Econ 101 Winter 2010 Problem Set 6

Econ 101 Winter 2010 Problem Set 6 - Economics 101...

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Problem Set 6 February 18 & 19 University of Michigan Winter 2010 Economics 101 Microeconomics

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Econ 101.400 Winter 2010 Question One Suppose you estimate the following daily demand function for milk in the local market: Q d = 1000 – 100 P m + 25 P c where Q d is the quantity of milk demanded (in gallons), P m is the price of milk (in dollars/gallon) and P c is the price of cheese (in dollars/pound). (a) Are milk and cheese substitutes or compliments? How do you know? (b) Local dairy farmers produce both milk and cheese. The following is the estimated supply curve for milk: Q s = 100 P m – 20 P c . If the price of cheese is \$4/pound, draw both the demand and supply curves. What is the equilibrium quantity of milk sold in the market each day? What is the equilibrium price of milk? (c) If the price of cheese were to fall, what will happen to the equilibrium price of milk? Can you tell what will happen to the equilibrium quantity of milk sold each day? (d) Suppose the price of cheese falls to \$3/pound. What effects (if any) will this have on supply and demand curves for milk? Show this in your diagram. Solve for the new equilibrium price and quantity of milk sold each day. Do these changes correspond to your predictions in part (c)?
Econ 101.400 Winter 2010 Question Two Suppose that all US consumers have roughly the same tastes for frozen apple pies. Consequently, we imagine that the demands for frozen apple pies in any two major US

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This note was uploaded on 04/20/2010 for the course ECON 101 taught by Professor Gerson during the Winter '08 term at University of Michigan.

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Econ 101 Winter 2010 Problem Set 6 - Economics 101...

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