Econs WEEK 2 Assignments PDF

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A supply-demand graph can be described as having a demand curve that begins in the upper left and slopes downward to the lower right; and having a supply curve that begins in the lower left and slopes upward to the upper right. Using words in a narrative, please describe and explain how both the equilibrium price and quantity will change when:

a) Only supply decreases ANSWER: A decrease in supply will shift the supply curve to the left thus increasing the equilibrium price and decreasing the quantity demanded of that good or service. As the price rises to a new equilibrium level, the quantity demanded decreases. Supply shifters which could cause the above effect include increase in costs of production, increase in returns from available alternative uses of production inputs, reduction in the number of suppliers/producers and their exit from the market, problems of technology in production and unforeseen naturally occurring events. b) Only supply increases ANSWER: An increase in supply will shift the supply curve to the right thus decreasing the equilibrium price and increasing the quantity demanded of that good or service. As the price falls to a new equilibrium level, the quantity demanded increases. However, this increase in quantity demanded is not a shift on the demand curve but just a movement along the demand curve. Supply shifters which could cause the above effect include decrease in the cost of production such as low labour costs, decrease in returns from available alternative uses of production inputs, improved technology employed in production, increase in the number of suppliers/producers and new entrants in the market. c) Only demand increases ANSWER: An increase in demand will shift the demand curve to the right thus increasing the equilibrium price and increasing the quantity supplied of that good or service also. As the price rises to a new equilibrium level, the quantity supplied also increases. However, this increase in quantity supplied is not a shift on the supply curve but just a movement along the supply curve. Demand shifters which could cause the above effect include a shift in preference that boosts consumption at lower prices for a related or a complement product example, crude oil and gasoline, a higher price for substitute product such as coffee and tea, rise in income, increase in the size of the target market and buyer expectations and speculations. d) Only demand decreases ANSWER:

A decrease in demand will shift the demand curve to the left thus decreasing the equilibrium price and decreasing the quantity supplied of that good or service also. As the price falls to a new equilibrium level, the quantity supplied also falls. Demand shifters capable of causing the above effect include a shift in preference that induces less consumption such as healthy lifestyle and nutrition considerations, increase in the price of product’s complements, reduction in the price of substitutes, low income, reduction in the size of target market, change in buyer expectations and speculations.

QUESTION: Gasoline "prices at the pump" go up and down and Oil "costs per barrel" go up or down, but they do so at different rates and even in opposite directions sometimes. We want to think that demand and supply controls prices where the cost of crude oil is set by the same economic conditions that determine the price of gas. What are these mismatched trends (graphs of each are shown in the following web links) telling us about how demand and supply work in the market?

ANSWER: This is a typical market scenario where the demand and supply of both products, crude oil and gasoline simultaneously shift their curves as a result of several demand and supply shifters or events occurring at the same time to cause both curves to shift in the same directions or in opposite directions and by different amounts. Consequently, as the curves of these two items make these shifts, their equilibrium price and quantity keep readjusting and resetting back to an appropriate equilibrium price and quantity. As a rule of thumb, since demand curves are downward sloping and supply curves are upward sloping, it then follows that if a simultaneous shift of both demand and supply curves causes equilibrium price or quantity to move in the same direction, then equilibrium price or quantity will move in that direction. However, if the shift of either the demand or the supply curve causes equilibrium price or quantity to rise while the shift of the other curve causes equilibrium price or quantity to fall, then the relative amount by which each curve shifts must be taken into account in determining or understanding how that variable changed. Therefore, as the demand and supply shifters change causing the demand and supply curves to shift simultaneously, we then can predict how price and quantity will respond to these changes too. Some of the mismatched trends include: CASE 1. When the demand curve shifts more than the supply curve, this increases the equilibrium quantity. CASE 2: When the supply curve shifts more than the demand curve, this decreases the equilibrium quantity. CASE 3: When both curves shifts by equal amounts, this leaves the equilibrium quantity unchanged. See attached graphs for illustration.

