Download 1 Assignment #5 ANSWERS Answer the questions below by

Dr. Shishkin
ECON 2106
Spring 2011
Assignment #5
ANSWERS
Answer the questions below by identifying which curves are going to be affected and
where would they shift. Show on the diagrams where the curves shift and where the
equilibrium price and quantity go.
1. If hamburgers become more expensive, what would happen with the equilibrium price
and quantity of French fries? Use the following diagram that represents supply and
demand for French fries to illustrate your explanation Show your work.
Market for French fries
Hamburgers and French
fries are complements in
consumption. As one thing
gets more expensive
demand for another goes
down. Both P* and Q*
decrease.
2. Suppose that beans are inferior good. What would happen with the equilibrium price
and quantity if consumers’ income goes down? Use the following diagram that represents
supply and demand for beans to illustrate your explanation. Show your work.
Market for Beans
As income goes down,
demand for inferior good
goes up. Both P* and Q*
increase.
Email me at [email protected], and text at (678) 524-5535 if I don’t respond
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Dr. Shishkin
ECON 2106
Spring 2011
3. Pulp is a major input used to produce paper. What would happen to the equilibrium
price and quantity of paper if price of pulp goes down? Use the following diagram that
represents supply and demand for paper to illustrate your explanation. Show your work.
Paper Market
When prices of inputs used to
produce a good go down,
supply of this good goes up.
P* will go down, Q* will go
up.
4. Suppose that in a particular country consumers can use either natural gas or coal to
warm their houses. Suppose the price of natural gas increases. Use the demand and
supply diagram to show the impact of the higher price of natural gas on the market for
coal. What would happen to the equilibrium price and quantity of coal? Show your work.
Market for coal
Natural gas and coal are
substitutes in
consumption. As price of
one good goes up, demand
for another good goes up.
Both P* and Q* increase.
Email me at [email protected], and text at (678) 524-5535 if I don’t respond
2
Dr. Shishkin
ECON 2106
Spring 2011
5. Consider two competing car industries: American and Japanese. What would happen to
the equilibrium price and quantity of Japanese cars if the prices of American cars go up?
Use the following diagram assuming that it represents supply of and demand for Japanese
cars. Show on the diagram where the curves shift and where the equilibrium price goes.
Market for Japanese Cars
American cars and Japanese cars are
substitutes in consumption. (They are
not substitutes in production because
they are produced by different
companies.) As the price of American
cars goes up, demand for Japanese cars
goes up. Both P* and Q* increase.
6. Consider an orange juice market. Suppose that the price of apple juice decreases, AND
the wages paid to workers employed by orange juice factories goes up due to a recent
successful strike? Keep in mind that wages paid to the workers are the price of labor used
by the factories. Use the following diagram assuming that it represents supply of and
demand for orange juice to illustrate your explanation.
Orange Juice Market
Apple juice and orange juice are substitutes
in production. As apple juice gets cheaper,
demand for orange juice goes down.
Wages paid to workers represent the price
of labor, which is an input. A rise in wages
discourages supply of orange juice.
(Productivity is not affected as this is a
result of a strike, not a motivational
increase in wages).
Both demand and supply decrease. Q* will
go down, P* might go up or down.
Email me at [email protected], and text at (678) 524-5535 if I don’t respond
3
Dr. Shishkin
ECON 2106
Spring 2011
7. Consider a market for coffee. What would happen to the equilibrium price and
equilibrium quantity of coffee if it becomes more popular among consumers AND a new
machine is invented that makes workers who make coffee more productive?
Coffee Market
Demand for coffee goes up, and
its supply goes up as well. Q* will
increase, P* might go up or down.
8. Consider the automobile industry that can produce either passenger cars or SUVs,
among other vehicles. Suppose that pick up SUV start selling at higher prices. What
effect would it have on the equilibrium price and quantity at the car market, assuming
that at the same time the system of public transportation in the country is expanding and
public transport fare is going down? (Assume that pick up trucks and cars are not
substitutes for consumers).
Market for Cars
Pick up trucks and cars are substitutes in
both production and consumption. Supply
of cars will go down as pick up trucks start
selling at a higher price. Demand for cars
will go down as public transportation gets
cheaper, but it will go up as SUVs get more
expensive. Whether demand goes up or
down depends on which effect is stronger.
Assuming that demand goes down, Q* will
go down, P* might go up or down.
Email me at [email protected], and text at (678) 524-5535 if I don’t respond
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