1. Explain each of the following statements using supply-and-demand diagrams.
a) "When a cold snap hits florida,the price of orange juice rises in supermarkets throughout the country."
b) "When the weather turns warm in New England every summer,the price of hotel rooms in Caribbean resorts plummets."
c) "When a war breaks out in the Middle East,the price of gasoline rises,and the price of a used Cadillac falls."
Ans : a)
In this case below things will happen
1. The cold snap in Florida will destroy oranges
2. This will reduce the quantity of oranges produced which in turn will reduce the supply of the quantity of oranges
3. So, for the same price now there will be less oranges which will shift the supply curve inward.
4. As the figure shows this decrease in supply raises the equilibrium price.
In this case the below things will happen
1. When the weather turns warm, there will be fewer people who will be eager to visit warm places like Carribean
2. So, at the existing prices the hotel rooms will be empty in Caribbean. In other words there will be a decrease in demand for hotel rooms
3. The demand curve will shift to the left
4. The hotel owners will reduce the price to keep the rooms booked
5. As the figure suggests, this will reduce equilibrium price.
In this case following things happen
1. War destroys oil fields ,oil tankers which reduces the supply of oil
2. The supply curve for oil moves inward as a result the supply curve of gasoline, made of oil, also moves inward
3. Thus the price of gasoline increases as is evident from the figure
4. On the other hand, since used Cadillac consumes lot of gasoline, it becomes expensive to run Cadillac
5. People demands less of this car as a result the demand curve moves to the left
6. This reduces the price of used Cadillac cars as is evident from the figure.
2. "An increase in the demand for notebooks raises the quantity of notebooks demanded but not the quantity supplied." Is this statement true or false ? Explain.
Ans : This statement is false. The figure below(FIG 1) shows that when the demand increases for notebooks, the quantity supplied also increases. The statement could have been true if the supply curve were a straight line as shown in the figure(FIG 2)
4.Consider the markets for DVD movies, TV Screens, and tickets at movie theaters.
a. For each pair, identify,whether they are complements or substitutes:
DVDs and TV screens
DVDs and movie tickets
TV screens and movie tickets
b. Suppose a technological advance reduces the cost of manufacturing TV screens. Draw a diagram to show what happens in the market for TV screens.
c.Draw two more diagrams to show how the change in the market for TV screens affects the markets for DVDs and movie tickets
DVDs and TV screens - Complements
DVDs and movie tickets – substitutes
TV screens and movie tickets – substitutes
b) Let us say that the market for TV screens is in equilibrium at the market price P1 and quantity demanded Q1. The technological advance reduces the cost of manufacturing TV screens. So, the producers will supply more TV screens at each price. This will result in an outward shift of the supply curve. The new equilibrium point is now at Price P2 and quantity Q2. This results in a fall in price and increase in quantity demanded.
c) When the price of TV screens, complement of DVDs, decreases, the demand for DVDs will increase at each price resulting in an outward shift in the demand for DVDs. This will move the new equilibrium to P2 and Q2 increasing the price as well as the quantity demanded.
When the price of TV screens, substitute of movie tickets, decreases, the demand for movie tickets will fall at each price resulting in a leftward shift of the demand for movie tickets. The new equilibrium will now be at P2 and Q2 decreasing the price as well as the quantity demanded of the movie tickets.
6. Consider these two statements from the In the News box:
a. "Political unrest overseas threatens to disrupt the supply of America's sweetest temptations."
b. "As the price goes up , farmers have motivation to do anything they can to get their product to the market."
Which of these statements refers to a movement along the supply curve? Which refers to a shift in the supply curve? Explain
Ans`: The second statement refers to movement along the supply curve. This is because in this case, the increase in quantity supplied is happening for an increasing price and not for a fixed price.
The first statement refers to a shift in the supply curve. In this case for the same price the quantity supplied is decreasing. As a result the supply curve will shift to the left.
