attacks in Turkey, demand for air travel to Antalya is plum-
meting. At the same time, vacations by car to the south of Europe are on the rise.
What do you think will be the eect of this evolution on the price of a hotel room
in the Turkish Riviera? Which eect, if any, would you expect in the European car
market? Illustrate your answers graphically (assuming standard demand and supply
functions).
Exercise 1.4.1 - Solution
Price of hotel rooms goes down as demand decreases and quantity follows suit, de-
mand for cars swings the other way.
1
Exercise 1.4.2
Suppose the demand for Tesla cars is given by xD (p) = 3 − p, and the supply is given
by xS (p) = 2p, where p is the price.
1. Solve for the equilibrium price p∗ and quantity x∗ . [Options: p∗ = 2, x∗ =
1; p∗ = 1, x∗ = 1; p∗ = 1, x∗ = 2]
2. Suppose now that supply shifts to xS (p) = 2p+1, because batteries become less
expensive. Can you derive to what extent the equilibrium price and quantity
- derived above - change? [Options: p∗ = 32 , x∗ = 73 ; p∗ = 32 , x∗ = 83 ; p∗ =
3, x = 3]
1 ∗ 7
Exercise 1.4.2 - Solution
1. The third option is correct. Setting demand for Tesla cars xD (p) equal to
supply xS (p), the market equilibrium is characterized by
xD (p) = 3 − p = 2p = xS (p) ⇒ p∗ = 1, x∗ = 2. (1)
2. The rst option is correct. Setting demand for Tesla cars xd (p) equal to supply
xs (p), we now get an equilibrium characterized by
2 ∗ 7
xD (p) = 3 − p = 2p + 1 = xS (p) ⇒ p∗ = ,x = . (2)
3 3
Exercise 1.4.3
Let us assume that Tesla cars and helicopters are substitutes. What is the eect of
an increase in the supply of Tesla cars (as analyzed in Exercise 1.4.2) on the price and
quantity sold of helicopters? Illustrate your answer with diagrams for both markets,
assuming standard demand and supply functions.
2
Exercise 1.4.3 - Solution
Since Tesla cars and helicopters are substitutes, fewer people buy helicopters if the
supply of Tesla cars increases, i.e., demand for helicopters goes down. Accordingly,
both the price and the quantity sold of helicopters decreases.
