Thought Exercise Answers L1-L3

Thought Exercise Answers L1-L3 - UNIVERSITY OF CALIFORNIA...

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UNIVERSITY OF CALIFORNIA HAAS SCHOOL OF BUSINESS EWMBA 201A—Economic Analysis for Business Decisions Fall 2009 Felix Várdy Answers to Selected Thought Exercises Lecture 1 Would you expect the prices for a commodity to be different at two different locations? By how much could the prices differ? The prices may be different in different locations, due to differences in demand and supply conditions across these locations. However these prices cannot differ by more than the transportation costs per unit of the commodity, due to arbitrage. If you reduce your price, what happens to the demand for your product? What happens to quantity demanded? A price reduction does not change the demand. In other words, it does not cause a shift in the demand curve. Price reduction increases the quantity demanded, which is a move along the demand curve. Do you think perfectly competitive market model describes the market for Diet Coke? No. Although there are many buyers, there are not many suppliers. In other words Diet Coke is not a homogenous product. What happens if the price of a good is above the perfectly competitive equilibrium price? What happens if it is below it? Assuming that the good and the market fulfill our assumptions underlying the perfectly competitive markets… If the price of a good is below the equilibrium price, firms will face a huge quantity demanded at that price. Thus firms will find it profitable to adjust the price upwards. As they do this, less quantity will be demanded, until firms no longer
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This note was uploaded on 09/15/2009 for the course EWMBA 201A taught by Professor Wolfram during the Fall '07 term at Berkeley.

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Thought Exercise Answers L1-L3 - UNIVERSITY OF CALIFORNIA...

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