chapter3_4questions

chapter3_4questions - Questions for Economics 1 SUPPLY,...

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Questions for Economics 1 1. For each of the following, draw a diagram that illustrates the likely effect on the market for eggs. Indicate in each case the impact on equilibrium price and equilibrium quantity. a. A surgeon general warning that high-cholesterol foods can cause heart attacks. b. A decrease in the price of bacon, a complementary product. c. An increase in the price of chicken feed. d. Caesar salad becomes popular at dinner parties. (The dressing is made with raw eggs.) e. A technological innovation that reduces egg breakage during packing. The following graphs illustrate each case. Comments follow below. a) b) c) e) d) P P P P P Q Q Q Q Q Q¹ Q² Q¹ Q² a. The risk of heart attack will cause a change in preferences. Demand will go down. This will cause a decrease in quantity as well as a decrease in price. b. A decrease in the price of a complementary good will cause an increase in demand. This causes an increase in price and quantity. c. The increase in the price of chicken feed will constitute an increase in the cost of inputs on the supply side. This will cause a decrease in supply, which in turn causes higher prices and lower quantity.
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d. This is a change in preferences which increases demand for eggs. Price and quantity will rise. e. This technological innovation will cause an increase in supply. In this case, there will be and increase in supply and lower prices. 2. Consider the market for high definition televisions (HDTVs). a. Scenario 1: Using a supply and demand graph, show what will happen to the current equilibrium price and quantity of HDTVs if people expect the price of HDTVs to fall in the future. b. Scenario 2: Now, using a second supply and demand graph, show instead what will happen to the equilibrium price and quantity of HDTVs if the price of DVD players falls. In answering your question, assume that DVD players and HDTVs are complements in consumption. c. Scenario 3: You observe that the price of HDTVs increases. Can you definitively conclude that there has been an increase in demand? If not, what besides an increase in demand could explain the price increase? a. See below. Demand will decrease because consumers will want to wait until the price drops. Supply will increase because suppliers will want to sell now while the price is high. Current equilibrium price will fall. We cannot say what will happen to equilibrium quantity. (Note: The way it’s
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This note was uploaded on 08/02/2011 for the course ECON 1 taught by Professor Tang during the Spring '08 term at UCSD.

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chapter3_4questions - Questions for Economics 1 SUPPLY,...

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