HW 3
What will happen to the equilibrium price and quantity of beef, if the price of chicken feed increases? (Assume that chicken and beef are substitutes.)
Both will increase. Explanation: An increase in the price of chicken feed shifts the supply curve of chickens to the left, resulting in an increase in the equilibrium price of chickens. Assuming that chicken is a substitute for beef, the increase in the price of chickens will shift the demand curve for beef to the right, increasing both the equilibrium price and the equilibrium quantity of beef.
How will a new law mandating an increase in required levels of automobile insurance affect the equilibrium price and equilibrium quantity in the market for new automobiles?
Equilibrium price will fall; equilibrium quantity will fall. Explanation: Automobile insurance and automobiles are complements, so an increase in automobile insurance rates will thus shift the demand curve for automobiles to the left. Some people who would have bought new automobiles with the lower insurance rates will choose instead to purchase a used car, use public transportation, or perhaps continue driving their current vehicle.
An Arizona student claims to have spotted a UFO over the desert outside of Tucson. How will this claim affect the supply (not the quantity supplied) of binoculars in Tucson stores?
Supply will not change. The demand for binoculars is likely to increase, leading to an increase in price and quantity supplied (but no change in supply). Explanation: The supply of binoculars will not be affected. The demand for binoculars might increase due to more people wanting to spot UFOs. This will lead to an increase in the equilibrium price of binoculars and the quantity of binoculars supplied. However, no change in the supply of binoculars should occur since nothing has changed with regard to input prices, technology, or any of the factors that determine supply.
Suppose that when milk sells for $4.50 per gallon, the quantity of milk demanded is 3,250 gallons per day and the quantity of milk supplied is 3,860 gallons per day. Will the equilibrium price of milk be greater than, less than, or equal to $4.50 per gallon?
The equilibrium price of milk will be less than $4.50. Explanation: At a price of $4.50 per gallon, there is excess supply in the market (since 3,860 is greater than 3,250). This excess supply will exert a downward pressure on prices, leading the equilbrium price to fall below $4.50 per gallon.
State whether the following pairs of goods are complements, substitutes, or both. a. Washing machines and dryers b. Tennis rackets and tennis balls c. Birthday cake and birthday candles d. Cloth diapers and disposable diapers
a. complements b. complements c. complements d. substitutes Explanation: Two goods are complements if an increase in the price of one causes a leftward shift in the demand curve for the other (or if a decrease in the price of one causes a rightward shift in the demand curve for the other). The opposite holds true if two goods are substitutes, where an increase in the price of one causes a rightward shift in the demand curve for the other (or a decrease in the price of one causes a leftward shift in the demand curve for the other). a. Since washing machines and dryers are typically used together, we would expect them to be complements. b. Since tennis rackets and tennis balls are typically used together, we would expect them the be complements. c. Since birthday cake and birthday candles are typically used together, we would expect them the be complements. d. Since cloth diapers and disposable diapers are generally consumed in place of one another, we would expect them to be substitutes.
Indicate how you think each of the following would shift demand in the indicated market: a. The income of buyers in the market for Adirondack vacations increase. The demand curve would b. Buyers in the market for pizza read a study linking pepperoni consumption to heart disease. The demand curve would c. Buyers in the market for gas-powered cars learn of an increase in the price of electric cars (a substitute for gas-powered cars). The demand curve would d. Buyers in the market for electric cars learn of an increase in the price of electric cars. The demand curve would
a. shift to the right b. shift to the left c. shift to the right d. remain unchanged Explanation: a. The demand curve would shift to the right. Buyer income has risen and vacations are a normal good, so this increases the quantity demanded at every given price. b. The demand curve would shift to the left. Buyer preference will probably change because most people want to avoid foods that cause heart disease, so buyers will purchase fewer pizzas with pepperoni. c. The demand curve would shift to the right. Since these goods are substitutes, an increase in the price of electric cars would result in an increased demand for gas-powered cars. d. The demand curve would remain unchanged. An increase in the price of electric cars decreases the quantity demanded of electric cars, which causes a movement along the demand curve.
