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Unformatted text preview: 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: ? = ( , , ) 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....
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This note was uploaded on 10/15/2010 for the course ECON Econ 104B taught by Professor Cannotremeberban? during the Summer '10 term at UC Riverside.
- Summer '10
- Supply And Demand