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Fall Term 2016 Yaşar University Introduction to Economics I (Econ 101) Answer key-Problem Sheet 3 The Market Forces of Supply and Demand Market for Gum 100 Price 80 60 Quantity demanded 40 Quantity supplied 20 0 0 100 200 Quantity a Qeq= 120 Peq=50 Since Qd=Qs b At P=70 cent, Qd=80 Qs= 160 then, there exists excess supply=160-80= 80 mio packs of unsold gum. Then to sell more gum, seller should decrease price until equilibrium price=50 cent c Shift in supply curve, since quantity supplied decreases 40 mio packs for every price level d movement in demand curve e New equilibrium price= 60cents Equilibrium quantity= 100 New quantity Price of gum Quantity demanded Quantity supplied supplied 20 180 60 20 30 160 80 40 40 140 100 60 50 120 120 80 60 100 140 100 70 80 160 120 80 60 180 140 Market for Gum 100 Quantity demanded 60 Quantity supplied P 80 " 40 New quantity supplied 20 0 0 100 200 Q 2. During the 1990s, technological advances reduced the cost of computer chips. How do you think this affected the market for computers? For computer software? For typewriters? Answer: Technological advances that reduce the cost of producing computer chips represent a decline in an input price for producing a computer. The result is a shift to the right in the supply of computers, as shown in Figure 3. The equilibrium price falls and the equilibrium quantity rises, as the figure shows. Figure 3 Since computer software is a complement to computers, the lower equilibrium price of computers increases the demand for software. As Figure 4 shows, the result is a rise in both the equilibrium price and quantity of software. Figure 4 Since typewriters are substitutes for computers, the lower equilibrium price of computers reduces the demand for typewriters. As Figure 5 shows, the result is a decline in both the equilibrium price and quantity of typewriters. Figure 5 3. Ayşe’s income declines and, as a result, she buys more spaghetti. Is spaghetti an inferior or a normal good for Ayşe ? What happens to Ayşe’s demand curve for spaghetti? Answer: Since Ayşe buys more spaghetti when his income falls, spaghetti is an inferior good for her. Since she buys more spaghetti, but the price of spaghetti is unchanged, her demand curve for spaghetti shifts out as a result of the decrease in her income. 4. Suppose that in the year 2005 the number of births is temporarily high. How does this baby boom affect the price of baby-sitting services in 2010 and 2020? (Hint: 5-year olds need baby-sitters, whereas 15-year-olds can be baby sitters) Answer: A temporarily high birth rate in the year 2005 leads to opposite effects on the price of babysitting services in the years 2010 and 2020. In the year 2010, there are more 5-year olds who need sitters, so the demand for babysitting services rises, as shown in Figure 23. The result is a higher price for babysitting services in 2010. However, in the year 2020, the increased number of 15-year olds shifts the supply of babysitting services to the right, as shown in Figure 24. The result is a decline in the price of babysitting services. Figure 6 Figure 7