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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

The price of coffee rose sharply last month, while the quantity sold remained the same. Each of five people suggests an explanation:

Tom:    Demand increased, but supply was perfectly inelastic.

Dick:    Demand increased, but it was perfectly inelastic.

Harry:    Demand increased, but supply decreased at the same time.

Larry:    Supply decreased, but demand was unit elastic.

Mary:    Supply decreased, but demand was perfectly inelastic.

Who could possibly be right?

  1. a. Tom, Dick, and Harry
  2. b. Tom, Dick, and Mary
  3. c. Tom, Harry, and Mary
  4. d. Dick, Harry, and Larry
  5. e. Dick, Harry, and Mary

To determine
Choosing the right explanation for the cause.

Explanation

Figures 1-5 below is the graphical illustrations of explanations offered by Tom, Dick, Harry, Larry and Mary for the cause of sharp rise in price of coffee with no change in quantity sold. Explanations of each of them are graphed separately to evaluate the correct explanation of the cause. In all the figures from 1 to 5, the vertical axis represents the price of coffee and horizontal axis represents the quantity demanded and supplied of coffee. 

Figure 1 illustrates Tom’s explanation and according to him, supply is perfectly inelastic and demand is increased. From the figure, it can be inferred that the price increased while the quantity remained the same. This proves Tom’s explanation to be correct.

By Dick’s explanation as in figure 2, the demand has increased but is perfectly inelastic. As a result, both the price and quantity of coffee increased which implies his explanation to be incorrect.

In Figure 3, by Harry’s explanation, demand increased and supply decreased at the same time...

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