microeconomics book solution 3

microeconomics book solution 3 -...

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Solution Supply and Demand 1. A survey indicated that chocolate is Americans’ favorite ice cream flavor. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream. a. A severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream. b. A new report by the American Medical Association reveals that chocolate does, in fact, have significant health benefits. c. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream. d. New technology for mixing and freezing ice cream lowers manufacturers’ costs of producing chocolate ice cream. 1. a. By reducing their herds, dairy farmers reduce the supply of cream, a leftward shift of the supply curve for cream. As a result, the market price of cream rises, raising the cost of producing a unit of chocolate ice cream. This results in a leftward shift of the supply curve for chocolate ice cream as ice-cream producers reduce the quantity of chocolate ice cream supplied at any given price. Ultimately, this leads to a rise in the equilibrium price and a fall in the equilibrium quantity. Consumers will now demand more chocolate ice cream at any given price, repre- sented by a rightward shift of the demand curve. As a result, both equilibrium price and quantity rise. c. The price of a substitute (vanilla ice cream) has fallen, leading consumers to sub- stitute it for chocolate ice cream. The demand for chocolate ice cream decreases, represented by a leftward shift of the demand curve. Both equilibrium price and quantity fall. d. Because the cost of producing ice cream falls, manufacturers are willing to supply more units of chocolate ice cream at any given price. This is represented by a rightward shift of the supply curve and results in a fall in the equilibrium price and a rise in the equilibrium quantity. 2. In a supply and demand diagram, draw the shift of the demand curve for hamburg- ers in your hometown due to the following events. In each case show the effect on equilibrium price and quantity. a. The price of tacos increases. All hamburger sellers raise the price of their french fries. c. Income falls in town. Assume that hamburgers are a normal good for most people. d. Income falls in town. Assume that hamburgers are an inferior good for most people. e. Hot dog stands cut the price of hot dogs. S-33 3 chapter: S33-S60_Krugman2e_PS_Ch03.qxp 9/16/08 9:18 PM Page S-33
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Solution 2. a. A rise in the price of a substitute (tacos) causes the demand for hamburgers to increase. This represents a rightward shift of the demand curve from D 1 to D 2 and results in a rise in the equilibrium price and quantity as the equilibrium changes from E 1 to E 2 .
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microeconomics book solution 3 -...

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