Question

Completion is only granted for questions that require a graph if your answer includes:

A clear and completely labeled graph.

A clear statement of what curve(s) are changing.

Why those curve(s) are changing.

A clear statement of what is happening to the equilibrium values of the variables in the model.

1)     A survey indicated that chocolate is the most popular flavor of ice cream in America. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream.

a.     A severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream.

b.     A new report by the American Medical Association reveals that chocolate does, in fact, have significant health benefits.

c.     The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream.

d.     New technology for mixing and freezing ice cream lowers manufacturers’ costs of producing chocolate ice cream.

2.     In a supply and demand diagram, draw the shift of the demand curve for hamburgers in your hometown due to the following events. In each case, show the effect on equilibrium price and quantity.

a.     The price of tacos increases.

b.     All hamburger sellers raise the price of their French fries.

c.     Income falls in town.

d.     Hot dog stands cut the price of hot dogs.

Answer 1

1.

a. There is a reduction in the supply of cream by the dairy farmers (as a result of a reduction in cattle). Thus, the supply curve shifts to the left because the supply falls.

As a result of a decline in supply, the market price of cream increases, thereby increasing the per unit cost of producing a chocolate ice cream. As a result, the supply curve of chocolate ice cream also shifts to the left. Producers are willing to supply a lesser quantity of chocolate ice cream at any price.

Thus, there is a resultant increase in the equilibrium price while an equilibrium fall in the quantity of chocolate ice cream.

b. As a result of the new report, the demand for chocolate ice cream is likely to increase. This is represented by a rightward shift in the demand curve for chocolate ice cream. Thus, as a result of an increase in the demand for chocolate ice cream, there is an increase in the equilibrium price and quantity in the market.

c. Vanilla ice cream is a substitute good to chocolate ice cream. Thus, a fall in the price of vanilla ice cream leads to a fall in the demand for chocolate ice cream because consumers will now prefer a cheaper substitute good and shift their preferences.

This can be represented as a leftward shift in the demand curve for chocolate ice cream. Also, as a result of this leftward shift, the equilibrium price and quantity of chocolate ice cream falls.

d. As a result of a fall in the manufacturing costs of chocolate ice cream, producers will now be willing to supply more quantity at any given price. As a result, the supply curve of chocolate ice cream shifts rightward.

As a result of this increase in supply, the equilibrium price of chocolate ice cfream falls while the equilibrium quantity rises.

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Answered question 1, hope it helps.