Problem Set 2 - Stanford University Department of...

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Stanford University Department of Management Science and Engineering MS&E 241 Economic Analysis Winter 2016 Problem Set 2 Due Date: 01/20/16 In Class Problem 1 For each of the following scenarios, use a supply and demand diagram to illustrate the effect of the given shock on the equilibrium price and quantity in the specified market (assume that markets were initially at equilibrium). Explain whether there is a shift in the demand curve, the supply curve, or neither. (Short Answer question, Midterm 2013) a) Assume that sugar cane is a principal ingredient for rum, but not for whiskey (assume that rum and whiskey are substitutes) and that a hurricane destroys a large portion of the sugar cane crop. Show the effect in the market of rum and in the market of whiskey. b) The government imposes a price cap on bread. Show the effect in the market of bread. c) The government introduces a subsidy for bread. Show the effect in the market of bread. Problem 2 Fishville is an island with no energy resources. People of Fishville only eat bread and fish. The island imports gasoline for two main purposes: personal use and use of FishMart. FishMart is a state-owned company that owns fishing boats and
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