eco405answer2 - Eco 405 Assignment 2 (Due Feb. 6,...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Eco 405 Assignment 2 (Due Feb. 6, Wednesday) 1. Much of the demand for U.S. agricultural output has come from other countries. In 1998, the total demand for wheat was Q = 3244 - 283 P . Of this, domestic demand was Q D = 1700 - 107 P . Domestic supply was Q S = 1944 + 207 P . Suppose the export demand for wheat falls by 40 percent. a. U.S. farmers are concerned about this drop in export demand. What happens to the free market price of wheat in the United States? Do the farmers have much reason to worry? Given total demand, Q = 3244 - 283 P , and domestic demand, Q d = 1700 - 107 P , we may subtract and determine export demand, Q e = 1544 - 176 P . The initial market equilibrium price is found by setting total demand equal to supply: 3244 - 283 P = 1944 + 207 P , or P = $2.65. The best way to handle the 40 percent drop in export demand is to assume that the export demand curve pivots down and to the left around the vertical intercept so that at all prices demand decreases by 40 percent, and the reservation price (the maximum price that the foreign country is willing to pay) does not change. If you instead shifted the demand curve down to the left in a parallel fashion the effect on price and quantity will be qualitatively the same, but will differ quantitatively. The new export demand is
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/11/2008 for the course ECO 405 taught by Professor Mingaling during the Spring '08 term at SUNY Buffalo.

Page1 / 3

eco405answer2 - Eco 405 Assignment 2 (Due Feb. 6,...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online