{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

HW1solution for 105A - Chapter 1 Question3 A...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 1 Question3: A market-clearing model is one in which prices adjust to equilibrate supply and demand. Market-clearing models are useful in situations where prices are flexible . Yet in many situations, flexible prices may not be a realistic assumption. For example, labor contracts often set wages for up to three years. Or, firms such as magazine publishers change their prices only every three to four years. Most macroeconomists believe that price flexibility is a reasonable assumption for studying long-run issues. Over the long run, prices respond to changes in demand or supply, even though in the short run they may be slow to adjust. Market-clearing assumption : the markets are normally in equilibrium so the price of any good or service is found where the supply and demand curves intersect. The price of a good or a service moves quickly to bring quantity supplied and demanded into balance. Problems and Applications: Question3: Assume that the quantity of ice cream demanded depends not only on the price of ice cream and income, but also on the price of frozen yogurt: Demand function: 𝑄𝑄 𝑑𝑑 = 𝐷𝐷 ( 𝑃𝑃 𝐼𝐼𝐼𝐼 , 𝑃𝑃 𝐹𝐹𝐹𝐹 , 𝐹𝐹 ) 𝐹𝐹 𝑖𝑖𝑖𝑖 𝑡𝑡ℎ𝑒𝑒 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑒𝑒𝑎𝑎𝑎𝑎𝑡𝑡𝑒𝑒 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑒𝑒 We expect that demand for ice cream rises when the price of frozen yogurt rises, because ice cream and frozen yogurt are substitutes . That is, when the price of frozen yogurt goes up, I consume less of it and, instead, fulfill more of my frozen dessert urges through the consumption of ice cream.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}