Question

MBA 6073: INDIVIDUAL ASSIGNMENT Question 1a Show in a diagram the effect on the demand curve, the supply curve, the equilibrium price, and the equilibrium quantity of each of the following events a. The market for newspapers in your town Case 1: The salaries of journalists go up. Case 2: There is a big news event in your town, which is reported in the newspapers. b. The market for St. Louis Rams cotton T-shirts Case 1: The Rams win the Super Bowl. Case 2: The price of cotton increases. c. The market for the Krugman and Wells economics textbook Case 1: Your professor makes it required reading for all of his or her students. Case 2: Printing costs for textbooks are lowered by the use of synthetic paper Question 1b Suppose that the market demand for potatoes is given by Q 1000 250P and the market supply of potatoes is given by Q 150P, where P is the price per bag of potatoes and Q is the number of bags per month a. What are the equilibrium price and quantity for potatoes? lustrate your answer graphically Question 1c With the guide of curves explain the changes in total revenue of the following; a Ped is elastic (>1) and a firm raises price b Ped is-1.5 (elastic) and the firm raises price by 4% Ped is-0.4 (inelastic) and the firm raises price by 30% d Ped is-02 (inelastic) and the firm lowers price by 20%

Answer 1

(Question 1a)

In each instance, it is assumed that case (1) and case (1) are independent events since question does not mention otherwise.

In following graph, price (P) and quantity (Q) are depicted vertically and horizontally respectively. D0 and S0 are initial demand and supply curves, intersecting at point A. Initial equilibrium price is P0 and quantity is Q0.

(a)

(Case 1)

Higher salary of journalists will increase production cost of newspapers, so firms will reduce output, which will lower market supply. Supply curve shifts to left, increasing price and decreasing quantity. In following graph, S0 will shift leftward to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.

0 115 8

(Case 2)

The big event will increase the demand for newspapers. Demand curve shifts to right, increasing price and increasing quantity. In following graph, D0 will shift rightward to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

8 6

(b)

(Case 1)

Rams win will increase the demand for Rams cotton t-shirts. Demand curve shifts to right, increasing price and increasing quantity. In following graph, D0 will shift rightward to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

8 6

(Case 2)

Higher price of cotton, an input, will increase production cost of t-shirts, so firms will reduce output, which will lower market supply. Supply curve shifts to left, increasing price and decreasing quantity. In following graph, S0 will shift leftward to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.

0 115 8

(c)

(Case 1)

The textbook being referred to as required text, will increase the demand for the textbook. Demand curve shifts to right, increasing price and increasing quantity. In following graph, D0 will shift rightward to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

8 6

(Case 2)

Lower printing cost will decrease production cost of books, so firms will raise output, which will increase market supply. Supply curve shifts to right, decreasing price and increasing quantity. In following graph, S0 will shift rightward to S1, intersecting D0 at point B with lower price P1 and higher quantity Q1.

So 2 8o 919 0

NOTE: As per Answering Policy, 1st question is answered.