Problem Set 2

1. Assume that shampoo and conditioner complement each other.  If the price of shampoo increases, then

(a)  the quantity demanded of shampoo increases.

(b)  the demand curve for shampoo shifts leftward.

(c)   the quantity demanded of conditioner increases.

(d)  the demand curve for conditioner shifts leftward.

(e)   neither the demand curves for shampoo or conditioner shift.

2. Assume that shampoo and conditioner complement each other.  If the price of shampoo increases, then

(a)  the quantity demanded of shampoo decreases.

(b)  the demand curve for shampoo shifts rightward.

(c)   the quantity demanded of conditioner decreases.

(d)  the demand curve for conditioner shifts rightward.

(e)   neither the demand curves for shampoo or conditioner shift.

3. Suppose that person A's demand schedule for good x per month is Q^A = M /(2P), where Q^A is A's quantity demanded for good x per month, P is the price of good x, and M is person A's income.  Draw A's demand curves when M = 1 and 2 respectively.  Describe your results.  What type of good is good x?

4. Suppose that in the market for good x there are three consumers: person A whose demand function is Q^A = -P + 3, person B whose demand function is Q^B = -3P + 6, and person C whose demand function is Q^C = -(5/4)P + 5.  We would like to find the market demand function for good x.

(a) Solve each person's demand function for P.

(b) Determine who demands good x at what price levels.

(c) Take the (horizontal) summation of each person's demand at each price level to find the market demand for good x.

5. The market demand for plastic container is given by Q^D = -P + 100 and the market supply of plastic container is given by Q^S = 2P - 20.

(a) Find an equilibrium.

(b) A researcher reports to the government that plastic case containers contain an environmental hormone which can be harmful to humans.  The government would like to decrease the possible harm to consumers from using this good. What kind of policy can the government implement to reach this goal?

(c) The market supply has changed to Q^S = 2P - 50.  Give a possible explanation for this change. Find a new equilibrium and compare this to the equilibrium in (a).