Econ 201 - HW 3 - Chapter 3: Supply and Demand

The U.S. government has subsidized ethanol production since 1978. With the advent of affordable electric cars, policymakers are considering whether to allow the subsidy to expire. The accompanying graph represents the market for ethanol. Move the supply and/or demand curves to show how reducing the subsidy will affect the ethanol market.

Equilibrium price increases. Equilibrium quantity decreases. (supply curve shifts up).

The demand curve

is a graphical representation of the relationship between price and quantity demanded.

During the Obama administration, the development of low-cost batteries for electric cars received large amounts of federal funding in terms of subsidies. Meanwhile, American households gave a higher priority towards minimizing their environmental impact. Consider the market for zero-emissions electric vehicles where there is an upward-sloping supply curve and a downward-sloping demand curve. Which direction will demand and supply shift? What will happen to the equilibrium price? What will happen to the equilibrium quantity?

Both curves will shift right. Change is ambiguous. Quantity increases.

The figure shows the supply and demand for online music. Suppose that an economic downturn decreases household wealth and erodes consumer confidence. Move the supply and/or demand curves to reflect the primary effect this would have on the market for online music. You can assume that online music is a normal good. Also select the end result of equilibrium price and quantity.

Equilibrium price decreases. Equilibrium quantity decreases.

Suppose the cost of lithium-ion batteries, an input into the production of electric vehicles, has dropped more steeply than expected. The accompanying graph depicts a market for electric vehicles. Demonstrate the effect of a reduction in the price of lithium-ion batteries by adjusting the accompanying diagram.

Equilibrium price decreases. Equilibrium quantity increases. (supply curve shifts down).

Suppose that there has been a sudden influx of refugees in the small town of Dallon, leading to a doubling of the local population. The accompanying graph depicts Dallon's market for food. Adjust the graph to show the immediate impact that this rise in population has on the food market. Then determine what happens to equilibrium price and quantity.

Equilibrium price increases. Equilibrium quantity increases.

Classify each scenario according to whether the change in quantity is caused by a shift in the supply curve or movement along the supply curve.

Shift of the supply curve = (After discovering that flash-steaming tuna before using mechanical processes to extract meat removes more tuna flesh, more cans of tuna arrive on the shelves at all major grocers) + (Amplitude decides to join the smartphone market) Movement along the supply curve = (a national consumer products company produces less of its premium quality soap as a result of lower soap prices) + (Americans sell their gold and silver jewelry as a result of rising prices)

According to the law of demand,

a decrease in price increases quantity demanded.