Question

3. Draw completely labeled Supply or Demand graphs. Draw a separate graph for each question. Answer the following questions by showing which way which curve moves:

a. What happens to YOUR demand curve for macaroni and cheese after you graduate and get a better paying job?

b. When the price of olive oil goes up, what probably happens to the demand for corn oil?

c. When the price of petroleum goes up, what probably happens to the demand for natural gas? To the demand for solar power?

d. If consumers think that the price of tomatoes will go up next week, what is likely to happen to demand for tomatoes today?

e. If incomes decrease what should happen to the demand for Nordstrom clothes?

f. If incomes decrease what should happen to the demand for second-hand clothes?

g. Imagine that a technological innovation reduces the costs of producing high-quality steel. What happens to the supply curve for steel?

h. When oil companies expect the price of oil to be higher next year, what happens to the supply of oil today?

i. Assume that butter and margarine are substitutes. What will happen to the demand curve for butter if the price of margarine increases?

j. Assume cars and gasoline are complements. What will happen to the demand curve for gasoline if the price of cars decreases?

k. The industrial areas in northeast Washington, D.C., were relatively dangerous in the 1980s. Over the last two decades, the area has become a safer place to work (although there are still seven times more violent crimes per person in these areas compared with another DC neighborhood, Georgetown). When an area becomes a safer place to work, what probably happens to the “supply of labor” in that area?

Answer 1

a. When you graduate and get a better paying job, you can eat more healthy and expensive foods and here macaroni and cheese can be considered as an inferior good because when your income was relatively low, you used to eat macaroni and cheese and when you graduated and get a better paying job, you may demand for some other foods with high nutrients. Hence the demand curve for macaroni and cheese will shift leftward from D1 to D2 and as the economy moves from point A to point B, the equilibrium price of macaroni and cheese will decline from P1 to P2 and the equilibrium quantity of macaroni and cheese will decline from Q1 to Q2.

b. As olive oil and corn oil are perfect substitutes, when the price of olive oil goes up, consumers will switch to the consumption of corn oil and the demand for corn oil will increase and the demand curve for corn oil will shift rightward from D1 to D2, and as the economy moves from point A to point B, the equilibrium price of corn oil will increase from P1 to P2 and the equilibrium quantity of corn oil will increase from Q1 to Q2.

c. Here petroleum, natural gas and solar power are perfect substitutes of each other and as the price of petroleum goes up, consumers will switch to the consumption of natural gas and solar power and hence the demand curve for both natural gas and solar power will shift rightward from D1 to D2 and as the economy moves from point A to point B, the equilibrium price of both natural gas and solar power will increase from P1 to P2 and the equilibrium quantity of natural gas and solar power will increase from Q1 to Q2.

d. If the consumers think that the price of tomatoes will go up next week, then consumer will buy more tomatoes today to avoid the price hike and hence the demand curve for tomatoes today will shift rightward from D1 to D2 and as the economy moves from point A to point B, the equilibrium price of tomatoes today will increase from P1 to P2 and the equilibrium quantity of tomatoes today will increase from Q1 to Q2.