Solution Manual for Microeconomics 2nd Edition Bernheim

Whinston 0073375853 9780073375854

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Chapter 02 – Supply and Demand

Answers to Discussion Questions

1. After terrorists destroyed the World Trade Center and surrounding office
buildings on September 11, 2001, some businesspeople worried about the risks
of remaining in Manhattan. What effect would you expect their concern to have
on the price of office space in Manhattan? Over time, those fears eased and the
area around the World Trade Center site was made into a park, so the destroyed
office buildings were never rebuilt. Who would be likely to gain economically
from the creation of this park? Who would be likely to lose?

Answer:
The destruction of the World Trade Center caused a change in both the supply of and
the demand for office space in Manhattan. The change in supply was a physical
reduction in the available space; the change in demand came from worry from
businesspeople about issues of safety. When both supply and demand decrease in this
way, the effect on quantity is obvious: there will be less office space rented in
Manhattan. What is not clear is the effect on price. If the decrease in supply were greater
than the decrease in demand, price would rise; if the other way around, price would fall.

In the long run, after office space is rebuilt, the supply curve would shift back out to (or
closer to) its original position. If demand never rebounded, then this would cause an
overall reduction in the price of office space.

However, now that the area around the World Trade Center has been turned into a park,
the decrease in supply is permanent. Further, if demand were to rebound (say because
the park causes a lower density of office space, making it a less likely target for another
attack, thereby alleviating concerns), this would mean a higher price in the long run.
Those who owned the office space not destroyed by the attacks would be the “winners,”
as they would see their prices rise. The “losers” would be those who pay higher rents for
their office space.

2. If the U.S. government were to ban imports of Canadian beef for reasons
unrelated to health concerns, what would be the effect on the price of beef in the
 United States? How would the typical American’s diet change? What about the
typical Canadians? What if the ban suggested to consumers that there might be
health risks associated with beef?

Answer:
A ban on Canadian beef would lower the supply of beef available to U.S. consumers,
which would cause an increase in the price of beef. Initially, before the price changes,
there will not be enough beef to satisfy demand. This will cause upward pressure on
prices, driving some consumers out of the market, and leading some suppliers into the
market. Depending on how much of the beef being sold in the U.S. was Canadian beef,
the increase could be great. Americans will reduce their beef consumption (though
more Americans are producing beef than before).

2-1
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Chapter 02 – Supply and Demand

In Canada, beef producers would be supplying too much beef to the market, with no one
to buy it. This will cause downward pressure on prices. Because of the decrease in
price, some Canadian consumers will enter the market and some producers will leave
the market. Canadians will consume more beef (and produce less).

Unless U.S. consumers believed that the health risk associated with Canadian beef also
implied health risks associated with U.S.-produced beef, the analysis for the U.S.
would not be any different. If U.S. consumers did believe that all beef was unsafe, this
would cause a decrease in the demand for beef, which would reverse the price-
increasing trend of the ban (making the final effect on price ambiguous) while further
reducing beef consumption.

If Canadian consumers believed that their beef was unsafe, there would also be a
decrease in demand. This would counter the trend toward consuming more beef (so that
the final effect on beef consumption would be ambiguous, but it would further reduce the
price.

3. Published reports indicate that Economics professors have higher salaries

than English professors. Discuss the factors that might be responsible for this.

Answer:
Salaries are determined by demand and supply. Relative to English, fewer Economics
Ph.D.’s are granted every year. Additionally, economists have relatively more
nonacademic job options, further reducing the supply of Economics professors, relative
to English. There may be more demand for English professors, but the difference in
demand is not large enough to make up for the difference in supply.

4. In the last 30 years, the wage difference between high school and college graduates
has grown dramatically. At the same time, the fraction of adults over age 25 that
have college degrees has risen from around 16 percent to over 27 percent. How
might the widespread adoption of computers explain these trends?

Answer:
Widespread adoption of computers has increased the demand for computer literate
workers while decreasing the demand for computer illiterate workers. College graduates
are more likely to have the necessary computer literacy. Also, the increase in demand
for computer literate workers has been faster than the increase in supply of college
graduates.

2-2
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Chapter 02 – Supply and Demand

Answers to Problems

2.1 Consider again the demand function for corn in formula (1). Graph the
corresponding demand curve when potatoes and butter cost $0.75 and $4 per
pound, respectively, and average income is $40,000 per year. At what price does
the amount demanded equal 15 billion bushels per year? Show your answer using
algebra.

