Question

In: Economics

1. For each of the following scenarios, determine if there is an increase or decrease in...


1. For each of the following scenarios, determine if there is an increase or decrease in supply for the good in italics. Explain your reasoning using economic principles.

a. Tomato growers have an unusually good season


b. New medical evidence reports that consumption of organic products reduces the incidence of cancer.

c. Wages of clothing producers increase.

d. The price of silver increases.




2. For each of the following scenarios, determine if there is an increase or decrease in demand for the good in italics.  Explain your reasoning using economic principles.

a. The price of oranges increases

  

b. You love air travel, but get fired from your job.

c. A wet spring results in an unusually bad mosquito season, which can be mitigated with citronella

d. Idaho starts to require motorcycle helmets for adults.



3. Consider the market S&D schedules for ice cream – draw the curves & determine the equilibrium price & quantity. Calculate the S&D functions and solve for equilibrium mathematically.

Price (per quart)

QD

QS

2

100

20

3

80

40

4

60

60

5

40

80

6

20

100

  4. Suppose the market for wooden #2 pencils is in equilibrium. Determine how the following changes will affect the market and the equilibrium price and quantity. Explain your reasoning. Draw a graph to illustrate each of your answers.

a. Professors begin to require ink on all exams

b. The price of graphite (pencil lead) increases

c. School attendance falls

d. Legislation restricts lumber harvests

e. Pencil makers unionize and receive a large wage increase

f. The price of ballpoint pens falls


5. Suppose the market for laptops is in equilibrium. Determine how the following changes will affect the market and the equilibrium price and quantity. Explain your reasoning. Draw a graph to illustrate each of your answers.

a. Computers become easier to use

b. The price of memory chips falls

c. Software prices fall

d. College students are required to own a laptop

e. The price of electricity increases

f. Doctors warn of health risks from radiation from video terminals


please complete all of them

Solutions

Expert Solution

Answer:

  1. Changes in Supply:
    1. If they have an unusually good season, that means the production of tomato has risen and this will therefore increase the supply.

    2. Given, that organic consumption can reduce cancer, producers know that increasing the supply will be beneficial because people will demand more as well. This will increase the supply

    3. If wages of clothing producers increase, it means their cost of production will also increase. An increase in the cost of production means that it is now more costly for the producers to produce a unit of a good. Therefore this has the effect of decreasing supply.

    4. If the price of silver increases, again the cost of production of let’s say making silver jewelry will increase, and therefore supply also decreases.

  2. Changes in Demand:

    1. If the price of oranges increases then it is more expensive to consume it. Therefore the overall demand for oranges will decrease.

    2. If you get fired from your job, your income falls, and therefore now it is difficult for you to pay for airfare, and thus your demand for air travel will decrease.

    3. Given that people are concerned about their health, they will want to consume more citronella to avoid getting any disease during the mosquito season. This will increase the demand for citronella.

    4. If motorcycle helmets become compulsory, then people will have to wear them. Thus this will increase the demand for motorcycle helmets.

  3. According to the table, the equilibrium price is $4, since demand is equal to supply at this point. Now, to estimate the demand and supply equation mathematically we need to note down the general form:

    • Qd = a-bP

    • Qs = c+dP

    • where b and d are the slopes of the demand and supply function respectively

    • The slope is calculated by (Change in Q / Change in P)

    • Using this logic, notice that the slope of demand function (b) is -20. The price change is by 1 unit and quantity is decreasing by 20 units for every unit increase in price.

    • Similarly, the slope of the supply function (d) is 20. The price change is by 1 unit and the quantity is increasing by 20 units.

    • We can now write this as:

    • Further, we know the equilibrium price is 4 then the quantity demanded is 60, so let us try to substitute:

    • This implies,

    • Similarly, quantity supplied is also 60 when P is 4, then

    • Therefore Qd = 140 - 20P and Qs = -20+20P

    • Te demand and supply schedule is depicted blow:

  1. The market for wooden #2 pencils:
    1. If professors require ink, then the demand for pencils will decrease, the price will decrease and so will quantity demanded
    2. If the price of graphite pencil increases, then since wooden pencils are substitutes, people decrease the quantity demanded for graphite pencil and will increase the demand for wooden pencils, increasing both price and quantity demanded.
    3. If school attendance falls then it seems less students are studying and therefore it will decrease the demand for pencils and decrease both price and quantity demanded.
    4. Lumber is needed to produce these wooden pencils, if lumber harvest is restricted then the production of these pencils will fall and so will their supply. This will increase prices and reduce the quantity (same diagram as e)   
    5. If pencil makers receive a large wage increase then the cost of production rises and therefore this will decrease supply, increase the price, and decrease quantity.
    6. If the price of ballpoint pens falls then more people will use it and this will decrease the demand for wooden pencils, decreasing both price and quantity.
  2. Market for laptops:
    1. If computers become easier to use, more people will buy laptops computer since it will help them in their day to day activity. Their demand for laptops will rise, increasing both price and quantity.
    2. Memory chip is used in laptops, thus if the price of it falls, the cost of producing a laptop falls and thus the supply increases, cause both price and quantity to increase.
    3. If software prices fall, then suppliers will want to offer more laptops in the market, increasing supply.
    4. If college students need their own laptops, the demand for laptops will increase.
    5. Laptop operates on electricity (needs to be charged, wifi router costs) therefore if the price of it increases, people will consume fewer laptop since it's more expensive for them now. Demand therefore decreases.
    6. Doctors warning will discourage people from using laptops as they are health-conscious, demand will decrease.

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