# ECON 200. Introduction to Microeconomics Homework 2

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1 ECON 200. Introduction to Microeconomics Homework 2 [Multiple Choice] Name: 1. A change in which of the following will NOT shift the demand curve for hamburgers? (b) a. the price of hot dogs b. the price of hamburgers c. the price of hamburger buns d. the income of hamburger consumers 2. An increase in will cause a movement along a given demand curve, which is called a change in (b) a. supply, demand b. supply, quantity demanded c. demand, supply d. demand, quantity supplied 3. Movie tickets and DVDs are substitutes. If the price of DVDs increases, what happens in the market for movie tickets? (d) a. The supply curve shifts to the left. b. The supply curve shifts to the right. c. The demand curve shifts to the left. d. The demand curve shifts to the right. 4. The discovery of a large new reserve of crude oil will shift the curve for gasoline, leading to a equilibrium price. (b) a. supply, higher b. supply, lower c. demand, higher d. demand, lower 5. If the economy goes into a recession and incomes fall, what happens in the markets for inferior goods? (a) a. Prices and quantities both rise. b. Prices and quantities both fall. c. Prices rise, quantities fall. d. Prices fall, quantities rise. 6. Which of the following might lead to an increase in the equilibrium price of jelly and a decrease in the equilibrium quantity of jelly sold? (c) a. an increase in the price of peanut better, a complement to jelly b. an increase in the price of Marshmallow Fluff, a substitute for jelly c. an increase in the price of grapes, an input into jelly d. an increase in consumers??incomes, as long as jelly is a normal good

3 5. Explain each of the following statements using supply-and-demand diagrams. a. When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country. Cold weather damages the orange crop, reducing the supply of oranges and raising the price of oranges. This leads to a decline in the supply of orange juice because oranges are an important input in the production of orange juice. This can be seen in the figure as a shift to the left in the supply curve for orange juice. The new equilibrium price is higher than the old equilibrium price. b. When the weather turns warm in New England every summer, the price of hotel rooms in Caribbean resorts plummets. People often travel to the Caribbean from New England to escape cold weather, so the demand for Caribbean hotel rooms is high in the winter. In the summer, fewer people travel to the Caribbean, because northern climates are more pleasant. The result, as shown in the figure, is a shift to the left in the demand curve. The equilibrium price of Caribbean hotel rooms is thus lower in the summer than in the winter, as the figure shows.

4 c. When a war breaks out in the Middle East, the price of gasoline rises and the price of a used Cadillac falls. When a war breaks out in the Middle East, many markets are affected. Because a large proportion of oil production takes place there, the war disrupts oil supplies, shifting the supply curve for gasoline to the left. The result is a rise in the equilibrium price of gasoline. With a higher price for gasoline, the cost of operating a gas-guzzling automobile like a Cadillac will increase. As a result, the demand for used Cadillacs will decline, as people in the market for cars will not find Cadillacs as attractive. In addition, some people who already own Cadillacs will try to sell them. The result is that the demand curve for used Cadillacs shifts to the left, while the supply curve shifts to the right. The result is a decline in the equilibrium price of used Cadillacs. 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

5 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.

6 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.

7 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. 8. Ketchup is a complement (as well as a condiment) for hot dogs. If the price of hot dogs rises, what happens to the market for ketchup? For tomatoes? For tomato juice? For orange juice? Ketchup is a complement for hot dogs. Therefore, when the price of hot dogs rises, the quantity demanded of hot dogs falls and this lowers the demand for ketchup. The end result is that both the equilibrium price and quantity of ketchup fall. Because the quantity of ketchup falls, the demand for tomatoes by ketchup producers falls, so the equilibrium price and quantity of tomatoes fall. When the price of tomatoes falls, producers of tomato juice face lower input prices, so the supply curve for tomato juice shifts out, causing the price of tomato juice to fall and the quantity of tomato juice to rise. The fall in the price of tomato juice causes people to substitute tomato juice for orange juice, so the demand for orange juice declines, causing the price and quantity of orange juice to fall. Now you can see clearly why a rise in the price of hot dogs leads to a fall in the price of orange juice!

8 9. The market for pizza has the following demand and supply schedules: Price Quantity demanded Quantity supplied \$ a. Graph the demand and supply curves. What is the equilibrium price and quantity in this market? Quantity supplied equals quantity demanded at a price of \$6 and quantity of 81 pizzas b. If the actual price in this market were above the equilibrium price, what would drive the market toward the equilibrium? If the price were above \$6, quantity supplied would exceed quantity demanded, so suppliers would reduce the price to gain sales. c. If the actual price in this market were below the equilibrium price, what would drive the market toward the equilibrium? If the price were below \$6, quantity demanded would exceed quantity supplied, so suppliers could raise the price without losing sales. In both cases, the price would continue to adjust until it reached \$6, the only price at which there is neither a surplus nor a shortage. 10. Consider the following events: Scientists reveal that eating oranges decreases the risk of diabetes, and at the same time, farmers use a new fertilizer that makes orange trees produce more oranges. Illustrate and explain what effect these changes have on the equilibrium price and quantity of oranges. The news of the increased health benefits from consuming oranges will increase the demand for oranges, increasing both the equilibrium price and quantity. If farmers use a new fertilizer that makes orange trees more productive, the supply of oranges will increase, leading to a fall in the equilibrium price but a rise in the equilibrium quantity. If both occur at the same time, the equilibrium quantity will definitely rise, but the effect on equilibrium price will be ambiguous.

9 11. Because bagels and cream cheese are often eaten together, they are complements. a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of bagels have risen. What could be responsible for this pattern - fall in the price of flour or a fall in the price of milk? Illustrate and explain your answer. Because flour is an ingredient in bagels, a decline in the price of flour would shift the supply curve for bagels to the right. The result, shown in the figure, would be a fall in the price of bagels and a rise in the equilibrium quantity of bagels. Because cream cheese is a complement to bagels, the fall in the equilibrium price of bagels increases the demand for cream cheese, as shown in the figure. The result is a rise in both the equilibrium price and quantity of cream cheese. So, a fall in the price of flour indeed raises both the equilibrium price of cream cheese and the equilibrium quantity of bagels. What happens if the price of milk falls? Because milk is an ingredient in cream cheese, the fall in the price of milk leads to an increase in the supply of cream cheese. This leads to a decrease in the price of cream cheese, rather than a rise in the price of cream cheese. So a fall in the price of milk could not have been responsible for the pattern observed.

10 b. Suppose instead that the equilibrium price of cream cheese has risen but the equilibrium quantity of bagels has fallen. What could be responsible for this pattern - rise in the price of flour or a rise in the price of milk? Illustrate and explain your answer. In part (a), we found that a fall in the price of flour led to a rise in the price of cream cheese and a rise in the equilibrium quantity of bagels. If the price of flour rose, the opposite would be true; it would lead to a fall in the price of cream cheese and a fall in the equilibrium quantity of bagels. Because the question says the equilibrium price of cream cheese has risen, it could not have been caused by a rise in the price of flour. What happens if the price of milk rises? From part (a), we found that a fall in the price of milk caused a decline in the price of cream cheese, so a rise in the price of milk would cause a rise in the price of cream cheese. Because bagels and cream cheese are complements, the rise in the price of cream cheese would reduce the demand for bagels, as the figure shows. The result is a decline in the equilibrium quantity of bagels. So a rise in the price of milk does cause both a rise in the price of cream cheese and a decline in the equilibrium quantity of bagels.

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