Problem 1: Dairies make low-fat milk from full-cream milk. In the process of making low-fat milk, dairies produce cream, which in turn makes ice cream. In the market for low-fat milk, the following events occur:

a) The wage of dairy worker rises

b) The price of cream rises

c) The price of low-fat milk rises

d) A new technology lowers the cost of producing ice cream

e) Dairy farmers switch some of the production of full-cream to vegetables, based on input from health research studies.

Explain the effects of each of the above events on the supply of low-fat milk.

Draw a supporting diagram to illustrate each of the effects.

Problem 2: Suppose that a 12 percent rise in the price of pancakes decreases the quantity of pancakes demanded by 22 percent and increases the quantity of waffles demanded by 14 percent. Calculate the:

a) Price elasticity of demand for pancakes.

b) Cross elasticity of demand for waffles with respect to the price of pancakes

Problem 3: Explain why each the following statements are true or false.

a) As the price of apples fall, demand for apples increases.

b) As income falls, demand for apples may increase or decrease.

c) Given a demand curve, the reason for a down-ward sloping demand curve is that as price goes down, more buyers enter the market.

d) When more suppliers enter the market, the supply curve shifts to the right.