WRITTEN ASSIGNMENT FOR CHAPTER 5 Suppose you are the manager of a restaurant that serves an average of 400 meals per day at an average price per meal of $20. On the basis of a survey, you have

determined that reducing the price of an average meal to $18 would increase the quantity demanded to 450 per day. 1.

e

Compute the price elasticity of demand between these two points.

D=

∆Q

A-B

QAvg

∆PA-B PAvg

Where

eD

∆QA-B

Change in Quantity demanded between points A an B

=

=

Price elasticity of demand

QAvg = Average quantity demanded between points A and B ∆PA-B

= Change in price between points A and B

PAvg = Average price between points A and B

e

D A-B = 400-450

400+450 2

20-18 20+18 2 = -1.12%

Analysis: Total Revenue at $20 = (20*400) = $8,000 Total Revenue at new price of $18 = (18*450) = $8,100

2. Would you expect total revenues to rise or fall? Explain. ANSWER: Total Revenue will rise because the absolute value of the price elasticity of demand here is

˃1 which means the demand is elastic. Thus, the price reduction leads to increased

consumption which in turn increases Total Revenue because with an elastic demand, Total Revenue moves in the direction of Quantity change. In this analysis, Quantity change increased, therefore Total Revenue also increased. 3.

Suppose you have reduced the average price of a meal to $18 and are considering a further reduction to $16. Another survey shows that the quantity demanded of meals will increase from 450 to 500 per day. Compute the price elasticity of demand between these two points. ANSWER:

Using the above formula also but this time around from point B ($18) to point C ($16). We have thus

e

D B-C = 450-500

450+500 2

18-16 18+16 2 = -0.89%

Analysis: Total Revenue at $18 = (18*450) = $8,100 Total Revenue at new price of $16 = (1*450) = $8,000

4. Would you expect total revenue to rise or fall as a result of this second price reduction? Explain. ANSWER: Total Revenue will fall because the absolute value of the price elasticity of

˂

demand here is 1 which means the demand is inelastic. Thus, the price reduction leads to increased consumption but not enough to increase Total Revenue because with an inelastic demand, Total Revenue moves in the direction of price change and not in the direction of quantity change. In this analysis, price change decreased, therefore Total Revenue also decreased. 5.

Compute total revenue at the three meal prices. Do these totals confirm your answers in (b) and (d) above?

ANSWER: Total Revenue at $20 = (20*400) = $8,000 Total Revenue at new price of $18 = (18*450) = $8,100 Total Revenue at new price of $16 = (1*450) = $8,000

WEEK 2 QUIZ

St ar t edon St at e Compl et edon Ti met aken Gr ade

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Question 1

Tuesday ,9Febr uar y2021,5: 26AM Fi ni s hed Tuesday ,9Febr uar y2021,6: 28AM 1hour1mi n 10. 00outof10. 00( 100%)

Cor r ect Mar k1. 00outof1. 00

Fl agques t i on Question text I ft hepr i c eofc hocol at ec ov er edpeanut sdec r eas esf r om $1. 10t o$0. 90andt hequant i t y demandeddoesnotc hange,t hi si ndi c at est hat ,i fot hert hi ngsar eunc hanged,t hepr i c eel as t i c i t y ofdemandi s : Sel ectone: a.0.

b.0. 5. c .1. d.2.

Question 2 Cor r ect Mar k1. 00outof1. 00

Fl agques t i on Question text I ft hepr i c eel as t i c i t yofdemandi sf oundt obe3/ 4,t hendemandi s : Sel ectone: a.pr i c ei nel as t i c .

b.pr i c eel as t i c . c .uni tpr i c eel as t i c . d.pos i t i v el ysl oped.

