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# eco405answer2 - Eco 405 Assignment 2(Due Feb 6 Wednesday 1...

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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.

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eco405answer2 - Eco 405 Assignment 2(Due Feb 6 Wednesday 1...

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