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econ1001_endofchapter03

econ1001_endofchapter03 - Chapter 3 Supply and Demand...

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Chapter 3 Supply and Demand
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Problem #1, Chapter 3 State whether the following pairs of goods are complement or substitutes. (If you think a pair is ambiguous in this respect, explain why.) Tennis courts and squash courts Squash racquets and squash balls Ice cream and chocolate Cloth diapers and paper diapers Substitutes- goods that can be used / consumed interchangeably, i.e. Coca Cola and Pepsi Complements- goods that have to be used / consumed at the same time, i.e. Computer hardware and software
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Solution to Problem #1 (2) Tennis courts and squash courts Substitutes- you cannot play tennis in a squash court and you cannot play squash court in a tennis court. Two kinds of sport venue Squash racquets and squash balls Complements- to play squash, you will need both Ice cream and chocolate Substitutes for some people who regard them as desert Complement for some people who want to have chocolate (chips) on top of the ice cream Cloth diapers and paper diapers Substitutes- just different materials! We can use them interchangeably
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How would each of the following affect the U.S. market supply curve for corn? a. A new and improved crop rotation technique is discovered. Supply curve shifts to right. The improved technique leads to increase in the production of crops. b. The price of fertilizer falls. Supply curve shifts to right. Decrease in input price leads to decrease in cost of production. c. The government offers new tax breaks to farmers. Supply curve shifts to right . This tax breaks actually make farming more profitable than before. Thus, can supply more corn. d. A tornado sweeps through Iowa. Supply curve shifts to left. Tornadoes destroy the corns, so less supply of corns. Chapter 3, Problem 2
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Problem #3, Chapter 3 Indicate how you think each of the following would shift demand in the indicated market Incomes of buyers in the market for Adirondack vacation increase Buyers in the market for pizza read a study linking hamburger consumption to heart disease Buyers in the market for CDs learn of an increase in the price of audiocassettes (a substitutes for CDs) Buyers in the market for CDs learn of an increase in the price of CDs Demand shifts up (right)- increase in demand at any given level of price Demand shifts down (left)- decrease in demand at any given level of price
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Solution to problem #3 (1) Incomes of buyers in the market for Adirondack vacations increase The demand curve will shift up (right) Assume vacations are a normal good. Buyers will increase their consumption in vacations when their incomes increase. Buyers in the market for pizza read a study linking hamburger consumption to heart disease The demand curve will shift up (right) Pizza and hamburger are both junk food and can be consumed interchangeably. If a study shows proven connection between hamburger consumption and heart disease, people will consume less pizza for now. People will probably switch to consume pizza going forward.
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