AK2.7 - Rice University ECON 211, Fall 2009 Problem Set 2...

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Rice University ECON 211, Fall 2009 Problem Set 2 Due on Friday, Sept 11 1. ( 24 pts .) Diagram the effects of the following events on the supply and/or demand for raisin bran cereal, assume that raisins are a factor in the production raisin bran cereal and milk is a complementary good. How do these events affect the equilibrium price and quantity? a) The price of raisin increases. Raisin is a factor of production. When its price increases, the supply curve of raisin bran will shift left to S’. Equilibrium price will rise and equilibrium quantity will fall changing (change from point O to point A). b) The price of milk decreases. Milk is a complement of raisin bran cereal. If the price of milk decreases, more raisin bran cereal will be demanded at a given price and the demand curve of raisin bran will shift right to D’. Equilibrium price will rise and equilibrium quantity will rise (change from point O to point B) c) The price of raisin increases and the price of milk decreases. The raisin bran supply will shift left (to S’) and raisin bran demand will shift right as describe (to D’) As a result, the equilibrium price will increase, while the equilibrium quantity may either increase, decrease or remain unchanged depending on the relative change of the demand respect the supply. P S’ A B O D’
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2. ( 16 pts. ) Suppose that the demand functions (not the demand curves as quantities are on the vertical axis) for goods A, B, and C have the following functional forms: Q A
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AK2.7 - Rice University ECON 211, Fall 2009 Problem Set 2...

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