f07 ec51 practice problems for final answers

f07 ec51 practice problems for final answers - BAG OF...

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Economics 51D 17 November 2007 BAG OF ANSWERS TO PRACTICE PROBLEMS 1. We can use the supply-demand model to show the differences between the 1990s and the 2000s markets for chips. These are 2 different markets, so it would be best to use 2 different supply-demand diagrams. The idea here is that in both the 1990s and the 2000s, the computer chip industry had a large decrease in MC of producing chips. This will cause an increase in supply, shifting the curves in the “1990s Chip Market” and the “2000s Chip Market” down. The difference between the 1990s and the 2000s was that in the 1990s, businesses had an even larger increase in the demand for computer chips, as businesses went through a massive period of computerization of their processes. But by the early 2000s, according to the article, this phase was over and businesses will have a very small increase in demand for chips, probably because of the long-term increase in the number of businesses. So the increase in demand in the 1990s was quite large, resulting in a price for computer chips that stayed even or actually went up a little, while in the 2000s the increase in demand is small so that the market price for chips is falling. Thus, in the 1990s there was an increase in quantity at a stable or slightly increasing price, which was good for chip makers like Intel, but in the 2000s there is an increase in quantity at falling prices, which is bad 1
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news for chip makers. 2
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2. : Use the Supply and Demand model. The article is mistaking a fall in quantity demanded for a fall in demand. The reason that the price of oil rose in the first place is that supply contracted, due to a mixture of reasons like Hurricane Katrina’s disruption of US production and refining, OPEC supply restrictions, and other Mideast political troubles. These factors shifted the supply curve up and to the left, reducing the equilibrium quantity and increasing the equilibrium price of oil. As we move to the new equilibrium, we move along the demand curve. As price increases, people reduce their quantity demanded of oil. But a rise in the price of oil does not cause a shift in the demand for oil. 4
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3. The VER is a quantity restriction, though one imposed by two governments jointly. The net effect is to restrict the quantity of imported cars at a low level lower than the previous equilibrium level. The new quantity is denoted in the diagram of the market for imported cars by Q VER . At this low quantity level, demand exceeds supply and the price of imported cars rises from P* before the VER is imposed to P VER . This will have a spillover effect onto the market for domestic cars. Since imported cars and domestic cars are substitutes, an increase in the price of imported cars will result in an increase in demand for domestic cars. This is the reason why the demand for domestic cars shifts to the right in the domestic cars market diagram. This makes the price of domestic cars rise, and the quantity of domestic cars sold also rise, relative to the old equilibrium in which there were no
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f07 ec51 practice problems for final answers - BAG OF...

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