Problem_Set_1-Answers

Problem_Set_1-Answers - Department of City & Regional...

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Department of City & Regional Planning CP 113A – Fall, 2006 University of California, Berkeley Mark R. Wolfe PROBLEM SET # 1 ANSWERS Total Points = 40 1. For each set of facts, identify the effect on the market equilibrium price (P) and quantity (Q) of the good, and illustrate your answer with a graph showing an original supply curve (S) and demand curve (D), and, as appropriate, new curves S’ and D’. Assume that all goods described are normal goods, and that all other things remain equal ( ceteris paribus ). a. The price of rubber and canvas rises sharply. What happens to the price and quantity sold of tennis shoes? The supply curve shifts to the left as input costs increase; the price of shoes increases and the quantity decreases. (2 points) b. A severe drought wipes out the entire grape crop in California. What is the likely affect on the price and quantity sold of beer? Identify any assumptions you make. If we assume beer is a substitute for wine, then demand curve for beer shifts to the right, and both price and quantity increase; if wine and beer are complementary goods, then demand shifts left and price and quantity decrease. (2 points) c. The student population at U.C. Berkeley doubles. What is the effect on the price and quantity sold of textbooks on campus? Of gold jewelry sold on campus? (Draw 2 graphs – are the curves shaped differently?.) Demand curves for both shift t the right; however, demand curve for books is less elastic (ie, it is steeper) than for jewelry. (2 points)
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This note was uploaded on 09/06/2008 for the course CP 113A taught by Professor Markr.wolfe during the Spring '06 term at Berkeley.

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Problem_Set_1-Answers - Department of City & Regional...

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