Question

Attached is our first individual project. Please reply to all 4 questions, including the subquestions: 1a, 1b, 1c, etc. What you should do is determine if the supply or demand will increase or decrease given the effect and then provide a real-life example..
For example; for question 1a, “Product B becomes more fashionable.”
   Answer: If product B becomes more fashionable. The demand curve will increase and shift to the right. A practical example is if there was an article in The New England Journal of Medicine; suggesting drinking a glass of orange juice will decrease heart disease. Presumably, orange juice will become more fashionable, causing demand to increase

Note – you should graph by using pencil and paper. I strongly urge you NOT to use Excel or related software, I don’t want you waste a lot of time as it is more important to understand the concept! Word is fine if use the drawing tools)

If you decided to graph, using Word, using Clip Art and Shapes, the demand shift for orange juice would look something like this

Thank you

1.   What effect will each of the following have on the demand for product B?
a.   Product B becomes more fashionable.
  
b.   The price of substitute product C falls.
  
c.   Income declines and product B is an inferior good.
  
d.   Consumers anticipate the price of B will be lower in the near future.
  
e.   The price of complementary product D falls.
  
f.   Foreign tariff barriers on B are eliminated.

2.   What effect will each of the following have on the supply of product B?
a.   A technological advance in the methods of producing B.
  
b.   A decline in the number of firms in industry B.
  
c.   An increase in the price of resources required in the production of B.
  
d.   The expectation that the equilibrium price of B will be lower in the future than it is currently.
  
e.   A decline in the price of product A, a good whose production requires substantially the same techniques as does the production of B.

f.   The levying of a specific sales tax upon B.
  
g.   The granting of a 50-cent per unit subsidy for each unit of B produced.

     

3.   How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market; that is do price and quantity rise, fall, remain unchanged, or are the answers indeterminate, depending on the magnitudes of the shifts in supply and demand? You should rely on a supply and demand diagram to verify answers.
a.   Supply decreases and demand remains constant.
  
b.   Demand decreases and supply remains constant.
  
c.   Supply increases and demand is constant.
  
d.   Demand increases and supply increases.
  
e.   Demand increases and supply is constant.
  
f.   Supply increases and demand decreases.
  
g.   Demand increases and supply decreases.
  

h. Demand decreases and supply decreases.
     

4.   Suppose the total demand for wheat and the total supply of wheat per month in the Kansas City grain market are as follows:

Thousands
of bushels
demanded   Price
per
bushel   Thousand
of bushels
Supplied   Surplus (+)
or
shortage (-)

85
80
75
70
65
60   $3.40
3.70
4.00
4.30
4.60
4.90   72
73
75
77
79
81  
   a.   What will be the market or equilibrium price? What is the equilibrium quantity? Using the surplus-shortage column, explain why your answers are correct.   
b.   Graph the demand for wheat and the supply of wheat. Be sure to label the axes of your graph correctly. Label equilibrium price “P” and the equilibrium quantity “Q.”
  

c.   Why will $3.40 not be the equilibrium price in this market? Why not $4.90? “Surpluses drive prices up; shortages drive them down.” Do you agree?

d   Now suppose that the government establishes a ceiling price of, say, $3.70 for wheat. Explain carefully the effects of this ceiling price.
   Demonstrate your answer graphically. What might prompt the government to establish a ceiling price

Answer 1

1

b) When the price of substitute product C falls, then demand for product B will fall. The demand curve will shift to the left. The equilibrium price and quantity will fall.

c) Demand for product B will increase. The demand curve will shift to the right. The equilibrium price and quantity of B will increase. An inferior good is one whose demand will increase if income falls and whose demand will decrease if income increases.

d) Demand curve will shift to the left ( decrease) if future prices are expected to fall. The equilibrium price and quantity for B will fall.

e) If price of complementary product D falls, then demand for product B will increase. The demand curve will shift to the right. The equilibrium price and quantity of B will increase.

f) The demand will increase. The demand curve will shift to the right. The equilibrium price and quantity of B will increase.