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In: Economics

2) Explain how the following statements affect the demand curve for PASTA. Indicate whether they cause...

2) Explain how the following statements affect the demand curve for PASTA. Indicate whether they cause an increase/decrease in demand or an increase/decrease in quantity demanded. Show graphically. a) The price of rice falls. b) Consumer income increases (assume that pasta is an inferior good). c) The price of pasta sauce rises. d) The price of pasta rises.

3) Explain how the following statements affect the supply of orange juice. Indicate whether the event causes an increase/decrease in supply or an increase/decrease in the quantity supplied. Show graphically. a) Florida, “The Sunshine State”, experiences a devastatingly cold winter. b) Thepriceofplasticdecreases. c) The government mandates that all orange juice producers must provide child care for their employees

4) The Wonka chocolate bar market can be represented using the supply and demand equations below. ?? =587.5−50? ?? =500?−375 a) Find the price and quantity intercepts for the demand curve. b) Find the price intercept for the supply curve. (note: no need to solve for the quantity intercept) c) Find the equilibrium price and quantity for Wonka chocolate bars. d) Using the supply and demand graph, show the following items: demand intercepts, supply intercept, and the market equilibrium. Make sure the graph is labeled appropriately. e) Explain what would happen to the market if the price of a Wonka bar was set at ? = 3. Surplus or shortage. Calculate excess demand or supply.

Solutions

Expert Solution

2.

a. As pasta and rice are substitutes of each other, as the price of rice falls, consumer will substitute pasta with rice, hence the demand for pasta falls and the demand curve for pasta shifts leftward from D1 to D2 and as the economy moves from point A to point B, the equilibrium price of pasta falls from P1 to P2 and the equilibrium quantity of pasta falls from Q1 to Q2.

b. As pasta is an inferior good, this means that as consumers income increase, demand for pasta will falls and the demand curve for pasta shifts leftward from D1 to D2 and as the economy moves from point A to point B, the equilibrium price of pasta falls from P1 to P2 and the equilibrium quantity of pasta falls from Q1 to Q2.

c. As the pasta sauce is used to make pasta, pasta sauce and pasta are complements of each other. Now as the price of pasta sauce rises, people will buy less pasta and the demand for pasta will fall and the demand curve for pasta shifts leftward from D1 to D2 and as the economy moves from point A to point B, the equilibrium price of pasta falls from P1 to P2 and the equilibrium quantity of pasta falls from Q1 to Q2.

d. As the price of pasta is an endogenous variable, this means that price of pasta is determined on the basis of the model, now as the price of pasta rises, there will be an upward movement along the demand curve and as the economy moves from point A to point B, the price of pasta rises from P1 to P2 and the quantity demanded of pasta declines from Q1 to Q2.

Rahul Sunny answered 7 months ago
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