Answers for hw1 - answer for homework 1 PDF

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answer for homework 1...

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1. For each of the following markets, indicate whether the stated change causes a shift in the supply curve, a shift in the demand curve, a movement along the supply curve, or a movement along the demand curve. a) The housing market: Consumer incomes fall. Demand for housing decreases. The demand curve shifts down to the left. b) The tea market:

The price of sugar goes down.

Sugar is a complement. A fall in the price of a complement (sugar) causes the demand for tea to increase. The demand curve for tea shifts up to the right. c) The coffee market: A freeze in Columbia severely damages the coffee crop. The freeze causes the supply of coffee to decrease. The supply curve of coffee shifts up to the left. d) The coffee shop market: The number of coffee shops increase. The increase in coffee shops causes the supply curve for coffee to shift down to the right. e) The peanut market: A drought lowers supply. The drought causes the supply of peanuts to decrease. The supply of peanuts shifts up to the left.

2. Determine which of the following four sentences use the terminology of the supply and demand correctly. a) The price of bicycles rose, and therefore the demand for bicycles went down. Incorrect use of terminology. An increase in the price of bicycles causes the quantity demanded of bicycles to decline. There is an upward movement along the demand curve as opposed to a shift in the demand curve. b) The demand for bicycles increased, and therefore the price went up. Correct usage. An increase in the demand for bicycles causes the demand for bicycles to shift up to the right along the supply curve. Bicycle prices increase. c) The price of bicycles fell, decreasing the supply of bicycles. Incorrect use of terminology. A decrease in the price of bicycles causes a decrease in the quantity supplied of bicycles. There is a downward movement along the supply curve as opposed to a shift in the supply curve (a decrease in supply). d) The supply of bicycles increased, and therefore the price of bicycles fell. Correct usage. An increase in the supply for bicycles causes the supply for bicycles to shift down to the right along the demand curve. Bicycle prices fall.

3. Consider the following supply and demand model of the world tea market (quantity is in billions of pounds)

Price per Quantity Quantity Pound Supplied Demanded $0.38 1,500 525 $0.37 1,000 600 $0.36 700 700 $0.35 600 900 $0.34 550 1,200 a) Is there a shortage or a surplus when the price is $0.38? What about $0.34? At $0.38 quantity demanded equals 525 and quantity supplied equals 1,500. There is an excess supply (a surplus) of tea equal to 975 billion pounds. At $0.34 quantity demanded equals 1,200 and quantity supplied equals 550. There is an excess demand (a shortage) for tea equal to 650 billion pounds. b) Graph the supply and demand curves and show where the equilibrium price and quantity are on the graph.

c) If there is a surplus (excess supply) or a shortage (excess demand) at a price of $0.38, calculate its size in billions of pounds and show it on the graph. There is a surplus when the price of tea equals $0.38.

4.

Bagels and cream cheese are complements because they are often eaten together. a) If the equilibrium price of cream cheese and the equilibrium quantity of bagels increase, which of the following is the most likely explanation? A fall in the price of flour or a fall in the price of milk? Explain. The price of cream cheese rose and the equilibrium quantity of bagels increased because of a fall in the price of flour. This occurred because a fall in the price of flour (an input in bagel production) causes the supply of bagels to increase, which, in turn, causes an increase in the equilibrium quantity of bagels and a decrease in the equilibrium price of bagels. The fall in the price of bagels causes an increase in the demand for cream cheese (a complement to bagels), which, in turn, causes the price of cream cheese to increase.

b) If the equilibrium price of cream cheese has risen while the equilibrium quantity of bagels has fallen, then which of the following is the best explanation? An increase in the price of flour or an increase in the price of milk? Explain. The price of cream cheese rose and the equilibrium quantity of bagels fell because of an increase in the price of milk. This occurred because milk is an input in cream cheese production. The price of milk increasing causes a decrease in the supply of cream cheese, which, in turn, causes an increase in the price of cream cheese. A higher price of cream cheese causes the demand for bagels to fall because cream cheese and bagels are complements. The equilibrium quantity of bagels falls because of the decrease in the demand for bagels.....