How would each of the following affect the U.S. market supply curve for corn? a. A new and improved crop rotation technique is discovered. The supply curve would b. The price of fertilizer falls. The supply curve would c. The government offers new tax breaks to farmers. The supply curve would d. A tornado sweeps through Iowa. The supply curve would
a. shift to the right b. shift to the right c. shift to the right d. shift to the left Explanation: a. The supply curve would shift to the right. The discovery is a technological improvement, so the improved technique would allow a farmer to use the same inputs to produce more corn. b. The supply curve would shift to the right. Fertilizer is an input into the production of corn, so this is an example of a decrease in an input price. A decrease in input prices would shift the supply curve to the right. c. The supply curve would shift to the right. New tax breaks would make farming relatively more profitable than before, so those who were earning an income from a non-farming job that paid just a little bit more than farming would switch to farming if the tax break is big enough. d. The supply curve would shift to the left. A tornado would destroy corn fields along with infrastructure used to harvest and store it. Thus, at every given price, the quantity of corn supplied would be lower and the supply curve would shift to the left.
Use the graphs provided to predict what will happen to the equilibrium price and quantity of oranges if the following events take place.Instructions: Depict how this event will affect the market of oranges by dragging the appropriate curve in the graph. a. A study finds that a daily glass of orange juice reduces the risk of heart disease. What will happen to the equilibrium price and quantity of oranges? b. The price of grapefruit falls drastically. What will happen to the equilibrium price and quantity of oranges? c. Suppose the wage paid to orange pickers rises. What will happen to the equilibrium price and quantity of oranges? d. Suppose exceptionally good weather provides a much bigger than expected orange harvest. What will happen to the equilibrium price and quantity of oranges?
a. supply stays the same and demand shifts right; Both equilibrium price and equilibrium quantity will increase. b. supply stays the same and demand shifts left; Both equilibrium price and equilibrium quantity will decrease. c. supply shifts left and demand stays the same; Equilibrium price will increase and equilibrium quantity will decrease. d. supply shifts right and demand stays the same; Equilibrium price will decrease and equilibrium quantity will increase. Explanation a. The discovery will shift the demand curve for oranges to the right. As a result, both the equilibrium price and the equilibrium quantity of oranges will increase. b. Since grapefruit can be assumed to be a substitute for oranges for most consumers, a drastic decrease in the price of grapefruit will make some of the current orange consumers buy grapefruit instead. This will shift the demand curve of oranges to the left. As a result, both the equilibrium price and equilibrium quantity of oranges will decrease. c. Since labor is an input to orange production, an increase in the wage is an increase in the cost of an input. This will shift the supply curve of oranges to the left. As a result, the equilibrium price of oranges will increase and the equilibrium quantity will decrease. Note that an increase in wages does not automatically mean an increase in the productivity of the workers, which would have affected supply in the opposite direction. d. A better than expected harvest means that supply will be greater, shown graphically as a shift of the supply curve to the right. As result, the equilibrium price of oranges will decrease and the equilibrium quantity of oranges will increase.
In March 2020, global crude oil prices tumbled from over $50 a barrel to below $23 per barrel, bringing prices to their lowest level in nearly two decades. This precipitous drop in crude oil prices was fueled by two major shocks to the oil market. First, the COVID-19 pandemic led to a massive reduction in all forms of travel as large numbers of people around the world were advised to shelter in place. Second, Russia, Saudi Arabia, and a number of other major oil-producing nations typically reach collective agreements to limit the world supply of oil in order to keep prices high, but these negotiations broke down in March of 2020, prompting a sharp increase in oil production. Using a supply and demand graph, show how each of these factors affected the market price and quantity of crude oil. Instructions: Click on and drag one or both of the lines below to depict the changes in supply and/or demand in the crude oil market.
demand shifts left and supply shifts right Explanation: The abrupt reduction in travel during the COVID-19 pandemic led to a sharp decrease (leftward shift) in the demand for crude oil since it is a primary ingredient in the production of gasoline and jet fuel. At the same time, the increase in the production of crude oil lead to an increase (rightward shift) in supply. Both the decrease in demand and the increase in supply worked to lower the equilibrium price of crude oil. The net effect on the equilibrium quantity, however, depends on the relative magnitude of the shifts in supply and demand. In theis case, the demand shift dominates, so the equilbrium quantity falls. If the supply shift had dominated, equilibrium quantity would have increased.
How will an increase in the birth rate affect the equilibrium price of land? (Assume the supply of land is fixed.) The equilibrium price of land will ________ because _______ for land shifts to the __________.
increase; demand; right Explanation: An increase in the birth rate will increase the population of potential buyers of land. This will shift the demand curve for land to the right and increase the equilibrium price of land.
