Problem Set #2
1. New Old Space Deodorant commercials lead consumers to believe that using Old Space will make them more attractive. Which chain of events will occur in the market for Old Space?
a) An increase in supply, followed by an increase in the quantity demanded
b) An increase in demand, followed by a decrease in the quantity supplied
c) An increase in demand, followed by an increase in the quantity supplied
d) An increase in the quantity demanded, followed by an increase in the quantity supplied
2. Old Space and Left Guard are substitutes. The price of Old Space falls. What occurs in the market for Left Guard?
a) An increase in demand and an increase in the equilibrium price
b) An increase in the quantity demanded and an increase in the equilibrium price
c) A decrease in demand and a decrease in the equilibrium price
d) A decrease in the quantity demanded and a decrease in the equilibrium price
3. Which of the following would cause an increase in the quantity supplied of Left Guard?
a) A decrease in the price of the inputs used to make Left Guard
b) An increase in the price of Left Guard
c) A new study indicating Left Guard causes skin rashes
d) A new technology which allows producers to make Left Guard more cheaply
4. It is discovered that Old Space Executives wear real fur coats, which causes some mammal-friendly consumers to buy another brand of deodorant. Simultaneously, the price of the red plastic used to make Old Space containers falls. What will happen to the quantity exchanged and the equilibrium price in the market for Old Space? (hint: draw the graph with the supply and demand curves and make the appropriate shifts in supply and demand)
a) The equilibrium price will rise, but the effect on the quantity exchanged is ambiguous
b) The effect on the equilibrium price is ambiguous, but the quantity exchanged will increase
c) The equilibrium price will fall, and the quantity exchanged will decrease
d) The equilibrium price will fall, but the effect on the quantity exchanged is ambiguous
5. Consider the following table which gives the market supply and individual demand for two consumers in the market for pudding snacks:
|
Price ($)
|
Mkt. Supply
|
Laura
|
George
|
|
0
|
0
|
8
|
10
|
|
1
|
6
|
7
|
8
|
|
2
|
12
|
6
|
6
|
|
3
|
18
|
5
|
4
|
|
4
|
24
|
4
|
2
|
a) Find the equations for Laura's demand, George's demand, and the market supply, and graph each for prices 0 through 4 (P=0 through P=4). Find an equation for the market demand (for P=0 through P=4) by summing the demand schedules (horizontally) for the two individuals. Now find the equilibrium price and quantity in this market.
b) Suppose now that the market supply has changed to Qs = P + 10. Find the new equilibrium price and quantity (relative to that of part a). Draw a graph with the market demand and both market supply curves (label the old one Qolds and the new one Qnews for simplicity).
If a positive shift in market demand occurs, under which supply curve will the change in price be greatest? What about the change in quantity?
6. Suppose that market demand for UW rugby shirts is given by QD= -2P + 140 and market supply of the shirts is given by Qs= P - 10.
a) Find the equilibrium price and quantity in this market.
b) Suppose the Wisconsin state government obtains evidence that students who wear UW rugby shirts perform worse on their final exams. The government would like to reduce the number of shirts exchanged to improve final exam performance.
i) If the government wishes to create a price floor to accomplish its objective, what is the minimum price it would have to set to make sure no shirts are bought by consumers?
ii) Say the government sets a price of $55 for the shirts. What is the excess quantity supplied in this case? Give a general expression for excess quantity supplied in this market. (hint: QD- QS, where P> equilibrium price found in part a)
c) Suppose now that market demand for UW rugby shirts has changed to QD = -2P + 170. Give a possible explanation for the change. What do you expect to happen to the equilibrium price (relative to that of part a)? What do you expect to happen to the equilibrium quantity (relative to that of part a)? Find the new equilibrium to verify your answers.
7. Using the terms normal good and inferior good, explain why Bill, an aspiring carnivore, might expect to consume less Ramen and more steaks after graduating from college.