Question

1. Suppose the following events occur in the market for orange juice. In each case, graph both the supply and demand curves and show the shift that would occur. For each, briefly explain WHY the curve will shift in the direction graphed.

a. Consumer incomes decrease.

b. New technology decreases production costs.

c. The price of bacon decreases (assume bacon is a complementary good)

d. An additional per-unit tax is placed on sales of orange juice.

2. Suppose apple juice is a substitute good for orange juice.

a. Graph a Supply and Demand curve for orange juice. Label the equilibrium as P* and Q*.

b. Now suppose the price of apple juice decreases. In the above graph, show the resulting shift that would occur in the market for orange juice.

c. At the original price P*, would there now be excess demand or excess supply?

d. Would this cause the price of orange juice to increase or decrease?

e. As prices adjust what happens to the supply curve? Will producers produce more or less orange juice?

3. Analyze the following situation in the market for orange juice.

a. Graph a Supply and Demand curve for orange juice. Label the equilibrium as P* and Q*.

b. Now suppose that the transportation costs involved in shipping orange juice decrease. In the above graph, show the resulting shift that would occur.

c. At the original price P*, would there now be excess demand or excess supply?

d. Would this cause the price of orange juice to increase or decrease?

e. As prices adjust what happens to the demand curve? Will consumers buy more or less orange juice?

4. Suppose the market for used Rick Astley cassette tapes is made up of 8 potential buyers. The most each of these buyers is willing to pay for a cassette tape is $2.20, $3, $2, $0.50, $0.90, $2.50, $1.80, and $1.20 respectively.

a. If the price is $2, how many consumers would purchase cassette tapes?

b. If the price was $2.20, how many consumers would purchase cassette tapes?

c. If the price was $2.50, how many consumers would purchase cassette tapes?

d. If the price was $3.00, how many consumers would purchase cassette tapes?

e. Given these 8 potential buyers, plot the demand curve for Rick Astley cassette tapes.

f. If the price of the cassette tapes is $2, calculate the total consumer surplus that would be created in this market.

5. Suppose the market also contains 8 potential sellers of Rick Astley cassette tapes. The minimum amount each seller requires to be willing to sell a cassette tape is $2, $2.50, $1.40, $0.20, $1, $2.40, $3.50, and $2.80 respectively.

If the actual price of the cassette tapes is $2, how much total producer surplus would be created in this market?

Answer 1

A: consumer income decreases : when consumer income decreases a change in demand occurs. For a normal and luxury good, the demand decreases as income decreases. While for a inferior good, demand increases as consumer income decreases ( as inferior goods become affordable at low income)

B: New technology decreases production costs: when a new technology is introduced and it decreases cost of production then a change in supply occurs. The supply curve shifts rightward as supply increases because the cost of production at that point is low , which results in more production and more Production leads to more supply.

C: price of beacon decreases (beacon here is a complimentary good) : when the price of complementary good decreases the demand of one good increases which increases the demand for other good also. Thus, fall in price of beacon , increases demand for beacon and organe both( as both go together , complementary good). Thus shifts demand curve to right.

D: An additional per unit tax is imposed on sales of orange juice: when a tax is imposed on supply it increases the cost of that good being supplied as we have to inccur some additional costs also in form of tax. When tax increases , supply of the product decreases and shifts supply curve to left.