Homework 2_AK

# 6 consider the markets for dvds tv screens and

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6. Consider the markets for DVDs, TV screens, and tickets at movie theaters a. For each pair, identify whether they are complements or substitutes: - DVDs and TV screens DVDs and TV screens are likely to be complements because you cannot watch a DVD without a television. - DVDs and movie tickets DVDs and movie tickets are likely to be substitutes because a movie can be watched at a theater or at home. - TV screens and movie tickets TV screens and movie tickets are likely to be substitutes for the same reason. b. Suppose a technological advance reduces the cost of manufacturing TV screens. Draw a diagram to show what happens in the market for TV screens. The technological improvement would reduce the cost of producing a TV screen, shifting the supply curve to the right. The demand curve would not be affected. The result is that the equilibrium price will fall, while the equilibrium quantity will rise. This is shown in the figure

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. c. Draw two more diagrams to show how the change in the market for TV screens affects the markets for DVDs and movie tickets. The reduction in the price of TV screens would lead to an increase in the demand for DVDs because TV screens and DVDs are complements. The effect of this increase in the demand for DVDs is an increase in both the equilibrium price and quantity, as shown in the figure. The reduction in the price of TV screens would cause a decline in the demand for movie tickets because TV screens and movie tickets are substitute goods. The decline in the demand for movie tickets would lead to a decline in the equilibrium price and quantity sold. This is shown in the following figure.
7. Using supply-and-demand diagrams, show the effect of the following events on the market for sweatshirts. a. A hurricane in South Carolina damages the cotton crop. When a hurricane in South Carolina damages the cotton crop, it raises input prices for producing sweatshirts. As a result, the supply of sweatshirts shifts to the left, as shown in the figure. The new equilibrium price is higher and the new equilibrium quantity of sweatshirts is lower. b. The price of leather jackets falls. A decline in the price of leather jackets leads more people to buy leather jackets, reducing the demand for sweatshirts. The result, shown in the figure, is a decline in both the equilibrium price and quantity of sweatshirts. c. All colleges require morning exercise in appropriate attire. The effects of colleges requiring students to engage in morning exercise in appropriate attire raises the demand for sweatshirts, as shown in the figure. The result is an increase in both the equilibrium price and quantity of sweatshirts.

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d. New knitting machines are invented. The invention of new knitting machines increases the supply of sweatshirts. As the figure shows, the result is a reduction in the equilibrium price and an increase in the equilibrium quantity of sweatshirts.
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