8. Suppose that in the year 2010 the number of births is temporarily high. How does this baby boom affect the price of baby-sitting services in 2015 and 2025? (Hint: 5-year-olds need baby-sitters whereas 15-year-olds can be baby-sitters)
Ans: A temporarily high birth in 2010 will result in higher price for baby sitters in 2015 and lower price in 2025. This is because in 2015, there will be more 5-year-olds who will need baby sitters, so the demand for baby sitting services will rise. In 2025 there will be more 15-year-old which will shift the supply of baby sitting services outward. This will result in a fall in the baby sitting service prices.
9. Ketchup is a complement (as well as a condiment for hot dogs. If the price of hot dogs rises what happens to the market for ketchup? For tomatoes? For tomato juice? For orange juice?
Market for ketchup:
If the price of hot dogs rises, it will result in a low demand of hot dog. This in turn will result in low demand of ketchup. This will also lead to price fall in ketchup.
Market for tomato:
Since tomato is a raw material for ketchup, fall in price of ketchup will result in fall in demand of tomato leading to a fall in price of tomato as the producers will try to increase sales by cutting price.
Market for tomato juice:
Since tomato juice is produced from tomatoes, fall in price of tomato will lead to more supply of tomato juice at each price. This will shift the supply curve to the right resulting in a fall of price and increase in demand for tomato juice.
Market for orange juice:
If the price of tomato juice decreases, demand for orange juice decreases because it is a substitute of tomato juice.
11. Because bagels and cream cheese are often eaten together, they are complements.
a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of bagels have risen. What could be responsible for this pattern—a
fall in the price of flour or a fall in the price of milk? Illustrate and explain your answer.
b.Suppose instead that the equilibrium price of cream cheese has risen but the equilibrium quantity of bagels has fallen. What could be responsible for this pattern—a rise in the price of flour or a rise in the price of milk? Illustrate and explain your answer
a. The reason for this pattern is a fall in the price of flour.
Bagel market: When the price of flour which is a raw material for bagel falls, the producers will supply more bagel at each price. So, the supply curve of bagel shifts outwards. This will result in a rise in the equilibrium quantity of the bagel as is evident from the figure below. This will also result in reduced price of bagel.
Cream cheese market: When the price of bagel(complement of cream cheese) falls, the demand for cream cheese increases. This shifts the demand curve to the right thus increasing the equivalent price of cream cheese as is evident form the figure below.
b. The reason for this pattern is a rise in the price of milk
Cream cheese market: Due to the increase in the price of milk, the producers will produce less of cream cheese. This will result in a reduction in supply of cream cheese which will shift the supply curve to the left. This results in a rise in the equilibrium price of cream cheese.
Bagel market: Since the price of the complement increases, the demand for bagel falls. The curve shifts to the left. This results in a fall in the equivalent quantity of bagel.
12. Suppose that the price of basketball tickets at your college is determined by market forces. Currently, the demand and supply schedules are as follows:
PRICE QUANTITYDEMANDED QUANTITYSUPPLIED
$ 4 10,000 8000
8 8000 8000
12 6000 8000
16 4000 8000
20 2000 8000
a. Draw the demand and supply curves. What is unusual about this supply curve? Why might this be true?
b. What are the equilibrium price and quantity of tickets?
c. Your college plans to increase the total enrollment next year by 5000 students. The additional students will have the following demand schedule:
$ 4 4000
Now add the old demand schedule and the demand schedule for the new students to calculate the new demand schedule for the entire college. What will be the new equilibrium price and quantity?
The unusual thing is that the supply curve is vertical.
This might be true because the basketball stadium might have a fixed number of seats irrespective of the price.
b. equilibrium price is $8, equilibrium quantity is 8000
The new equilibrium price is $12 and equilibrium quantity is 8000.
13. Market research has revealed the following information about the market for Pizza: The demand schedule can be represented by the equation QD = 380 – 20P, where QD is the quantity demanded and P is the price. The supply schedule can be represented by the equation QS = -120 + 30P,where QS is the quantity supplied. Calculate the equilibrium price and quantity in the market for pizza.
Ans : Equilibrium happens when quantity supplied = quantity demanded.
380-20P = -120 + 30P
or, 50P = 500
or, P = 10
Therefore Q = 180
The equilibrium price is 10 and the equilibrium quantity is 180
Saturday, August 25, 2007
Posted by Rajib at 7:47 PM