Problem Solutions Chapter 3

Problem Solutions Chapter 3 - KrugmanMacro_SM_Ch03.qxp...

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Solution Supply and Demand 1. A survey indicated that chocolate ice cream is America’s favorite ice-cream Favor. ±or each of the following, indicate the possible effects on demand and/or supply and equilibrium price and quantity of chocolate ice cream. a. A severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream. b. A new report by the American Medical Association reveals that chocolate does, in fact, have signi²cant health bene²ts. c. The discovery of cheaper synthetic vanilla Favoring lowers the price of vanilla ice cream. d. New technology for mixing and freezing ice cream lowers manufacturers’ costs of producing chocolate ice cream. 1. a. By reducing their herds, dairy farmers cause the supply of cream to decrease—a left- ward shift of the supply curve for cream. As a result, the market price of cream rises, which means that a unit of chocolate ice cream is more expensive to produce. This results in a leftward shift of the supply curve for chocolate ice cream as ice- cream producers reduce the quantity of chocolate ice cream supplied at any given price. This leads to a rise in the equilibrium price and a fall in the equilibrium quantity. Consumers will now demand more chocolate ice cream at any given price, repre- senting a rightward shift of the demand curve. As a result, both equilibrium price and quantity rise. c. The price of a substitute (vanilla ice cream) has fallen, and consumers will tend to substitute it for chocolate ice cream. The demand for chocolate ice cream decreases, representing a leftward shift of the demand curve. Both equilibrium price and quan- tity fall. d. Because the cost of producing ice cream falls, manufacturers are willing to supply more units of chocolate ice cream at any given price. This is represented by a right- ward shift of the supply curve and results in a fall in the equilibrium price and a rise in the equilibrium quantity. 2. In a supply and demand diagram, draw the shift in demand for hamburgers in your hometown due to the following events. In each case show the effect on equilibrium price and quantity. a. The price of tacos increases. All hamburger sellers raise the price of their french fries. c. Income falls in town. Assume that hamburgers are a normal good for most people. d. Income falls in town. Assume that hamburgers are an inferior good for most people. e. Hot dog stands cut the price of hot dogs. 27 chapter 3 KrugmanMacro_SM_Ch03.qxp 10/19/05 3:46 PM Page 27
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Solution 2. a. A rise in the price of a substitute (tacos) causes the demand for hamburgers to in- crease. This represents a rightward shift of the demand curve from D 1 to D 2 and results in a rise in the equilibrium price and quantity as the equilibrium changes from E 1 to E 2 .
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This note was uploaded on 03/31/2008 for the course ECON 2010 taught by Professor Mertens,wi during the Fall '07 term at Colorado.

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Problem Solutions Chapter 3 - KrugmanMacro_SM_Ch03.qxp...

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