PS2_AK - Econ 110 Spring 2010 L1 L2 HW2 Solution A Chapter3...

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Econ 110, Spring 2010, L1 & L2 HW2 Solution A. Chapter3, problem 3, [(3.2)] Place the following goods and services into pairs of likely substitutes and into pairs of likely complements. (You may use an item in more than one pair.) The goods and services are: coal, oil, natural gas, wheat, corn, rye, pasta, pizza, sausage, skateboard, roller blades, video game, laptop, iPod, cell phone, text message, email, phone call, voice mail Substitutes include: coal and oil; coal and natural gas; oil and natural gas; wheat and corn; wheat and rye; corn and rye; pasta and pizza; pasta and sausage; pizza and sausage (they type of sausage that cannot be used as a topping on pizza); skateboard and roller blades; skateboard and video game; roller blades and video game; text message and email; text message and phone call; and, email and phone call. Complements include: pizza and sausage (the type of sausage that can be used as a topping on pizza); skateboard and iPod; roller blades and iPod; video game (the type played on a computer) and laptop; cell phone and text message; cell phone and phone call; cell phone and voice mail; and, phone call and voice mail. B. Chapter3, problem 5, [(3.2)] In January 2007, the price of gasoline was $2.38 a gallon. By May 2008, the price had increased to $3.84 a gallon. Assume that there were no changes in average income, population, or any other influence on buying plans. How would you expect the rise in the price of gasoline to affect a. The demand for gasoline? Explain your answer. The rise in the price of gasoline does not change the demand for gasoline. The demand for gasoline changes only when some other relevant factor other than the price of the good changes. b. The quantity of gasoline demanded? Explain your answer. The rise in the price of gasoline decreases the quantity of gasoline demanded. A rise in the price of a good or service decreases the quantity of that good or service demanded. C. Chapter3, problem 7 [(3.3)] American to cut flights, charge for luggage American Airlines announced yesterday that it will begin charging passengers $15 for their first piece of checked luggage, in addition to raising other fees and cutting domestic flights as it grapples with record-high fuel prices. Boston Herald, May 22, 2008 a. How does this news clip illustrate a change in supply? Explain your answer. Fuel prices are a cost of a factor of production. As the cost rises, the supply decreases. American 1
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Airlines is decreasing the supply of its flights by cutting domestic flights. b. What is the influence on supply identified in the news clip? Explain your answer. The influence is the cost of a factor of production, in particular, the cost of fuel. c. Explain how supply changes. The increase in the cost of the factor of production decreases the supply and shifts the supply curve leftward.
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