Download Problem Set 4 Key

ECON 303
Spring 2006
Davis
KEY
Problem Set #4. Equilibrium Analysis.
1. Consider the market for “popcorn crisps” a new product that you prepare fresh (like
popcorn) but that has the look and feel of a potato chip.
a. What relationship should characterize the relationship between the price of popcorn
crisps and the number of packages sold per month? Why?
Relationship: _Inverse___________________________
Reason: __Diminishing Marginal Utility ______________
b. What relationship should characterize the relationship between the price of popcorn
crisps and the number of packages produced per month? Why?
Relationship: _ Direct____________________________
Reason: __Law of Diminishing Returns (Crowding) _____________
c. Suppose that Crisp-Makers of America, Local #458, a trade union that manufactures
the crisps, successfully negotiates a wage increase. Will this affect the supply of or the
demand for the crisps. How would the curve be affected?
Supply / Demand (circle one). Direction of adjustment: __Supply will shift up and in __
d. Relative to the initial equilibrium, identify the price and/or quantity adjustment. What
process causes the adjustment to the new equilibrium?
Equlibrium Price Change:
Equilibrium Quantity Change
Increase /Decrease /No Change (Circle One)
Increase /Decrease /No Change (Circle One)
Adjustment Process: _At the initial price with new supply and old demand a shortage
exists_______
3.
Suppose that the free market equilibrium price of bourbon is $6.00 a bottle, and
that the government sets a price ceiling of $4.50 a bottle on bourbon. The most
likely result of this action is that:
a.
b.
c.
d.
there will now be an excess demand for bourbon
the market price of bourbon will remain at $6.00 a bottle.
there will be a large reduction in the quantity of bourbon demanded.
the market price of bourbon will fall because the price ceiling will create
an excess supply.
4.
“The winds of the recent hurricanes in Florida are bringing soothing financial gain
to California citrus growers. Due to the extensive damage to the Florida citrus corp,
California citrus products are commanding their highest prices ever.”
Which of the following statements best explains the economics of the quotation?
a
b.
c.
d.
5.
The supply of Florida oranges has increased, causing their price to
increase and the demand for the substitute California oranges to also
increase.
The supply of Florida oranges has decreased, causing the demand for
California oranges to increase and their prices to rise.
The demand for Florida oranges has been reduced by the hurricanes,
causing a greater demand for the California oranges and an increase in
their price.
The demand for Florida oranges has been reduced causing their prices to
fall and therefore increasing the demand for the substitute California
oranges.
Suppose that a new, influential research study proves conclusively that cigarette
smoking causes cancer in a way that causes people to start to pay more attention
to the warning that "cigarette smoking is injurious to health." At the same time,
suppose that new restrictions on the use of fertilizer dramatically raise tobacco
production costs. Using conventional supply and demand analysis, one would
expect the combined effect of these changes on the cigarette market to be:
a.
b.
c.
d.
an increase in equilibrium price, with the change in equilibrium quantity
uncertain
a decrease in equilibrium price, with the change in equilibrium quantity
uncertain.
an increase in equilibrium quantity, with the change in equilibrium price
uncertain.
a decrease in equilibrium quantity, with the change in equilibrium price
uncertain.