econ 651 - economic analysis for managersbryongaskin.net/education/mba...

ECON 651 - Economic Analysis for Managers

Welcome Bryon Gaskin! If you're not Bryon, please click here. 09.02.04

Supply and Demand I Question 1

Practice Assignment: Due on 09.09.04, 11:00 PM

1. If the public utilities commission cuts the price of electricity, how would you show what happens in a graph with a demand curve? Drag the dot in this figure to show your answer. As you do, be careful not to change the position of the demand curve. Tool tip: Click and drag the dot along the curve. The dot will snap into position, so if you try to move it and it snaps back to its original position, just try again and drag it a little farther. When you are satisfied with your answer, click the Submit Answer button.

Go to: Table of Contents Score Sheet


Terms and Conditions | Privacy Notice | Security Notice | Aplia Support

Copyright © 2001-2004 Aplia Inc. All rights reserved.

of 1Aplia Inc.: Assignments

9/2/2004http://econ.aplia.com/af/servlet/quiz?quiz_action=takeQuiz&quiz_probGuid=FLPLC0A801010000000037B6B0030000&ctx=jhorowitz-0003



Supply and Demand I Question 12.3


On Thursday mornings through the summer, a farmers' market in a city neighborhood has fruits and vegetables for sale. Show how the market for fresh peaches sold at this market is affected by the following events by adding a new demand curve, a new supply curve, or one of each. Label all demand and supply curves. Use D1 and S1 to label the initial curves. Use D2 or S2 to label any new curves you add.

12.3. The cost of preventing a certain insect from destroying ripe peaches just before harvest suddenly declines with the introduction of a safe new pest control method. Some consumers, who previously were afraid of pesticide residues, buy peaches. Farmers are surprised to see that the price of peaches doesn't change. Notice that the initial equilibrium is shown with gray dashed droplines. In addition to labeling the initial supply and demand curves and labeling any new supply and demand curves, you should also indicate the new equilibrium with black dashed droplines.

Correct Answer:

Your Answer:

Two things happen in this example. First, the number of peaches lost to insects is reduced, expanding the number of peaches ready for sale at any price. This results in a rightward shift of the supply curve. Second, the number of people willing to buy peaches at any price expands due tolessened fears of pesticide residues. That will shift the demand curve to the right. It's possible that the new equilibrium price is the same as the old equilibrium price. However, note that for different sizes of shifts in demand and supply, price might move up or down. Equilibrium quantity definitely expands.





Page 1 of 1Aplia Inc.: Assignments

9/2/2004http://econ.aplia.com/af/servlet/quiz?quiz_action=takeQuiz&quiz_probGuid=FLPLC0A801010000000037B6B0140000&q...






12.2. The previous week, one third of the ripe peaches are destroyed on the trees by a hailstorm.

Correct Answer:

Your Answer:

The reduction in peaches ready for sale that week, at any price, is captured by a leftward shift of the supply curve.












12.1. One Thursday morning, two thousand visitors from outside the neighborhood turn out for an art festival across the street from the farmers' market. Tool tip: Click items in the Tools menu to select curves or other elements you want to place on the graph. Once you've selected an item, click on the graph to place it. You can change labels by clicking the label itself and selecting the appropriate title from the drop-down menu that appears. When you are satisfied with your answer, click the Submit Answer button.

Correct Answer:

Your Answer:

The increase in the number of people across the street that day increases the demand for fresh vegetables and fruit. At any price, the number of people willing to buy increases, which is represented as a rightward shift of the demand curve.











An analyst in the oil refinery industry is reviewing the market for heating oil to estimate the equilibrium price and quantity. She must consider factors that can affect supply and demand for heating oil. These include the price of crude oil, the cost of refining the oil, the cost of an oil furnace, average annual household income, and the tax per barrel of oil. Another factor is the cost of natural gas, which may be used instead of oil as a heating fuel.

11.4. Use the equilibrium calculator to answer the question below.

The fall in household income reduces the demand for heating oil. To show the $30 thousand decrease in household income, you should enter 30 in the Household Income box and click on the Calculate button. The demand curve shifts leftward. To re-equilibrate the market, price must fall. Move the Price line downward until quantity demanded and quantity supplied are again equal at what is the new equilibrium quantity.













