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ICE 3 Microeconomics January 21, 2020 4. Suppose we are analyzing the market for hot chocolate. From each of the following, identify the impact it would have on demand, supply, equilibrium price, and equilibrium quantity. a. Winter starts and the weather turns sharply colder. (D S P Q b. The price of tea, a substitute for hot chocolate, falls. (D_S_P_10 c. The price of cocoa beans decreases. (D ,S ,P ,Q d. The price of whipped cream falls. (D ,S ,P ,Q e. A better method of harvesting cocoa beans is introduced. (D ,S ,P ,Q f. The Surgeon General of the U.S. announces that hot chocolate cures acne. (D_ S_ P_ Q_ g. Protesting farmers dump millions of gallons of milk, causing the price of milk to rise. (D ,S ,P_ Q_ h. Consumer income falls because of a recession and hot chocolate is considered a normal good. (D ,S ,P_ Q__ i. Producers expect the price of hot chocolate to increase next month. (D ,S ,P_ Q_ j. Currently, the price of hot chocolate is $0.50 per cup above equilibrium. (D ,S ,P ,Q )

Answer 1

Question 4

(a)

Winter starts and the weather turns sharply colder.

In the winter months, people prefer to drink hot chocolate.

So, with start of winter and weather turning sharply colder, people will drink more hot chocolate.

This will result in an increase in demand for hot chocolate.

Given the supply of hot chocolate, this increase in demand for hot chocolate will result in an increase in price and quantity.

Thus, in the market for hot chocolate,

D = Increase

S = Remains Unchanged

P = Increase

Q = Increase

(b)

The price of tea, a substitute for hot chocolate, falls.

Tea is a substitute for hot chocolate.

When price of substitute good rises then demand for the given good increases and when price of substitute good falls then demand for the given good decreases.

So, fall in price of tea will result in a decrease in the demand for hot chocolate.

Given the supply of hot chocolate, this decrease in demand for hot chocolate will result in an increase in price and decrease in quantity.

Thus, in the market for hot chocolate,

D = Decrease

S = Remains Unchanged

P = Increase

Q = Decrease

(c)

The price of cocoa beans decreases

Cocoa beans are the inputs used in making chocolate.

The decrease in price of cocoa will reduce the cost of production of coffee. This will increase the profit margin of firms producing hot chocolate and will induce them to increase production.

This will result in an increase in supply of hot chocolate.

Given the demand for hot chocolate, this increase in the supply of hot chocolate will result in a decrease in price and increase in quantity.

Thus, in the market for hot chocolate,

D = Remains Unchanged

S = Increase

P = Decrease

Q = Increase

(d)

The price of whipped cream falls.

Whipped cream and hot chocolate are complements.

When price of complement increases, demand for the given good falls and vice versa.

So, the fall in price of whipped cream will result in an increase in the demand for hot chocolate.

Given the supply of hot chocolate, this increase in demand for hot chocolate will result in an increase in price and quantity.

Thus, in the market for hot chocolate,

D = Increase

S = Remains Unchanged

P = Increase

Q = Increase