Questions on Part 2A, 2B, and 2C

Problems, Applications and Short Essays (Questions in Black, Key answers in Red)

1. Over the past years, technological advances have reduced the cost of computer chips.
How do you think this has affected some related markets like the markets for computers,
for computer software, for printers and for typewriters? Illustrate graphically.

Market of computers: shift in the supply curve to the right , eq P decreases and eq Q increases. Market of
computer software: shifts the demand to the right since prices of computers decreased. Market for printers
shifts demand to the right

Market for Typewriters: shift demand curve to the left (P and Q decreases).

(You have to show the graphs and explain what happned to P and Q).

2. Use table 1 to answer the following questions :

Price Qs Qd
$50 100 400
60 150 300
70 200 200
80 250 100
90 300 0

a. Plot the supply and demand curves in this market.

b. Determine the equilibrium price and Q. (70)

c. What are the slopes of the supply and demand curves? SLOPE OF SUPLLY =
1/5

SLOPE OF DEMAND 1/10

d. Assuming linear supply curve, when will the Qs falls to 0. 30
e. Explain why price 80 is unstable.
Look at the lecture notes (cases when price is below or above equilibrium)
3. Scientists reveal that consumption of oranges decreases the risk for diabetes and at the
same time farmers start to use a new type of fertilizers that makes orange trees more
productive.

Explain graphically how would these events affect the equilibrium price and quantity of
oranges, assuming the impact of event 2 is greater than that of event 1
shifts the demand to the right and shifts the supply to the right as well (look at the at the
attached file)
4. “An increase in the demand for cornflakes raises the quantity demanded of cornflakes but not
the quantity supplied” Explain if this statement is true or false and why.

False RAISES THE Qs as well.

You have to draw and explain.

5. What are the characteristics of perfectly competitive markets. In such type of markets, what is
the main mechanism for rationing scarce resources. Explain

- Many buyers and sellers


- No buyer or seller can affect market price—each is a “price taker”

- Homogeneous goods.

- No barriers to entry into or exit from the market.
- Buyers and sellers have access to perfect information about price.