Homework_Assignment_1[1]

Homework_Assignment_1[1] - Matthew Steiner ECON 002.6...

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Matthew Steiner ECON 002.6 Homework Assignment #1 09/16/08 Part 1: Theoretical Analysis (a.) a) Assume that coffee is a normal good, and that the demand for coffee is stable over time.  Draw a graph (call it Figure 1) showing how fluctuations in the sizes of coffee harvests  will influence the equilibrium price and quantity for coffee on world markets. As displayed in the above graph, if the demand of coffee is stable over time, effects of  supply shifts are evident in the changes in equilibrium quantity from Q to Q’ and Q’’, as  well as the change in equilibrium price P to P’ and P’’.  This shows that coffee harvests  have a strong influence on quantity and price of coffee on world markets. b) It has sometimes been said that “the weather is always bad for farmers.” For the  sake of this question, assume that the demand for coffee is inelastic with respect  to price. Given this assumption, why would it make sense to say that the weather  is always bad for coffee farmers? (Hints: “weather is bad” will be used in two  different ways to answer this question correctly, only one of which has to do with 
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economics; think about the implications for revenue of coffee farmers of the  graph you drew for question a of this part of the assignment, given the  assumption of inelastic demand for coffee.)  First, being that the demand for coffee is inelastic, we know that if “bad weather” shifts  the supply curve left, the overall percent change in price is greater than the overall  percent change in quantity demanded.  Also, by the total-revenue test, we know that  inelastic demands total revenue yields change in the same direction of prices.  This  shows us, by economics, if the “bad” weather causes a supply shift to the right, total  revenue goes up.  On the other side of the argument, if the weather is “good” and there  is a high yield of crops and the supply curve shifts right, then the price should go down. 
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