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In: Economics

This problem is about the market for peanut butter. Bad whether and tornadoes in             Georgia...

This problem is about the market for peanut butter. Bad whether and tornadoes in             Georgia greatly affected the peanut crop, and as a result the market price of peanuts increased.

2i.        Suppose the price of peanuts increased from 20 cents per pound to 30 cents per pound,     and the quantity of peanuts purchased fell from 275 million pounds per month to 225        million pounds. The price elasticity of demand for peanuts is

            ___________________

2ii.       What is the effect of the change in the peanut market for the market for peanut butter?

            a.         Demand for peanut butter decreases.

            b.         Supply of peanut butter decreases.

            c.         The price of peanut butter increases.

            d.         Both answers b and c are correct.

            e.         Both answers a and c are correct.

2iii.      Suppose jelly is a complement to peanut butter. What is the effect in the jelly market of the change in the peanut market and the peanut butter market?

            a.         Demand for jelly decreases.

            b.         Demand for jelly increases.

            c.         Supply of jelly decreases.

            d.         Supply of jelly increases.

            e.         Both answers a and c.

2iv.      Suppose the strawberry crop is unusually large resulting in a decrease in the price of         strawberries and a decrease in the price of strawberry jelly. What would happen to the equilibrium price and quantity of peanut butter from the combination of the change in the       peanut market and the change in the strawberry market?

a.

Price will fall and the effect on quantity is ambiguous.

b.

Price will rise and the effect on quantity is ambiguous.

c.

Quantity will fall and the effect on price is ambiguous.

d.

Quantity will increase and the effect on price is ambiguous

e.

The effect on both price and quantity is ambiguous.

2v.       Suppose the income elasticity of demand for Jiff brand peanut butter is +.5, whereas the       income elasticity of demand for store brand X peanut butter is -.3. If income increases by     10 percent, how much does consumption of Jiff peanut butter change and how much does            consumption of brand X peanut butter change?

            ___________________

Solutions

Expert Solution

2i.        Suppose the price of peanuts increased from 20 cents per pound to 30 cents per pound,     and the quantity of peanuts purchased fell from 275 million pounds per month to 225        million pounds. The price elasticity of demand for peanuts is

Price elasticity of demand = Percentage change in quantity demanded/Percentage change in price = -18.18/50 = 0.36

2ii.       What is the effect of the change in the peanut market for the market for peanut butter?

            d.         Both answers b and c are correct.

Explanation: AS curve shifts to the left.

2iii.      Suppose jelly is a complement to peanut butter. What is the effect in the jelly market of the change in the peanut market and the peanut butter market?

            a.         Demand for jelly decreases.

Explanation: Demand for jelly is positively related to price of peanut butter.

2iv.      Suppose the strawberry crop is unusually large resulting in a decrease in the price of         strawberries and a decrease in the price of strawberry jelly. What would happen to the equilibrium price and quantity of peanut butter from the combination of the change in the       peanut market and the change in the strawberry market?

Ans. b
Explanation: DEmand for peanut butter has increased but supply has fallen.

Rahul Sunny answered 3 weeks ago
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