Econ 100A Ans to PS1 - Department of Economics University...

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D e p a r t m e n t o f E c o n o m i c s Spring 2007 University of California, Berkeley Prof. Woroch Economics 100A SOLUTIONS TO PROBLEM SET 1 I. TRUE or FALSE and EXPLAIN : For each statement below, decide whether it is true or false, and explain the reasoning behind your answer in a few sentences . When appropriate, provide a diagram. 1. If supply of good A shifts to the left while demand of good A shifts to the right, the equilibrium price and quantity increases. False: It is true that the new equilibrium price will increase; however, whether equilibrium quantity increases, decreases or remains constant depend on the magnitude of the change in demand and supply. 2. As one moves upward along a downward-sloping linear demand curve, the price elasticity of demand decreases. False: According to the formula for price elasticity of demand, dQ P dP Q , when one moves upward along a downward-sloping linear demand curve dQ dP stays constant but P increases and Q decreases. As such, elasticity of demand increases. 3. Alisa likes coffee but she hates beer. Her indifference curves representing bundles of coffee and beer have negative slope. False: Her indifference curves will have a zero slope (assume that x-axis representing quantity of beers and y-axis representing quantity of coffee. Her indifference curves will be a straight line horizontal to the x-axis. In other words, she is indifferent among all levels of beers. Preferences determine choice among baskets, not among consumption of those baskets. She is not forced to consume the beer. (If Alisa was forced to consume the beer in any basket she chose, then beer would enter as a “bad” and, like pollution, would result in positively sloped indifference curves.) 4. If the price of good X and price of good Y change by the same proportion, relative price will be the same and thus the budget constraint will not change. False: Even though the relative price doesn’t change, both goods are more expensive and thus the consumer can buy less of both goods given the same amount of income. As such, the budget constraint curve will parallel shift inward. II. SUPPLY-DEMAND ANALYSIS: For each of the follow recent news announcements, deduce the impact of the economic event on the price and quantity in indicated market(s). Sometimes a partial equilibrium analysis will suffice, while on other occasions you will want to follow simple general equilibrium reasoning. 1. Last week’s unusually cold weather in California damaged a large fraction of the citrus crop in the central valley, hitting especially hard the navel oranges: impact on U.S. orange juice market.
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Econ 100A-Spring 2007 Page 2 PS1 Suggested Answers The damaged oranges will cause the supply of oranges to fall, which in turn causes the price of oranges to increase. Being that oranges are the main ingredient in the production of orange juice, the increased production costs will make it more expensive for suppliers to provide the juice. This means that less will be produced at every price. Alternatively, we can think that a higher price is required to produce any level of orange juice.
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This note was uploaded on 07/15/2010 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.

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Econ 100A Ans to PS1 - Department of Economics University...

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