2021-SS242- Demand AND Supply Exercise 3 PDF

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DEMAND_AND_SUPPLY_EXERCISE_3...

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DEMAND AND SUPPLY EXERCISE #3 Please type your answers on a separate sheet of paper. 1. For each of the following pairs of goods, identify if they are substitutes or complements, and describe how the indicated change impacts the market for both goods or services. a) French fries and ketchup. The price of hot dogs increases Complement: The price increase on hot dogs will lead to less buying of hot dogs which ultimately leads to less of a need for French fries and ketchup. b) Taking a train or plane between NYC and Washington. The price of airfare increases Substitute: The increase in airfare prices will lead to more people taking the train. c) Gasoline and sports utility vehicles. The price of gasoline decreases. Complement: The decrease in gasoline will cause more use of the sports utility vehicles. d) Cloth facemasks and paper face masks. The price of cloth masks decreases. Substitute: The decrease in cloth mask will lead to more people buying the paper masks. e) A smartphone and a Verizon data plan. The price of a monthly plan increases. Complement: The increase in monthly plan price will result in a decrease of smart phone needs. 2. You have been hired by Frightfully Wobbly Airlines (FWA) to work in its’ planning office, Indicate how each event below will affect FWA’s supply of airline flights and the equilibrium price. a) FWA has just signed a new contract that lowers the salaries of its pilots. The supply will have a leftward shift and the equilibrium price will decrease. b) FWA has been ordered by the government to install extra safety devices on each plane. The supply will have a rightward shift and the equilibrium price will increase. c) Innovative new software allows FWA to more efficiently allocate its aircraft The supply will have a leftward shift and the equilibrium price will decrease. d) The pandemic forces FWA to take more time cleaning each plane interior between flights. The supply will have a rightward shift and the equilibrium price will increase. e) The minimum wage paid to the semi-skilled workers who work for FWA is raised significantly by Congress. The supply will have a leftward shift and the equilibrium price will decrease.

3. Consider the market for corn. Indicate whether each or these events will cause a movement along the demand curve or a shift in the demand curve for corn. If a shift, indicate which way and what will happen to equilibrium price. a) The government announces a cut in the subsidy to biofuels made from corn. There will be movement along the demand curve. b) The pandemic reduces the incomes of consumers in poor countries, who rely on corn as a staple food. There will be a leftward shift of demand. c) The surgeon general reports the discovery of new health benefits of eating con on the cob. There will be a rightward shift of demand. d) An advertising campaign by the beef producers; association highlights the benefits of corn-fed beef. There will be a rightward shift of demand. e) A new hybrid variety of corn seed causes a 20 percent in the yield of corn per acre. There will be movement along the demand curve. f) John Deere introduces new farming equipment that makes farmers more efficient in the production of corn. There will be a rightward shift of demand. 4. On separate supply and demand diagrams, draw and then explain the shifts of the demand curve for hot dogs in Bentlyville due to the following events. In each case, show the effect on equilibrium price and quality. a) The price of tacos increases. The tacos are a substitute for hot dogs. In this case the demand for hot dogs will increase, the equilibrium price will increase, the equilibrium quantity will increase. b) The price of milk shakes drunk with hot dogs increases. Milk shakes are a compliment to hot dogs, meaning the demand for hot dogs will decrease, the equilibrium price will decrease, the equilibrium quantity will decrease. c) Research shows that hot dog stands help increase the spread of Covid. The demand for hot dogs will decrease, the equilibrium price will decrease, the equilibrium quantity will decrease. d) Income falls in town. (Assume that hot dogs are an inferior good for most people.) The demand for hot dogs will increase, the equilibrium price will increase, the equilibrium quantity will increase. e) All hot dog sellers raise the prices of their French fries.

French fries are a compliment to hot dogs, meaning the demand for hot dogs will decrease, the equilibrium price will decrease, the equilibrium quantity will decrease. f) Fried chicken stands raise the price of fried chicken. The fried chicken is a substitute for hot dogs. In this case the demand for hot dogs will increase, the equilibrium price will increase, the equilibrium quantity will increase. g) Income rises in town. (Now assume that hot dogs are a normal good for most people.) The demand for hot dogs will increase, the equilibrium price will increase, the equilibrium quantity will increase.

A. M. Horowitz 1/2021 Sources: Krugman/Wells; Stevenson/Wolfers; and Karlan/Morduch....