Question 3

Cor r ect Mar k1. 00outof1. 00

Fl agques t i on Question text I ft ot al r ev enuegoesdownwhenpr i c ef al l s ,t hepr i c eel as t i c i t yofdemandi ss ai dt obe: Sel ectone: a.pr i c ei nel as t i c .

b.uni tpr i c eel as t i c . c .pr i c eel as t i c . d.pos i t i v e.

Question 4 Cor r ect Mar k1. 00outof1. 00

Fl agques t i on Question text Thedemandf oragr i c ul t ur alout puti spr i c ei nel as t i c .Thi smeanst hati ff ar mer s ,t ak enc ol l ec t i v el y , hav eabumperc r op,t heywi l l exper i ence: Sel ectone: a.l owerpr i c es ,gr eat erquant i t i ess ol d,andl oweri nc omes .

b.hi gherpr i c es ,gr eat erquant i t i ess ol d,andhi gheri ncomes . c .l owerpr i c es ,quant i t i ess ol d,andi nc omes . d.hi gherpr i c es ,quant i t i ess ol d,andi nc omes .

Question 5 Cor r ect

Mar k1. 00outof1. 00

Fl agques t i on Question text

I nt hi sexhi bi t( Demandf orBungal owBob' sBagel s )t ot alr ev enuer emai nsunchangedi ft hepr i c e ________f r om ________. Sel ectone: a.dec r eas es ;$0. 50t o$0. 40 b.dec r eas es ;$0. 60t o$0. 50

c .dec r eas es ;$0. 70t o$0. 60 d.i nc r eases ;$0. 60t o$0. 70

Question 6 Cor r ect Mar k1. 00outof1. 00

Fl agques t i on Question text

I nt hi sexhi bi t( Demandf orShi r t s)t hepr i c eel as t i c i t yofdemandf ort hesegmentCDi s : Sel ectone: a.gr eat ert han1( abs ol ut ev al ue) .

b.1. c .0. 71. d.0. 29.

Question 7 Cor r ect Mar k1. 00outof1. 00

Fl agques t i on Question text Ademandc ur v et hati sper f ect l yi nel as t i c : Sel ectone: a.wi l l bev er t i c al .

b.wi l l behor i z ont al . c .wi l l beupwar dsl opi ng.

d.hasanel as t i c i t yequalt o1ev er ywher eont hec ur v e.

Question 8 Cor r ect Mar k1. 00outof1. 00

Fl agques t i on Question text I ft hepr i c eofc hocol at ec ov er edpeanut si nc r eas esandt hedemandf ors t r awber r i esdoesnot c hange,t hi si ndi c at est hatt hes et wogoodsar e: Sel ectone: a.unr el at edgoods .

b.i nf er i orgoods . c .s ubs t i t ut egoods . d.c ompl ement ar ygoods .

Question 9 Cor r ect Mar k1. 00outof1. 00

Fl agques t i on Question text Thec r os spr i c eel as t i c i t yofdemandf orCok ewi t hr es pectt ot hepr i c eofPepsi hasbeen es t i mat edt obe0. 61.I ft hepr i c eofPepsi f al l sby10per c enti naper i od,howwi l l t hataffec tt he demandf orCok ei nt hatper i od,al l ot hert hi ngsunc hanged? Sel ectone: a.Thedemandf orCok ewi l l i ncr eas ebutbyl es st han6. 1per c ent . b.Thedemandf orCok ewi l l i nc r easeby6. 1per cent . c .Thedemandf orCok ewi l l notchangebec aus emanypeopl epr ef erCok eov erPeps i .

d.Thedemandf orCok ewi l l f al l .

Question 10 Cor r ect Mar k1. 00outof1. 00

Fl agques t i on Question text Al t houghi nmos tc as est hepr i c eel as t i c i t yofl abors uppl yi s________,f ors omei ndi v i dual si t ma ybe________. Sel ectone: a.negat i v e;z er o b.negat i v e;pos i t i v e c .pos i t i v e;negat i v e

d.z

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