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Unformatted text preview: Homework 1 answer key 1. (12 points) For each statement below describing changes in the coffee market, indicate whether the statement is true, false, or uncertain. Explain your reasoning in each case, using a graph as a part of your answer. a. If consumer income increases and coffee worker wages fall, the quantity sold of coffee will rise and the price of coffee will fall. Uncertain Assuming coffee is a normal good, demand will increase. Also, supply increases as coffee wages fall. This will increase the quantity, but price will only fall if the change in supply is larger than the change in demand. b. If tea prices decrease and coffee worker wages increase, the quantity sold of coffee will decrease and the price of coffee will increase. (*typo in HW* question will not be graded ) Uncertain Assuming tea is a substitute to coffee, the demand for coffee will decrease. Also, supply decreases as coffee wages rise. The price will definitely rise, but the quantity may or may not decrease, depending on the magnitude of supply and demand shocks. c. If the price of coffee processing machinery increases and there are unfavorable media reports concerning possible harmful effects of the caffeine in coffee, both the quantity sold of coffee and the price of coffee will fall. Uncertain The supply will decrease due to the higher costs of production, and demand will decrease due to the media reports. Therefore, the quantity will definitely fall, but the price may or may not. 2. (20 points) Assume that there are 400 identical consumers each with the following inverse demand equation: P = 64 2q d . There are 40 identical firms each which supply the good according to the following supply equation: q s = P. a. Derive the equations for the aggregate demand and supply curves. Demand: P=64-2q d q d =32-0.5P 400 consumers 400q d = Q d =12800 200P for 64 P Supply qs = P 40 domestic firms 40q s = Q s = 40P for 0 P b. Determine the equilibrium price and quantity. Q s =Q d in equilibrium. 40P = 12800 200P P = 12800/240 = $53.33 Q = 2133.33 Now suppose that 80 identical foreign suppliers enter the market and have a supply curve according to the following supply equation: q s = 0.5P-2. c. Determine the equations that represent market supply under free trade....
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- Spring '09