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Question: 1

Explain each of the following statements using supply-and-demand diagram: a) “when a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country” The cold snap will destroy the orange fields which will reduce the supply 0f oranges. The supply will decreases without the change in demand. This situation will shift the supply curve to the left side. The equilibrium point will change, equilibrium quantity will decrease and equilibrium price will increase

b) “when the weather turns warm in New England every summer, the price of hotel rooms in Caribbean resorts plummet.” When the weather turns warm, few people will visit Caribbean. At the given price the demand for the rooms will decrease which will shift the demand curve to the left. Analyzing the situation the hotel management will decrease the price of the rooms reducing the equilibrium price.

c) “when a war breaks out in the Middle East the price of gasoline rises, and the price of a used Cadillac falls.” War in the Middle East will destroy oil reservoirs reducing the supply of the oil in the market. This situation will shift the supply curve to the left. So the supply of gasoline will also move towards left increasing the price of gasoline.

As Cadillac consumes gasoline, so running Cadillac will become expensive. So people will avoiding using such cars which will also results in moving the demand curve to the left reducing the price of used Cadillac cars.

Question: 2
“An increase in the demand for notebooks raises the quantity of notebooks demanded but not the quantity supplied”. Is this statement true or false? Explain. The above statement is false as an increase in the demand for notebooks raises the quantity of notebooks demanded increasing the quantity supplied because quantity demanded should be equal to quantity supplied  Qd=Qs The price at which quantity demanded is equal to the quantity supplied is called the state of equilibrium. If the quantity demanded increases without the increase in quantity supplied then shortage occurs where there is excess of demand.

Question: 3
Consider the markets for DVDs, TV screens, and tickets at movie theatres.

1. For each pair, identify whether they are compliments or substitutes:  DVDs and TV screens= compliments  DVDs and movie tickets= substitutes  TV screens and movie tickets= substitutes 2. Suppose a technological advance reduces the cost of manufacturing TV screens draw a diagram to show what happen in the market for TV screens. Suppose the market for TV screens is in equilibrium at price P1 and quantity demanded Q1. The technological advance reduces the cost of manufacturing TV screens increasing the supply of TV screens shifting the supply curve to right. The new equilibrium point is at P2 and quantity Q2. The price will fall and equilibrium quantity will increase.

3. Draw two more diagrams to show how the change in the market for tv screens affects the markets for DVDs and Movie ticket. For TV screens compliment of DVDs, if the price of TV screens decrease it will increase the demand for DVDs shifting the demand curve to the right side. The new increased equilibrium price is P2 and quantity is Q2.

For TV screens substitute of movie tickets, if the price of TV screens decreases, the demand for movie tickets will fall resulting in a leftward shift of the demand for movie tickets. The new equilibrium will now be at P2 and Q2 decreasing the price as well as the quantity demanded of the movie tickets.

Question: 10
The market of pizza has a following demand and supply schedules: Price $4 $5 $6 $7 $8 $9 Quantity demanded Quantity supplied 135 pizzas 26 pizzas 104 pizzas 53 pizzas 81 pizzas 81 pizzas 68 pizzas 98 pizzas 53 pizzas 110 pizzas 39 pizzas 121 pizzas 1. Graph the demand and supply curve. What is the equilibrium price and quantity in this market?

2. If the actual price in this market were above the equilibrium price, what would drive the market towards the equilibrium? If the actual price of Pizza is above the market equilibrium price the buyers will either buy less or move on to another product resulting in surplus of pizzas in the market. To attract customers, the pizza market will reduce the price which will drive the market towards equilibrium.

3. IF THE ACTUAL PRICE IN THIS MARKET WERE BELOW THE EQUILIBRIUM PRICE, WHAT WOULD DRIVE THE MARKET TOWARD THE EQUILIBRIUM? If the actual price is below the market equilibrium price it tells that demand is more than the supply. There is shortage of pizzas in the market. So the suppliers will raise their prices which will reduce the demand and drive the market towards equilibrium.

QUESTION 14: MARKET RESEARCH HAS REVEALED THE FOLLOWING INFORMATION ABOUT
THE MARKET FOR CHOCOLATE BARS: THE DEMAND SCHEDULE CAN BE REPRESENTED BY THE

EQUATION QD = 1,600 – 300P, WHERE QD IS THE QUANTITY DEMANDED AND P IS THE PRICE. THE SUPPLY SCHEDULE CAN BE REPRESENTED BY THE EQUATION QS = 1,400 + 700P, WHERE QS IS THE QUANTITY SUPPLIED. CALCULATE THE EQUILIBRIUM PRICE AND QUANTITY IN THE MARKET FOR CHOCOLATE BARS.