sample_midterm1_S11_answersto6_7_8

sample_midterm1_S11_answersto6_7_8 - 6 The following is an...

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1 6. The following is an excerpt from The New York Times, September 12, 2007: “Be it fettuccine, linguine, or spaghetti, Italians will soon be paying up to 20 percent more for their pasta. Consumer groups are calling for a one-day pasta strike on Thursday – not against eating it, but against buying it – to protest the impending increase in price. But producers say the strike targeting Italy’s national dish makes no sense because the price is linked to a global rise in the cost of grain. The cost of a pound of flour has risen in just the last two months from 16 cents to 28 cents, and flour constitutes 70 percent of the cost of producing pasta.” a) Is the producers’ explanation plausible? Yes. Higher production costs reduce the supply of pasta (see graph below), which leads to an increase in the price and a decrease in the quantity of pasta. b) Imagine that, as a result of the one-day strike, supermarkets in Italy did not raise the price of pasta in the upcoming months as predicted. What would happen in that case? In the graph below, (p 0 , q 0 ) denote the original equilibrium, and (p 1 , q 1 ) denote the new equilibrium. If prices remained constant at p 0 after the decrease in supply from S to S’, then an excess demand would ensue – at p 0 , the quantity demanded, q 0 , exceeds the quantity supplied, q’. This excess demand would put upward pressure on prices and eventually lead to an increase in prices (up to p 1 ). In other words, the one-day strike would not be effective in preventing the increase in prices.
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3 7. In 2006, the average price for a daily edition of a Baltimore newspaper was $0.50.
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