Question

1. (15%) Consider a market for a good or service of your choosing in your local town (be specific). Suppose you are planning to conduct a study of this market. a. List at least two specific factors that you believe would cause changes in market demand. Based on this, write out a hypothetical demand function (i.e., in equation form, write out how quantity demanded depends on price and the two factors you chose). The coefficients on your two factors should make economic sense. b. List at least two specific factors that you believe would cause changes in market supply. Based on this, write out a hypothetical supply function (t.e., in equation form, write out how quantity supplied depends on price and the two factors you chose). The coefficients on your two factors should make economic sense. ELEE 2. (15%) Use supply and demand curves to illustrate how each of the following events would affect the market equilibrium of coffee. a. an increase in the price of tea, a substitute good. b. an increase in average incomes (coffee is an inferior good) c. a decrease in the cost of labor used to farm coffee beans d. a series of rainstorms causes a depletion of the coffee bean crop. 3. (50%) The demand function for Albuquerque Soccer League (ASL) membership is la = a- bp + cl and the supply function is Qs = d + ep where a, b, c, d and e are positive constants and I is the average income of Albuquerque residents. a. Calculate and interpret in one sentence how income affects (or doesn't affect) the demand and supply curves, dando b. Calculate the equilibrium price and equilibrium quantity as a function of average income, pl) and Q*(1). C. Sketch this market. Label the equilibrium price and quantity on your graph. d. Using calculus, calculate and interpret how the equilibrium price and quantity vary with income (i.e., find "p" and ). e. On your graph from (c), sketch what happens to this market when average income falls. Ensure that the change in equilibrium on your graph supports your mathematical findings in (d).

Answer 1

#he Cobba мм kее. - 1). Ние Lх (оnѕid income. good say Price of market will be in VO To two specific factors that would cause Changes will be income leve of household (in substitute and Price of it's subs. tea (Pt) Hole - Now based on this information we can woite the demand function for coffee asi Qe = 2800 - 6Pet 0.5M & IOPT Hue, Pe= price of coffee M = avuage income of househod. P.T = Price of it's substitute ( Huls a Qe at 0.5 o h - də M as 2 m age is positive, it means that as income lence increasis, demand for coffee. a se tue we a3 sme Coffee is a normal good? income auuage en crea sus eso + 10 Lol Now ade JPT - Positive as, a Qe is negative, it means that as Price I t increases, consmess switch from of coffee consumption and demand for co to CS Scanned with increa estea 2065ced within creasy. o Scanner . .

: - b Now two specific factors that can change market supply of coffee will be in Qs = 40+4Pe - 8 Pztof coffee bean (input) = PI - aid nun bu of : from the supply fiction we can see that - the two factors that can change market supply of coffice will bera - . Pue eobha blом (4 P" And nun bu of firm producing coffice = f. T. Now, aas =-8 Lo əPI This as price of coffee bean increases, the cost of producing coftce will increase and supply of cortice will ball. so there is an invuse relationship betwan Price of an input (PI) and supply of coob(as). Hence the negative Sign fim producing coffice will . Now das =+6 > which means that as the umbu of coffee increases, a supply of scalso in crease sal ned with CamScanner

2. a. Now as there is an increase in the price of tea, a substitute good, hence consumer will switch from tea to coffee consumption as tea and coffee are substitutes of each other and demand for coffee will increase and the demand curve for coffee will shift rightward from D1 to D2 and as the economy moves from point A to point B, the equilibrium price of coffee will increase from P1 to P2 and the equilibrium quantity of coffee will increase from Q1 to Q2.

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b. Now inferior goods meaning that as average income level of consumers increases, demand for the good falls. Now as in this case, there is an increase in average income, demand for coffee will fall as coffee is an inferior good and the demand curve for coffee will shift leftward from D1 to D2 and as the economy moves from point A to point B, the equilibrium price of coffee will decline from P1 to P2 and the equilibrium quantity of coffee will decline from Q1 to Q2.

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c. Now as the cost of labor used to farm coffee beans fall, hence the cost of producing coffee falls and the supply of coffee will increase and the supply curve will shift rightward from S1 to S2 and as the economy moves from point A to point B, the equilibrium price of coffee will decline from P1 to P2 and the equilibrium quantity of coffee will increase from Q1 to Q2.

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d. As a series of rainstorms causes a depletion of the coffee bean crop, hence the supply of coffee will fall and the supply curve for coffee will shift leftward from S1 to S2 and as the economy moves from point A to point B, the equilibrium price of coffee will increase from P1 to P2 and the equilibrium quantity of coffee will decline from Q1 to Q2.

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