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answerstopracticequestions2spring2004 - 1 Economics 102...

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Economics 102 Spring 2004 Answers to Practice Questions-2 I. Concepts Covered: Law of Demand Law of Supply Demand vs Quantity Demanded Supply vs Quantity Supplied Demand Shifters Supply Shifters Normal Good Inferior Good Substitute Complement Price Ceiling Price Floor II. True/False and Explain 1. True. The news about the disease affected people’s tastes and caused the demand curve shift inwards . 2. False. The Law of Demand states that quantity demanded falls as price rises. 3. False. An increase in the price of an input will shift the supply curve inwards. 4. False. In a market economy consumers and producers determine the equilibrium quantity and price. III. Fill in the Blanks 1. The market demand curve is the horizontal sum of individual demand curves. 2. An increase in the price of a substitute good will increase the demand for the good. 3. When demand is equal to supply prices have no tendency to change. This is called equilibrium . 4. A change in tastes or expectations leads to a change in demand . That is why; tastes and expectations are called demand shifters . 5. The government decided to help corn farmers, and declared the price of corn can be no less than 30 cents an ear this summer. This price is an example of a price floor . 6. As your income increases you buy fewer packages of Ramen Noodles. Ramen Noodles is a(n) inferior good . 7. Shoes are a normal good since you buy more of them as your income increases. IV. Problems 1. Suppose the demand and supply curve for queen-size down comforters in Madison is: A d = 7500– 60P d Q s = - 2000 + 40P s a. equilibrium price is equal to 95 and equilibrium quantity is 1800 Price Demand 125 Supply 95 50 Quantity -2000 1800 7500 1
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b. Consumer surplus = [(125 - 95) * 1800] / 2 = 27,000 dollars Producer surplus = [(95-50) * 1800] / 2 = 40,500 dollars Deadweight cost = 0 dollars c. Weather, a decrease or increase in heating cost, a change in the number of people living in Madison , expectations about the future prices or the future weather conditions d. This will cause demand curve to shift out. New Price and quantity will be higher Price New Demand 125 Supply new price 95 50 Quantity -2000 1800 New quantity 7500 e. This will result in a shift (inwards) in the supply curve . This will reduce price for each quantity supplied. Thus will result in a movement along the demand curve . New equilibrium price will be lower and quantity will be higher . f. This is a subsidy to the supplier. Thus, this subsidy will reduce the cost of each comforter by 10 dollars for them. this will result in a parallel shift down (right) in supply curve by ten dollars. New equilibrium price is 91 and new quantity is 2040.
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answerstopracticequestions2spring2004 - 1 Economics 102...

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