1SolutionsMicroProblem Set1Loyola

1SolutionsMicroProblem Set1Loyola - Solutions EC302...

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Solutions EC302 - INTERMEDIATE MICROECONOMICS Loyola University Spring Semester 2012 Problem Set 1 Answer all questions succinctly and thoroughly. 1. Consider the market for bread. Briefly describe what impact each of the following would have on demand, supply, equilibrium quantity, and equilibrium price of bread. Illustrate answers with graphs if helpful. a. A new type for fertilizer increases the productivity of the wheat crop. b. The price of butter rises due to a disease affecting cows. c. Concern over food additives reduces the demand for bread. d. A work stoppage by bread producers increases labor costs. e. To support bread prices, the government agrees to buy all surplus bread and pay 10% more than the current market price. f. To help reduce inflation, the government places a ceiling on the price of bread equal to the lower price that existed two years ago. 1. a. If a new type for fertilizer increases the productivity of the wheat crop, it will reduce the cost of producing bread. This will cause the supply curve to increase (shift right). At the old equilibrium price, there would now be an excess supply. Thus, market price will fall. As market price decreases, there is an increase in the quantity demanded (movement along the demand curve). At the new equilibrium, price will be lower and the quantity exchanged will be higher.
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b. Butter and bread are compliments in consumption. Thus, an increase in the price of butter, due to the cow disease, will cause the demand for bread to decrease (shift left). At the old equilibrium price, there would now be an excess supply. Thus, market price will fall. As market price decreases, there is a decrease in the quantity supplied (movement along the supply curve). At the new equilibrium, both price and the quantity exchanged will be lower. c. Bread and pho are substitutes in consumption. Thus, a decrease in the demand for pho will cause the demand for bread to increase (shift right). At the old equilibrium price, there would now be an excess demand. Thus, market price will rise. As market price increases, there is an increase in the
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