Answer:
Formula 1 - Consider the demand function for corn:

where Qdcorn is the amount of corn demanded per year in billions of bushels; Pcorn is the
price of corn per bushel; Ppotatoes and Pbutter are the price of potatoes and butter per
pound, respectively; and M is consumers’ average annual income.

The corresponding demand curve when potatoes and butter cost $0.75 and $4 per
pound, respectively, and average income is $40,000 per year---see the graph below:

At the price of $2.00 the amount demanded is equal to 15 billion bushels per year.

2-3
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Chapter 02 – Supply and Demand

Explanation:
Graphing a linear demand curve is most easily done by finding the x- and y-intercepts.

Y-intercept = 9.5: Substitute the values of Ppotatoes, Pbutter , and M into the demand function
and find the price of corn, Pcorn, at which Qd equals zero.
Qd = 5 – 2Pcorn + 4Ppotatoes – 0.25Pbutter + 0.0003M
0 = 5 – 2Pcorn + 4(0.75) – 0.25(4.00) + 0.0003(40,000)
0 = 5 – 2Pcorn + 3 – 1 + 12
– 19 = – 2Pcorn
Pcorn = 9.5 = y

X-intercept = 19: Substitute the values of Ppotatoes, Pbutter , and M into the
demand function. Set the price of corn, Pcorn, equal to zero and solve for Qd.
Qd = 5 – 2Pcorn + 4Ppotatoes – 0.25Pbutter + 0.0003M
Qd = 5 – 2Pcorn + 4(0.75) – 0.25(4.00) + 0.0003(40,000)
Qd = 5 – 2(0) + 3 – 1 + 12
Qd = 19 = x-intercept.
To find the price, set the demand function equal to 15. Substitute the values of Ppotatoes,
Pbutter, and M into the demand function and find the price of corn, Pcorn, at which Qd
equals 15.
Qd = 5 – 2Pcorn + 4Ppotatoes – 0.25Pbutter + 0.0003M
15 = 5 – 2Pcorn + 4(0.75) – 0.25(4.00) + 0.0003(40,000)
15 = 5 – 2Pcorn + 3 – 1 + 12
15 = 19 – 2Pcorn
– 4 = – 2Pcorn
Pcorn = $2.00.

2.2 Consider again the supply function for corn in formula (2). Graph the
corresponding supply curve when diesel fuel costs $2.75 per gallon and the
price of soybeans is $10 per bushel. At what price does the amount supplied
equal 21 billion bushels per year? Show your answer using algebra.

Answer:
Consider the supply function for corn:

where Qscorn is the amount of corn supplied per year in billions of bushels; Pcorn is the
price of corn per bushel; Pfuel is the price of diesel fuel per gallon; and Psoybeans is the
price of soybeans per bushel.

The corresponding supply curve is presented below:

2-4
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McGraw-Hill Education.
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important Japanese counteroffensive against the
Bougainville perimeter.
SOLOMON ISLANDS

INFANTRYMEN WITH BAYONETS FIXED advance

through jungle swamp, following an M4 medium tank, to
rout out the enemy, 16 March. The conquest of the island
necessitated much advance patrol work and many
mopping-up operations deep in the tropical jungle.
Casualties were heavier than in any operation since the
Guadalcanal Campaign in the Solomon chain.

NEW GUINEA
AUSTRALIA

AN AUSTRALIAN AIRFIELD, 18 September 1942. An

Australian sentry is on guard near a Flying Fortress in
right foreground as soldiers await planes to go to New
Guinea (top); troops boarding a C-47 transport plane for
New Guinea (bottom). During the last days of September
1942 the Allies launched a counterattack in Papua, New
Guinea, thus starting the Papua Campaign. American
troops for this action were sent to Port Moresby from
Australia, partly by plane and partly by boat.
 NEW GUINEA

MEN WADING ACROSS THE SAMBOGA, near

Dobodura, New Guinea. The enemy fell back under the
weight of the 28 September 1942 attack. Australians
laboriously made their way over steep mountain trails of
the Owen Stanley Range while most of the American
troops, a total of about 4,900, were flown overland to
Jaure in C-47’s. This was the first large-scale airborne
troop movement of the war. Troops from Milne Bay
garrison occupied Goodenough Island early in November.
NEW GUINEA

MEN CROSSING AN IMPROVISED FOOTBRIDGE,

15 November. From the 10th, troops advanced as rapidly
as possible along the muddy trails and waded, often breast
high, through streams to approach Buna. A surprise attack
on Buna was not possible as Australian patrols had
learned that “bush wireless” carried the news of the
American airborne movement to the Japanese.
 NEW GUINEA

