Excercise1

Excercise1 - Exercise The island of Pago-Pago imports...

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Exercise The island of Pago-Pago imports boomerangs from Australia, but by custom, only the boys of the island are allowed to play with them. Consider the following market information about boomerangs: At a price of (in ogaps): 10 9 8 7 6 5 4 3 QD-M (in thousands) 14 16 18 20 22 24 26 28 QS (in thousands) 29 26 23 20 17 14 11 8 QD-F (in thousands) 0 2 5 8 11 14 17 20 where QD-M is the quantity of boomerangs demanded by males, QS is the quantity of boomerangs supplied by Australian companies and the "ogap" is the local currency. PART A: 1. On a single graph plot the demand curve of Pago-Pago males and the supply curve for boomerangs. 2. Explain why the slopes of these two curves make sense. 1. Supply curve is upward sloping (positive slope) because the quantity supplied increases as the price goes up. An intuitive explanation of the positive relationship between price and quantity supplied is based on the concept of opportunity cost. At greater prices the firm has a greater incentive to devote more resources to production of boomerangs than it has at lower prices. On the other hand, at very low prices of boomerangs the firm can think of alternative uses of resources (e.g. make other goods out of mahogany, rent out the plant).

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2. Demand curve is downward sloping (negative slope) because the quantity demanded declines as the price goes up. A single individual buys smaller quantity of the product at increasing prices, and more people are attracted to smaller prices that high prices. 3. Consider each of the following circumstances and predict their separate impacts on one or both of these two curves. If a curve shifts, indicate the direction of the shift. a) the income of Pago-Pagoans declines after a typhoon hits the island; The demand curve shifts to the left because people have less disposable income for goods, and thus buy fewer boomerangs. b) the Australians win the Olympic boomerang championship; This could have the effect of increasing the demand for boomerangs in Australia , thereby raising the price of boomerangs in Australia and causing the manufacturer to divert supplies from Pago-Pago. In that case, the supply curve in Pago-Pago will shift left, causing a rise in price, a decline in quantity sold and a decline in quantity demanded . Or, If we assume that after the championship boomerangs become more popular in Pago-Pago and boys want to imitate the Australian boomerang stars, then the demand curve in Pago-Pago shifts to the right. c) the price of Frisbees increases; We assume that Frisbees and boomerangs are substitutes. An increase in the price of Frisbees will make boomerangs more attractive, and the demand curve for boomerangs will shift to the right . d) the Pago-Pago government reduces the tariff on imported clothing,
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Excercise1 - Exercise The island of Pago-Pago imports...

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