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1) What has happened to the market for computers in the last 30 years? 2) As the price of gasoline rises, what effect does this have on the market for car tires: What do we know about the computer market? There’s a lot more of them now, and they’re cheaper. Lower price and larger quantity would be caused by an increase in supply. Assume that gasoline and car tires are complements. As the price of gasoline rises, then demand for car tires will fall. S S1 S P 2 P 1 P2 1 D1 P2 D2 D 2 Q Q 1 Q1 Q2 As we see in the graph, with the increase in supply, price was driven down and quantity increased. Supply could have increased from new technology, cheaper resources (electronic parts became much cheaper), or from more firms. As we see in the graph, as the price of gasoline rises, the demand for car tires falls. This makes the price and quantity of car tires to decrease. 3) What would happen in the market of an inferior good during a recession (recession is when the economy experiences a drop in income)? 4) People love herbs, spices and seasonings. Explain why Give an example of an inferior good: Top Ramen, public busses, high mileage used cars, generic goods or store brand goods, stuff at dollar-stores. During a recession, demand for normal goods would decrease as income falls. But demand for inferior goods would increase during a recession as incomes fell. People are poorer, so they demand more inferior goods. S pepper is inexpensive and used a lot, and why saffron is extremely expensive (more expensive than gold by weight) and used rarely. Pepper has a large quantity and small price. Saffon has a small quantity and large price. This suggests differences in supply, not demand. So I’ll draw the graph with a single demand curve but two different supply curves. Ssaffron Spepper PS PP D P2 QS P1 D2 D1 Q1 Q2 During a recession, the demand for inferior goods rises. This makes the prices and quantity of inferior goods to rise. This would be a good time to be a producer in the inferior goods market. QP As we can see from the above graph, the price of saffron is high, but quantity is small. And the price of pepper is low, but the quantity is large. Differences in supply explain this. It must be easier and cheaper to produce pepper than saffron. 5) What is the elasticity of this supply curve: S 6) In order to increase total box-office receipts, the makers of the movie Transformers 2 increased the price of movie tickets. However, after the price rise, total revenue actually declined. As price was increased, total revenue declined. This happens if demand is elastic. Give an example of a good that would have this supply curve There are three categories of goods that have a perfectly inelastic supply: 1) “Land” is often analyzed using perfectly inelastic supply. There’s a certain amount available, and that amount is fixed. This ignores things like landfill. 2) Dated goods from the past: 1963 Shelby Cobra sports cars. 1974 Cabernet Sauvignon wines. Mickey Mantle rookie baseball cards. 19th Century antiques. 3) Any good if the time period is so short that producers can’t adjust production at all. Think of a fishing boat returning with their catch of salmon. It doesn’t matter the market price. The ship is going to offer all the catch. This example is called the “immediate run” which is a time period much shorter than the “short run”. 7) Grapefruit have inelastic demand. A freeze destroys about one-fourth of the crop. Will this be a good year or bad year for grapefruit farmers? This will be a good year for grapefruit farmers. Look at the following graph: P2 P1 D Q2 Q1 As seen in the above graph, the demand curve is drawn to suggest demand is elastic. The initial price is P1 with an initial TR of P1 * Q1 which is the area of the rectangle shaded with the upward sloping lines. After the price increase to P2, TR becomes P2 * Q2 which is the area of the rectangle with the downward sloping lines. We can see the TR1 rectangle is much large than the TR2 rectangle, so TR fell as price was raised from P1 to P2. 8) Would Cruise Ship travel/vacations have elastic or inelastic demand? Why? What does this mean? Cruise ship travel would have elastic demand. See the graph below. It shows an elastic demand. This means that small changes in price, such as a price increase, would result in a large quantity change. P2 P1 P2 P1 D D ¾ Q1 The demand curve is drawn to be inelastic as given in the question. The initial quantity and price is Q1 and Q2 Q1 Cruise ship travel would have elastic demand because: 1) there are close available substitutes. There are many P1. Quantity is reduced by ¼ to ¾. The new price is P2. Since demand is inelastic, price will rise more than quantity fell. As price rises for an inelastic good, TR will rise as can be seen in the TR rectangles. The new rectangle given by the downward sloping lines is much larger than the initial TR. So after the loss of crops, firms are taking in more TR. Since they also have less fruit to pick, handle and ship, their profits should be significantly higher. This is a good year for grapefruit growers. It would be especially good is other growers lost more than ¼ of their crop while you didn’t lose any. other types of vacations one could take. If the market was defined even more narrowly by looking at a specific cruise line or cruise destination, demand would even more elastic. 2) It takes a large fraction of most people’s budget. Cruises are expensive, often thousands of dollars 3) Cruises are economic luxuries. Income elasticity is probably greater than 1 which means people will spend a lot more on cruises as their income increases. This also makes demand elastic 4) The only question is what time period we’re talking about. If people have plenty of time to adjust, for example we’re looking at cruises leaving over the next 12 months, then demand would be elastic. However, if we were to restrict ourselves to cruises leaving next week where there was little time to adjust, time would be very inelastic.