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Unformatted text preview: Chapter 3 Supply and demand 25 May 2011 1. State whether the following pairs of goods are complement or substitutes. (If you think a pair is ambiguous in this respect, explain why.) (a) Tennis courts and squash courts Answer: Tennis courts and squash courts are substitutes. They are two kinds of sport venue. You cannot play tennis in a squash court and you cannot play squash court in a tennis court. (b) Squash racquets and squash balls Answer: Squash racquets and squash balls are complements. To play squash, you will need both squash racquets and squash balls. You cannot play squash with only one of them. (c) Ice cream and chocolate Answer: Ice cream and chocolate are substitutes for some people who regard them as desert. However, they can also be complement for some people who want to have chocolate chips on top of the ice cream. (d) Cloth diapers and paper diapers Answer: Cloth diapers and paper diapers are substitutes. They are just diapers made of di erent materials. We can use them interchangeably. 2. How would each of the following a ect the U.S. market supply curve for corn? (a) A new and improved crop rotation technique is discovered. Answer: In this case, for any given level of price, the improved technique leads to an increase in the crop production. Therefore, supply curve shifts to the right. (b) The price of fertilizer falls. Answer: For any given level of price, an decrease in input price leads to a decrease in the cost of production. Therefore, supply curve shifts downwards or equivalently to the right. (c) The government o ers new tax breaks to farmers. Answer: The tax breaks generally make farming more pro table than before. However, whether and how it will a ect the supply depends on whether the tax breaks is related to output. If it is related to output (i.e., the tax break is per unit basis), then individual supply curves will shift right and the market supply curve will shift right. If the tax break is unrelated to output, then individual supply curves will not shift but the pro t will invite new suppliers and the market supply curve will shift right. In both cases, the supply curve will shift right. 1 (d) A tornado sweeps through Iowa. Answer: Tornado destroys the corns. It leads to a less supply of corns at any given level of price. Thus, supply curve shifts to the left. 3. Indicate how you think each of the following would shift demand in the indicated market. (a) Incomes of buyers in the market for Adirondack vacation increase. Answer: Assume vacations are a normal good. For any given price level, buyers will increase their consumption of vacations when their incomes increase. Hence the demand curve for Adirondack vacation will shift up (or shifts to the right)....
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This note was uploaded on 03/13/2012 for the course ECON 1001 taught by Professor S.c during the Fall '10 term at HKU.
- Fall '10
- Supply And Demand