A market is in equilibrium when quantity demanded equals quantity supplied. The price at which this occurs is the equilibrium or market-clearing price.












11.2. Use the calculator to answer the question below.

Higher refining costs raise the cost of producing heating oil, which reduces the supply of heating oil. Enter 11 in the Cost of Refining Oil box and click the Calculate button to see how supply changes. Next, to find the new equilibrium, raise the Price line until it corresponds to the intersection of the demand and new supply curves. The new equilibrium quantity is the one for which quantity demanded equals the new quantity supplied.






9/2/2004http://econ.aplia.com/af/servlet/quiz?quiz_action=takeQuiz&quiz_probGuid=FLPLC0A801010000000037B6B00F0000&q...







A market is in equilibrium when quantity demanded equals quantity supplied. The price at which this occurs is the equilibrium or market-clearing price.






9/2/2004http://econ.aplia.com/af/servlet/quiz?quiz_action=takeQuiz&quiz_probGuid=FLPLC0A801010000000037B6B00E0000&q...





10. Suppose that the consumption and production of marijuana were legalized in the United States. What

would you predict would happen to the equilibrium price and quantity of marijuana?

A. Equilibrium quantity would increase, but the change in price depends on the magnitudes of the shifts in supply and demand.

B. Equilibrium price would increase, but the change in quantity depends on the magnitudes of the shifts in supply and demand.

C. Equilibrium quantity and price would both increase.

D. Equilibrium price and quantity would both decrease.

Both supply and demand can be expected to increase as a result of legalization. This would result in a definite increase in quantity, but the change in price would be indeterminate, since it depends on the magnitudes of the shifts in supply and demand.






9/2/2004http://econ.aplia.com/af/servlet/quiz?quiz_action=takeQuiz&quiz_probGuid=MCPLC0A801010000000037B6B0180000&...





9. True or False: If a disease kills a large number of turkeys, the supply curve of turkeys will shift

leftward. This will result in a price increase, which will then cause the supply of turkeys to shift rightward.

True

False

The disease will reduce the supply of turkeys available at any price. This is best described by a leftward shift of the supply curve. The new equilibrium price will be higher and quantity will be lower. The higher equilibrium price does not cause a further shift rightward in the supply curve as the statement claims, but is simply the result of the new equilibrium at the intersection of the new supply curve that is shifted to the left and the initial demand curve.






9/2/2004http://econ.aplia.com/af/servlet/quiz?quiz_action=takeQuiz&quiz_probGuid=TFPLC0A801010000000037B6B01A0000&q...





The senior buyer for Carson's Clothing, who is planning to purchase a new line of popular blue jeans for the retail chain, is estimating supply. In her analysis, she must take into consideration the wages of workers who make the jeans and the price of cotton.

8.3. Use the supply calculator to answer the question below.

When the price of an input increases, what happens to the supply curve for the output?

A. The supply curve shifts to the left.

B. The supply curve shifts to the right.

C. The supply curve stays in the same position but the quantity supplied goes down.

D. The supply curve could shift either to the right or the left depending on the slope of the demand curve.

An increase in the price of an input, such as the price of cotton, will reduce the supply of the goods that it is used to make. A reduction in supply is a shift to the left. This means that at any price the quantity will be lower. You can also think of a reduction in supply as a shift up, but for many people it is hard to remember that a decrease in supply means a shift up. Finally, you can predict what happens to the supply curve without knowing anything about the demand curve.













Replace the hourly wage of 8 with a value of 9 and then calculate the new value of quantity supplied. Because of the higher wage rate, the supply curve shifts to the left (or, equivalently, upward). Given a price of 40, suppliers are willing to sell fewer jeans because they must pay more per hour of labor.






9/2/2004http://econ.aplia.com/af/servlet/quiz?quiz_action=takeQuiz&quiz_probGuid=FLPLC0A801010000000037B6B00D0000&q...







