market demand curve for a ‘normal’ good shift | My Assignment Tutor

Problem Set 2 1.     How will the market demand curve for a ‘normal’ good shift (i.e. left, right or no shift) in each of the following cases?         (a)    The price of a substitute good falls……………………………………………………………………….. Left         (b)    Population rises……………………………………………………………………………………………….. Right         (c)    Tastes shift away from the good…………………………………………………………………………… Left         (d)   The price of a complementary good falls…………………………………………………………….. Right         (e)    The good becomes more expensive……………………………… No shift (movement along curve) 2.     How will the market supply curve of a good shift (i.e. left, right or no shift) in each of the following cases?         (a)    Costs of producing the good fall………………………………………………………………………… Right         (b)    Alternative products (in supply) become more profitable………………………………………… Left         (c)    The price of the good rises…………………………………………………………………………….. No shift         (d)   Firms anticipate that the price of the good is about to fall……………………………………… Right 3.     How will the following changes affect the market price of wheat flour (assuming that the market is initially in equilibrium)? In each case, sketch what happens to the demand and/or supply curves and, as result, what happens to the equilibrium price.  People consume more bread.                           (b)    The discovery of a new cheaper way of                                                                                         milling flour.   (c)    The prices of other grains rise.                              (d)   Rice and potatoes fall in price.   4.      The diagram below shows the demand for and supply of petrol. The market is initially in equilibrium at point x. There is then a shift in the demand and/or supply curves, with a resulting change in equilibrium price and quantity. To which equilibrium point (a, b, c, d, e, f, g or h) will the market move from point x after each of the following changes? The market for petrol (a)  A rise in the cost of refining petrol…………………………………………………………………………… h (b)  A fall in bus and train fares………………………………………………………………………………………. f (c)  A fall in the price of crude oil and an increase in the price of cars………………………………… e (d)  A rise in tax on petrol and a reduction in tax on cars…………………………………………………… a 5.       The demand and supply schedules for wheat in a free market are as follows: Price per tonne (£)120160200240280320360400Tonnes demanded per week725700675650600550500425Tonnes supplied per week22530040050060075010001300         (a)    Draw the demand and supply curves on the following diagram: S   D      What is the equilibrium price? ……………………. £280 per tonne (where D = S = 600 tonnes)  Suppose the government fixes a maximum price of £200 per tonne. What will be the effect?                                                                                                 Shortage of 275 tonnes (675 – 400)         (c)    Suppose that supply now increases by 150 tonnes at all prices. Enter the new figures. Price per tonne (£)120160200240280320360400Tonnes demanded per week725700675650600550500425(old) Tonnes supplied per week22530040050060075010001300(new) Tonnes supplied per week37545055065075090011501450         (d)   How much will price change from the original equilibrium (assuming that the government no longer fixes a maximum price)? How much more will be sold?                 Change in price……………………………………………………………………………. Fall by £40 to £240         Change in quantity…. Rise by 50 from 600 to 650 (i.e. less than the 150 increase in supply) 6.     Which of the following would be of interest to a behavioural economist? Briefly explain why or why not.         (a)    Brand loyalty……………………………………………………………………………………………………… Yes         (b)    Why a person buys a sports car when a friend or family member buys one………………… Yes         (c)    Why people queue through the night for the latest gadget………………………………………… Yes         (d)   Why supermarkets put confectionery near the checkouts…………………………………………. Yes         (e)    Whether it would be more effective if the government replaced opting in for organ donation for transplant (when you die) with people having to opt out if they do not want their organs to be automatically available for transplant.                                                                                     …………………………………………………………….. Yes In each case a behavioural economist will want to understand what motivates people to action and the effect, therefore, of varying incentives. Companies, governments and any other interested parties want to understand consumer behaviour (or that of any other economic agent) in order to work out how best to achieve their objectives. Thus firms will want to understand how to create brand loyalty or how to promote a product, like a new gadget, so as to generate demand before it comes on sale. Similarly they will want to know why people make impulse purchases, such as confectionery, at the supermarket checkout, in order to find the most effective ways of encouraging consumers to make such purchases. In other words, studying the factors that influence human behaviour helps economists gain a deeper understanding of how firms, governments and individuals can most effectively achieve their objectives. 7.     Consider the market for smart phones. Initially the market demand for these phones is given as P = 500 – .005Q and the market supply for these phones is given as P = .005Q. Given this information, what is the equilibrium price and equilibrium quantity of smart phones in this market? To find the equilibrium quantity set the market demand curve equal to the market supply curve: 500 – .005Q = .005Q or Q = 50,000. Use this quantity in either the demand or supply curve to find the equilibrium price: P = 500 – .005(50,000) = $250. What is the value of consumer expenditure on smart phones given this initial information? Consumer expenditure in this problem will be equivalent to total revenue. This implies that consumer expenditure can be found by multiplying the equilibrium price times the equilibrium quantity. Thus, consumer expenditure = ($250 per smart phone)(50,000 smart phones) = $12,500,000. Now, suppose that tastes and preferences for smart phones changes so that at every price an additional 20,000 phones are demanded. There are no changes in the market supply curve. Given this information, what is the new equilibrium price and equilibrium quantity of smart phones in this market? To find the new equilibrium price and equilibrium quantity of smart phones you need to first find the new demand curve. You know from the given information that the demand curve has shifted to the right by 20,000 units at every price: the new demand curve is therefore parallel to the initial demand curve. This implies that the two demand curves have the same slope. You also know that the point (120,000 smart phones, $0 per smart phone) sits on the new market demand curve. Use this point and the slope of the original demand curve to find the new demand curve: P = 600 – .005Q. Once you have the new marked demand curve use this demand curve and the supply curve to find the new equilibrium price and equilibrium quantity in the market. Thus, 600 – .005Q = .005Q or Q = 60,000 smart phones. Plug this quantity back into the new market demand curve or the supply curve to find the equilibrium price: P = 600 – .005(60,000) = $300 per smart phone. Given this new information, what is the value of consumer expenditure on smart phones in this market? Consumer expenditure in this problem will be equivalent to total revenue. This implies that consumer expenditure can be found by multiplying the equilibrium price times the equilibrium quantity. Thus, consumer expenditure = ($300 per smart phone)(60,000 smart phones) = $18,000,000. Now suppose that the government implements a price floor in the market for smartphones and this price floor is set at $150 per unit. Describe the impact of this price floor on the market for soybeans and in your answer explain why this is the impact. This price floor will have no impact on this market. For a price floor to be effective it must be set at a level that is greater than the equilibrium price in the market since a price floor is a minimum price that can be charged for the good. If the price floor is set at a level below the equilibrium price then consumers will continue to pay this equilibrium price and producers will continue to charge this equilibrium price and the price floor will not have any impact on the market. The government decides to institute a price ceiling in this market for soybeans instead of the price floor. The government sets this price ceiling at $400. Describe verbally (no numbers needed here) the impact of this price ceiling on the market for soybeans and in your answer explain why this is the impact. A price ceiling represents a maximum price that can be charged for a good. For a price ceiling to be effective it must be set below the equilibrium price in the market. In this example the price ceiling is effective since its level ($200 per unit of soybeans) is less than the equilibrium price of $250 in this market. When a price ceiling is effective there will be excess demand at the price ceiling price since suppliers will supply fewer units than the number of units demanded by consumers.

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