Econ 200, Spring 2012 Suggested Answers to Exercise Set 3

Transcription

1 Econ 200, Spring 2012 Suggested Answers to Exercise Set 3 1. Running shoes: The decrease in demand for running shoes could be caused by: 2 1 (Other reasons are possible.) 2 1 a. Under the assumption that running shoes is a normal good (please look up the definition of a normal good if you do not remember), a decrease in consumers incomes. b. An increase in the price of running shorts (since running shoes and running shorts are complement goods) c. A decrease in the price of bicycles. (since running and cycling are alternative sports running shoes and bicycles are substitute goods) 2. The market demand for corn (in millions of bushels) rice d ' d (for part b) ' d (for part c) $ $ $ $ $ $ $ b. If incomes rise and corn is a normal good, the demand schedule for corn will shift right in the graph. This can be achieved, for example, by increasing the quantity demanded numbers in the table by 20 units for each price. c. If corn is an inferior good, and incomes rise, then the demand schedule for corn will shift left in the graph. This can be achieved, for example, by decreasing the quantity demanded numbers in the table by 20 units for each price. d. A change in the price of a substitute can alter the demand for a good, because, for example, if the substitute good becomes cheaper, the consumers will increase their consumption of that substitute good and will demand a lower quantity of the original good. 3. Which of the following would be least likely to increase the demand for beer? a. A new FA study concludes that beer cures colds and skin disorders. This will increase the demand for beer. b. A price war results in beer selling for $0.05/bottle.

2 This will increase the quantity demanded but will not change demand. c. Bars beginning giving away spicy snacks to their customers. This is a decrease in the price of a complement good, demand for beer will increase. d. The price of a substitute, hard liquor, (example: vodka, gin etc) rises. This is an increase in the price of a substitute good, demand for beer will increase. e. There is an increase in the drinking-age population. If there are more consumers their total demand (which is called the market demand) will increase. 4. If a new technological breakthrough in genetic engineering makes it possible to grow twice as much corn per acre as had been possible in the past, the most likely result will be: a. a decrease (shift to the left) in the supply of corn, due to the increased costs associated with the new technology. This is false: A technological progress will cause an increase in supply not a decrease. b. an increase (shift to the right) in the supply of corn, due to the reduced cost of production. This is a likely outcome: A technological progress will cause an increase in supply not a decrease. c. an increase in the demand for corn, due to the greatly reduced price. NO. If price of corn decreases for whatever reason, quantity demanded will increase, demand will not change. d. an increase in quantity supplied, due to the increased willingness to sell corn. The increase in corn supply (the shift to the right) will cause a reduction in the price of corn but quantity supplied will be more likely to be larger than it was before. e. a shift from corn production to wheat production, using all of the extra land not needed for corn production. If new technology causes a decline in corn price, then since corn and wheat are substitutes demand for wheat will decrease. Hence there is not much reason to expect that more land will be allocated to wheat production. 5. An inferior good is one for which demand: a. rises as income rises. This is false since this is the definition of the normal good. b. falls as income rises. This is true since this is the definition of the inferior good. c. is unrelated to income. NO d. is low because of the low quality of the good. LOW demand HIGH demand are not well defined terms. Note that we define normal and inferior goods by how demand changes when income changes. e. is high because the good must be replaced often. 6. Assume that the demand function for (tons of) oranges is = 28 4, and the supply function is S = 18 +, where is price (in 100,000 TL per kilo). a. Compute quantity demanded if the price is 400,000 TL per kilo (i.e. = 4). Set = 4 in the demand equation: quantity demanded is 12 units. b. Compute the quantity supplied if the price is 400,000 TL per kilo (i.e. = 4). Set = 4 in the supply equation: quantity supplied is 22 units. c. Since quantity supplied exceeds quantity demanded, there is excess supply. It is 10 units.

3 7. rice Individual demand uantity demanded Market demand rice Individual supply uantity supplied Market supply x 5 = x 0 = x 4 = x 2 = x 3 = x 4 = x 2 = x 6 = 18 The equilibrium price is 3 at which the quantity demanded is equal to the quantity supplied ( = S = 12). Each firm will produce 4 units. Each consumer will consume 3 units. 8. (a) otatoes: (b) Automobiles: S S 1 * 0 * 0 * 1 * * 1 * 1 * 0 * Increase in demand ecrease in demand (c) Grapefruits: (d) ersonal Computers: S 1 S 0 S 1 1 * S 0 0 * 0 * 1 * 1 * 0 * 0 * 1 * ecrease in supply Increase in supply 9.

4 (1). A scientific report is issued saying that fish contains mercury. As a result, for every price quantity demanded falls and demand shifts to the left. Equilibrium price and equilibrium quantity falls. (2). The price of diesel fuel falls significantly. iesel fuel is an input for fish production. The fall in input prices shifts the supply curve to the right. As a result equilibrium price falls and equilibrium quantity increases S S S Both (1) and (2) lower the equilibrium price. Therefore when both of these events occur, equilibrium price is going to go down. (1) decreases equilibrium quantity and (2) increases it. The effect of both of the events on the equilibrium quantity is therefore ambiguous. It depends on the relative magnitudes of the changes in demand in (1) and supply in (2). Below are the three possible cases graphed. (a) Change in supply is bigger than the change in demand. Therefore e < e. (b) Change in supply is equal to the change in demand. Therefore e = e. (c) Change in demand is bigger than the change in supply. Therefore e < e. (a) S (b) S S (c) S S S e < e e = e e < e

5 10. Flour is an input in bagel production. When price of flour goes down, bagel supply curve shifts to the right. This causes equilibrium quantity to rise. But equilibrium price goes down. Therefore a fall in the price of flour cannot be responsible for the new equilibrium in the bagel market. The fall in the price of milk first affects the cream cheese market. Cream cheese supply shifts to the right. Equilibrium price of cream cheese falls and equilibrium quantity increases. Since cream cheese and bagel are complements this increases demand for bagels. Bagel demand curve shifts up and both equilibrium price and quantity of bagels rise. Therefore the fall in the price of milk may be responsible for the observed change in the bagel market.