An increase in price would increase the quantity of jeans, which is represented as a movement along the supply curve. To see how much quantity increases, replace the initial value of 40 in the Price of Blue Jeans box with the new value of 50 and then calculate the new quantity supplied by clicking on the Calculate button. Or, move the Price line upward until the value of 50 appears in the Price of Blue Jeans box and see the quantity that producers are willing to supply at this price. (Because the wage rate and price of cotton are both unchanged, you should not change their values.)






9/2/2004http://econ.aplia.com/af/servlet/quiz?quiz_action=takeQuiz&quiz_probGuid=FLPLC0A801010000000037B6B00C0000&q...





7. The government runs an agricultural extension service that gives advice to farmers. Suppose that extension service employees discover a new and better way to prepare a field before planting. They teach it to all farmers, who use it to increase the amount of corn that they grow on each acre of land. Adjust this graph to show the effect that this discovery has on the market for corn.

Correct Answer:

Your Answer:

The new method for growing corn will increase the quantity supplied at each price, so the supply curve shifts to the right. This is a special case of the general rule that an improvement in the technology used to produce a good will shift its supply curve out to the right.






9/2/2004http://econ.aplia.com/af/servlet/quiz?quiz_action=takeQuiz&quiz_probGuid=FLPLC0A801010000000037B6B00B0000&q...





6. Suppose that the price goes up for a type of fertilizer that farmers use to grow corn. Adjust this graph to show

the effect this price increase has on the market for corn.

Correct Answer:

Your Answer:

An increase in the price of fertilizer will reduce the amount of corn that farmers supply at each price, so the supply curve shifts to the left. This is an example of the general rule that an increase in the price of an input willreduce the supply of a good produced using this input.






9/2/2004http://econ.aplia.com/af/servlet/quiz?quiz_action=takeQuiz&quiz_probGuid=FLPLC0A801010000000037B6B00A0000&q...





This problem shows you a graphing calculator that illustrates the demand for spaghetti dinners from all the restaurants in a community. You can change the variables and see what happens to the quantity of spaghetti dinners that consumers demand.


According to the calculator, wine and spaghetti dinners are:

A. Complements

B. Normal goods

C. Substitutes

D. Inferior goods

According to this calculator, wine and spaghetti dinners are complements. An increase in the price of wine reduces the demand for spaghetti dinners. For example, someone who is deciding between a spaghetti dinner with wine or a taco dinner with beer may switch to the taco dinner when the price of wine goes up. It may or may not be obvious to you whether people are more likely to pair wine with spaghetti. Even so, you can confirm that according to this calculator wine and spaghetti are complements by increasing the price of wine and seeing that the entire demand curve for spaghetti dinners shifts to the left. To tell whether these are normal goods or inferior goods, you would need to have some information about how a changein income affects the demand for each good. You may have a hunch about whether an increase in income increases the demand for each of the two types of dinner (in which case they are normal goods) or decreases the demand for each of them (in which case they are inferior goods). However, this particular calculator does not tell you anything about the effect of an increase in income.












5.4. As you answer this question, notice whether an increase in the price of wine increases or decreases the demand

for spaghetti dinners.

To calculate the correct answer for this problem, you must set the price for spaghetti dinners at $12 and type in a price of $30 for a bottle of wine.













According to the calculator, spaghetti dinners and taco dinners are:

A. Normal goods

B. Complements

C. Substitutes

D. Inferior goods

The two types of dinners are substitutes. An increase in the price of one increases the demand for the other. You should expect the calculator to behave this way. A person typically eats one type of restaurant meal or the other, but not both. When the price of one meal goes up, people buy less of it. Because they still want to eat, they are more likely to buy the other kind of meal. To tell whether these are normal goods or inferior goods, you would need to have some information about how a changein income affects the demand for each good. You may have a hunch about whether an increase in income increases the demand for each of the two types of dinner (in which case they are normal goods) or decreases the demand for each of them (in which case they are inferior goods). However, this particular calculator does not tell you anything about the effect of an increase in income.












5.2. As you answer this question, notice whether an increase in the price of taco dinners increases or decreases the

demand for spaghetti dinners.

To calculate the correct answer for this question, you need to set the price of spaghetti dinners to $12 and set the price of taco dinners to $15. You should leave the price of wine at its initial value of $20. Notice that as you increase the price for taco dinners, the demand for spaghetti dinners also increases. That is, theentire demand curve shifts out to the right.












