AP_Krugman_Textbook

b.If supply increases relatively more than demand

decreases, then the equilibrium quantity rises, as

shown here:

In both cases, the equilibrium price falls.

Tackle the Test:

Multiple-Choice Questions

1. d


2. b


3. a


4. a


5. c

Tackle the Test:

Free-Response Question

2. 
   

Q 1 Q 2

Quantity (cups of coffee)

P 1

P 2

Price of

coffee

(per cup)

S 1

S 2

D

E 1

E 2

Q 1 Q 2

Quantity of computers

P 1

P 2

Price of

computer S^1

D 1

S 2

D 2

E 1

E 2

Q 2 Q 1

Quantity of computers

P 1

P 2

Price of

computer S^1

D 1

S 2

D 2

E 1

E 2

Module 8

Check Your Understanding

1.

a.Fewer homeowners are willing to rent out their driveways

because the price ceiling has reduced the payment they

receive. This is an example of a fall in price leading to a

fall in the quantity supplied. This is shown in the accom-

panying diagram by the movement from point Eto point

Aalong the supply curve, a reduction in quantity of 400

parking spaces.

b.The quantity demanded increases by 400 spaces as the

price decreases. At a lower price, more fans are willing to

drive and rent a parking space. It is shown in the diagram

by the movement from point Eto point Balong the

demand curve.

c.Under a price ceiling, the quantity demanded exceeds

the quantity supplied; as a result, shortages arise. In

this case, there will be a shortage of 800 parking

spaces. It is shown by the horizontal distance between

points Aand B.

d.Price ceilings result in wasted resources. The additional

time fans spend to guarantee a parking space is wasted

time.

e.Price ceilings lead to the inefficient allocation of goods—

here, the parking spaces—to consumers. If less serious

fans with connections end up with the parking spaces,

diehard fans have no place to park.

f.Price ceilings lead to black markets.

2.a.False. By lowering the price that producers receive,

a price ceiling leads to a decrease in the quantity

supplied.

b.True. A price ceiling leads to a lower quantity supplied

than in an efficient, unregulated market. As a result,

some people who would have been willing to pay the

market price, and so would have gotten the good in an

unregulated market, are unable to obtain it when a price

ceiling is imposed.

c.True. Those producers who still sell the product now

receive less for it and are therefore worse off. Other pro-

ducers will no longer find it worthwhile to sell the prod-

uct at all and so will also be made worse off.

0 3,200 3,600 4,000 4,400 4,800

$15

11

7

3

Parking fee

Quantity of parking spaces

D

E

S

AB

SOLUTIONS TO AP REVIEW QUESTIONS S-5