AERIAL VIEW OF THE TERRAIN NEAR

DOBODURA. The rugged terrain of Papua includes the
high Owen Stanley Range, jungles, and impassable,
malaria-infected swampy areas as well as coconut
plantations and open fields of coarse, shoulder-high kunai
grass encountered near Buna. Only one rough and steep
trail existed over the range from the Port Moresby area to
the front, taking from 18 to 28 days to traverse on foot;
however, American troops and supplies flown over the
range made the trip in about 45 minutes.
AUSTRALIA

MEN BOARDING THE ARMY TRANSPORT GEORGE

TAYLOR in Brisbane, Australia, for New Guinea on 15
November. The Papua Campaign and the almost
simultaneous action on Guadalcanal were the first
victorious operations of U.S. ground forces against the
Japanese.
 NEW GUINEA

SOLDIERS CARRYING RATIONS ALONG A TRAIL

for the troops at the front, 24 December. Only a few trails
led from Allied positions to the enemy’s fortified areas at
Buna and Sanananda. Food was so short during November
and the early part of December that troops sometimes
received only a small portion of a C ration each day. The
rain, alternating with stifling jungle heat, and the insects
seemed more determined than the enemy; disease inflicted
more casualties than the Japanese.
NEW GUINEA

FIRING A 60-MM. MORTAR M2 into the enemy lines at

Buna Mission. Because of transportation difficulties
which lasted until the end of November, only about one
third of the mortars were brought with the troops. Allied
attacks were made on both Sanananda and Buna with no
material gains.
 NEW GUINEA

BREN-GUN CARRIERS, disabled in an attack on 5

December. These full-track, high-speed cargo carriers,
designed to transport personnel, ammunition, and
accessories, were produced for the British only. The
presence of several Bren-gun carriers proved a surprise to
the enemy. However, enemy soldiers picked off the
exposed crews and tossed grenades over the sides of the
carriers. In a short time they were all immobilized and
infantry following behind them met with intense fire from
the enemy’s defenses.
NEW GUINEA

AMERICAN LIGHT TANKS M3, mounting 37-mm.

guns, near the Duropa Plantation on 21 December 1942.
During the latter part of December, tanks arrived by boat.
Only one 105-mm. howitzer was used in the campaign
and it was brought to the front by plane. After many
setbacks, Buna Village was captured on 14 December.
Although Allied attacks at various points were often
unsuccessful, the Japanese, suffering from lack of supplies
and reinforcements, finally capitulated on 2 January 1943
at Buna Mission.
 NEW GUINEA

U.S. SOLDIERS FIRING A 37-MM. GUN M3A1 into

enemy positions. The 37-mm. gun was the lightest
weapon of the field-gun type used by the U.S. Army.
Japanese tactics during the Buna campaign were strictly
defensive; for the most part the enemy dug himself in and
waited for Allied troops to cross his final protective line.
NEW GUINEA

A NATIVE DRAWING A MAP to show the position of

the enemy forces. In general, the islanders were very
friendly to the Allies; their work throughout the campaign,
in moving supplies over the treacherous trails and in
rescuing Allied survivors of downed aircraft, was
excellent.

NEW GUINEA

INFANTRYMEN READY TO FIRE .30-CALIBER M1

RIFLES into an enemy dugout before entering it for
inspection (top); looking at a captured Japanese
antiaircraft gun found in a bombproof shelter in the Buna
area (bottom). Enemy fortifications covered all the
approaches to his bases except by sea, and were not easily
discerned because of fast growing tropical vegetation
which gave them a natural camouflage.
NEW GUINEA

CONSTRUCTING A CORDUROY ROAD with the help

of the natives in New Guinea. Constant work was
maintained to make routes passable for jeeps.
Construction of airstrips near Dobodura and Popondetta,
underway by 18 November, was assigned the highest
priority because of the lack of a harbor in the area. Some
supplies were flown to the airstrips and some arrived by
sea through reef-studded coastal waters near Ora Bay. The
last vital transport link was formed by a few jeeps and
native carriers who delivered the supplies to dumps just
beyond the range of enemy small arms fire.
 NEW GUINEA

ADVANCE PATROL CREEPING ALONG A BEACH to

its objective just ahead, 21 January 1943. Attacks from all
sides by the American and Australian units in their drive
toward Sanananda met with stiff enemy resistance after
Buna Mission had been captured.