Solutions - for inferior goods at lower income levels....

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MGMT 407.04 Supply and Demand Graphs Solution to In Class Problem no. 2, July 16, 2009 Supply and Demand Graphs: Supply, Demand and Changing Market Equilibrium. The following problems give examples of changing supply and demand conditions which result in a change in the equilibrium price and quantity. a. The ramen noodle market: U.S. Income falls. Ramen noodles are an inferior good. b. Macaroni and cheese is considered a substitute for ramen noodles. The price of macaroni & cheese falls: c: Є:$1 exchange rate P* P 2 Q 2 Q* Q-U.S. dollar S1 S2 D 1 D 2 $Price P 2 P* Q* Q 2 Q-Ramen Noodles S D2 D 1 $Price per pound P* P 2 Q 2 Q* Q-Ramen Noodles D2: Demand increases as income falls, since there is a higher demand
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Unformatted text preview: for inferior goods at lower income levels. Lower price of a substitute good reduces demand and shifts the demand curve left. C: International investors decide to buy more Euro bonds as the global economy improves. As investors buy more Euro bonds, they will buy fewer U.S. Treasury bonds. Demand for the U.S. dollar falls. Some of the international investors are U.S. investors, and so they will have to sell dollars in order to buy Euros to purchase Euro bonds. The supply of dollars increases. Both these shifts work to lower the exchange rate for U.S. dollars, thus weakening the U.S. dollar and strengthening the Euro. S D2 D1...
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This note was uploaded on 09/08/2011 for the course MGMT 407 taught by Professor Staff during the Spring '11 term at S.F. State.

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