5.1. Use the calculator to answer the question below. Tool tip: To change a value in any of the boxes on the right side of the calculator, click in the box and then type. The graph and any related values will change accordingly. You can also use your mouse to drag the horizontal Price line up and down. The values in the boxes will change accordingly.

If you set the price of spaghetti dinners to $12, you get a rough idea of the quantity demanded of dinners from the drop lines in the graph. You can get the precise number from the Quantity Demanded box to the right of the graph. Be sure that the price of taco dinners and the price of wine are both equal to their initial values. If you want to return them to these initial values, click on the button labeled "Reset to Initial Values." Even after a problem has been graded, you can still change the values in the graph. So try again if you got the answer wrong the first time.











4. This graph shows the quantity of resort hotel rooms that consumers demand at a fixed price, which is set far in

advance by the resort. Adjust the graph by dragging the dot or the demand curve (or both) to show what happens when an unexpected increase in income increases the demand for resort vacations.

Correct Answer:

Your Answer:

The question tells you that the increase in income increases the demand for resort hotel vacations, and hence for resort hotel rooms. It also says that the price that the hotel charges is set in advance, so it can't change. So the correct graph shows a rightward shift of the demand curve with no change in price.











3. This graph shows the quantity of milk that consumers demand at a regulated price set by the government of an imaginary country. Because it wants to raise income for dairy farmers, the government raises the regulated price for milk. Adjust the graph by dragging the dot or the demand curve (or both) to show what happens when an increase in the price of milk causes a decrease in the quantity demanded of milk.

The description in the problem says that the government increases the price of milk. It does not say anything about any change that would shift the position of the demand curve. The correct response is therefore to drag the dot up along a stationary demand curve. After this change, the price is higher and the quantity that consumers demand is lower.











2. Suppose that a heat wave increases the demand for electricity to run air conditioners and that the public utilitiescommission holds the price of electricity constant. How would you show what happens in a graph with a demandcurve? You can drag either the dot or the demand curve in this figure. (To answer this question you will have to do both.) Like the dot, the curve will snap into position once you let go. If at first you are not able to get the demand curve to snap to a new position, try dragging it a little farther before you let go. Click on the Submit Answer button when you are done.

Correct Answer:

Your Answer:

This question illustrates an "increase in demand," which is not the same thing as an increase in the quantity demanded. An increase in demand means that people will buy more of a good at every price. In a graph, it means that the entire demand curve shifts out to the right. As you drag the demand line, it actually shifts both to the right and up. You could think of this as a shift up in the demand curve, but it will be much easier if you always think of shifts in demand and supply curves as being to the left or right because the horizontal axis measures quantity. Notice that after you have made the change in the figure, the horizontal arrow shows the shift of the demand curve from its original position, which is now labeled D1, to its new position, D2. After you shift the position of the demand curve, you must also drag the dot down along the new curve to a position where the price is the same as it was before you moved the demand curve because the problem says that the public utilities commission does not change the price.






9/2/2004http://econ.aplia.com/af/servlet/quiz?quiz_action=takeQuiz&quiz_probGuid=FLPLC0A801010000000037B6B0040000&quiz_practiceAnswered=yes&ctx=jhorowitz-0003





13. The price of tomatoes at a local market will fall because of the following event:

A. A news report of one medical study suggesting tomatoes cure certain illnesses

B. A strike by farm workers resulting in higher wages for harvesting tomatoes

C. A summer of prime tomato-growing weather resulting in a large harvest of tomatoes

D. A hailstorm that destroys one half of the tomatoes just ready for harvest

Of these choices, only a large harvest is capable of bringing about a fall in prices. The bumper crop oftomatoes raises the quantity supplied at any given price, which is best represented by a rightward shift in supply. The other options are incorrect. The hailstorm causes supply to shift left, as does the wage-increasing strike. The health report causes demand to shift right. These three events would all, taken individually, cause the equilibrium price of tomatoes to rise. (What would happen if the hailstorm, themedical report, and the large harvest all occurred at once?)







econ 651 - economic analysis for managersbryongaskin.net/education/mba...

Documents