Question

Complete all problems. 75 point points total. A possible 7 extra credit points. Please type all prose responses and produce clean graphs wherever appropriate. Generous use of graphs encouraged. Show all work for algebra. Powerpoint is one good tool for making clean graphs. 1. Suppose there is a sudden increase in the price of crude oil. a. How will this change the equilibrium price and quantity in the market for gasoline? (2 points) b. Based on your answer in part a), will there be a change in the equilibrium price and quantity in the market for new automobiles? (2 points) c. Based on your answers above, will there be a change in the equilibrium price and quantity in the market for used automobiles? (2 points) 2. Suppose incomes increase for all workers. At the same time, labor costs also increase for all employers. What effect will these two changes have on the equilibrium price and quantity in the market for canned meats? What effect will these two changes have on the equilibrium price and quantity in the market for fresh fruits and vegetables? (6 points) 3. For each of the following markets, find the equilibrium price and quantity. (3 points each) a. b. Q- 60-5P Q,- 5P-10 c. Q. Q, = 4P-120 - 240-6P 4. Let demand for good X be given by the function Q,=100-5P and supply be given by Q, =5P-40. a. What are the equilibrium price and quantity in this market? (3 points) b. Suppose the demand function shifts, doubling quantity demanded for every possible price. What is the new demand function? What are the new equilibrium price and quantity? (4 points) 5. Construct an example and solve with Supply and Demand analysis one of cach of the following. Name and graph the market of analysis and contingent markets, if any. (4 points each, and ½ extra point possible for each if I think the example is clever and unique. You may collude to attain product differentiation)

Answer 1

(1)

In each graph, D0 and S0 are initial demand and supply curves intersecting at point A with initial price P0 and quantity Q0.

(a) Crude oil being an input to gasoline, higher price of crude will decrease the production of gasoline, decreasing its supply. Supply curve will shift left, increasing price and decreasing quantity.

In following graph, S0 shifts left to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.

(b) Gasoline being a complement to new automobiles, higher price of gasoline will decrease the demand for new automobiles. Lower demand shifts demand curve leftward, decreasing both price and quantity. In following graph, D0 shifts left to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(c) Used automobiles being substitute to new automobiles, higher price of new automobiles will increase the demand for old automobiles. Higher demand shifts demand curve rightward, increasing both price and quantity. In following graph, D0 shifts right to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

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