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Homework203_5AK(f09)

# Homework203_5AK(f09) - Homework#5 Answer Key 1 Suppose you...

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Homework #5 Answer Key 1. Suppose you observe that both the equilibrium price of hamburgers and the equilibrium quantity of french fries have risen. What can be responsible for this—a fall in the price of beef or a fall in the price of potatoes? Illustrate with appropriate graphs and explain your answer ( Hint: try each— a fall in the price of beef and a fall in the price of potatoes to determine which one causes the P of hamburgers and Q of french fries to rise ) To answer this question, you should try both scenarios to see which one causes the equilibrium price of hamburgers and the equilibrium quantity of french fries to rise: 1. What happens when the price of beef falls? Beef is an input into the production of hamburgers— changes in the price of beef, changes the costs of producing hamburgers and consequently, the supply of hamburgers shifts. When the price of beef falls, supply of hamburgers increases (shifts in the direction of lower prices or higher quantity). This will cause the equilibrium price of hamburgers to fall and equilibrium quantity of hamburgers to rise. Since french fries are a complement to hamburgers & given the price of hamburgers fell, then the demand for french fries increases. Thus, the equilibrium quantity and price of french fries rises.

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Homework203_5AK(f09) - Homework#5 Answer Key 1 Suppose you...

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