Question

1. In each of the following cases, draw the supply and demand curves for the market indicated. Your drawings need not be perfectly to scale. After that, please show how the event indicated would affect the supply and/or demand curves. Clearly indicate the new and old equilibrium prices and quantities. In one sentence please explain your reasoning. A) Market: Bicycles Event: Gasoline prices rise to $6.00 per gallon B) Market: Bicycles Event: Your university trustees vote to establish automobile parking fees of $1.00 per hour C) Market: Bicycles Event: Bicycle assemblers successfully lobby and receive a 50% pay raise D) Market: Bicycles Event: Events in (B) and (C) occur simultaneously E) Market: Automobiles Event: Workers agree to a pay cut for the good of the company F) Market: Bicycles Event: Because of expanded federal regulations, the price of bicycle helmets triples G) Market: Bicycles Event: The president decides that the best use of the budget surplus is to divide it up among the 8 – 20 year olds in the country

Answer 1

A) Market: Bicycles Event: Gasoline prices rise to $6.00 per gallon : Motor Cycle and cycles are substitutes and hence as gasoline prices rise., using motorcycle will be expensive and hence demand for cycles will shift to right, demand curve will shift from D1 to D2 and quantity will go up from Q1 to Q2.Prices go up from P1 to P2.

B) Market: Bicycles Event: Your university trustees vote to establish automobile parking fees of $1.00 per hour:

Automobile and parking are complementary and hence parking charges will discourage motorcycles and encourage cycles and hence demand curve will shift from D1 to D2 and quantity will go up from Q1 to Q2.Prices will go up from P1 to P2.

C) Market: Bicycles Event: Bicycle assemblers successfully lobby and receive a 50% pay raise.

Wage are cost of production. As costs go up cycle producers will produce less and hence supply will shift to left from S1 to S2 and prices will go up from P1 to P2, quantity will decrease from Q1 to Q2.

D) Market: Bicycles Event: Events in (B) and (C) occur simultaneously change from Q1 to Q2.

This will shift demand to right and supply to left and hence prices will first go up from P1 to P2 and further up to P3. Quantity will change from Q1 to Q2.