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Problem set CH4-8

# Problem set CH4-8 - ECON-200 Exam#1 Practice Problem Set 1...

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ECON-200 Exam #1 Practice Problem Set 1 1. Use supply and demand diagrams to explain what happens to the equilibrium price and the equilibrium quantity in the butter market in each of the following cases: (1) The price of margarine falls. (2) The price of bread falls. (3) Household incomes rise and butter is a normal good. (4) The New England Journal of Medicine publishes a widely cited report that says people who consume a great deal of butter are more likely to have heart attacks. (5) The price of milk butter makers use to produce butter rises. (6) The government places a 10 cent tax on each pound of butter produced. (7) The government offers a 10 cent subsidy on each pound of butter produced. In each case, discuss and explain you diagram carefully. 2. Suppose one of your friends offered the following argument: An increase in demand will cause an increase in price. The increase in price will cause an increase in supply that will cause an offsetting decrease in price. Therefore, it is impossible to tell what effect an increase in demand will have on price. Do you agree with your friend? If you disagree, what is wrong with your friend = s reasoning? 3. Consider the following demand and supply data for the world market for soybeans: Price per Bushel Quantity Supplied Quantity Demanded \$3.80 1,500 525 \$3.70 1,000 600 \$3.60 700 700 \$3.50 600 900 \$3.40 550 1,200 (a) Is there excess demand or excess supply when the price is \$3.80? When the price is \$3.40? (b) Find the equilibrium price and the equilibrium quantity. (c) Graph the supply and demand curves. (d) Show how the equilibrium price and quantity can be found on the graph. (e)

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