Problem Set 1 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 (b) Population rises (c) Tastes shift away from the good (d) The price of a complementary good falls (e) The good becomes more expensive 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. (b) Alternative products (in supply) become more profitable. (c) The price of the good rises. (d) Firms anticipate that the price of the good is about to fall. 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.The discovery of a new cheaper way of milling flour.The prices of other grains rise.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. (b) A fall in bus and train fares. (c) A fall in the price of crude oil and an increase in the price of cars. (d) A rise in tax on petrol and a reduction in tax on cars. 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 Draw the demand and supply curves using the information from the table: What is the equilibrium price? Suppose the government fixes a maximum price of £200 per tonne. What will be the effect? 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 week (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? 6. Which of the following would be of interest to a behavioural economist? Briefly explain why or why not. (a) Brand loyalty (b) Why a person buys a sports car when a friend or family member buys one. (c) Why people queue through the night for the latest gadget (d) Why supermarkets put confectionery near the checkouts (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. 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? What is the value of consumer expenditure on smart phones given this initial information? 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? Given this new information, what is the value of consumer expenditure on smart phones in this market? 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. 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 the impact of this price ceiling on the market for soybeans and in your answer explain why this is the impact.
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