What will happen to the equilibrium quantity and price of corn if the price of butter a complement increases and the price of fertilizer decreases?

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Chapter 3 Supply and Demand Q. 8, 10, 12, 14

Chapter 3, Problem 8 What will happen to the equilibrium price and quantity of beef if the price of chickenfeed increases?

Solution to Problem 8 (1) • • •

•

Beef and chicken are substitutes Increase in price of chickenfeed shifts the supply curve of chicken to the left. Resulting in an increase in the price of chicken. Therefore, people will generally switch from consuming chicken to consuming beef As a result, demand for beef increases • Is it a change in demand or a change in quantity demanded? -Change in demand -Increase in demand for beef is an outside factor affecting the demand curve. It will cause the demand curve shift up (right)

Solution to Problem 8 (2) Price of beef (P) S0

P1 P0 D1

D0 0 Q0

Quantity of beef (Q)

Q1

• Equilibrium is achieved where a demand curve and a supply curve intersect • Resulting in an increase in equilibrium price and equilibrium quantity of beef.

Chapter 3, Problem 10 How will a new law mandating an increase in required levels of automobile insurance affect the equilibrium price and quantity in the market for new automobiles?

Solution to Problem 10 (1) • •

•

Automobile insurance and automobiles are complement goods. As the new law mandating the automobile insurance, some people who would have bought new automobiles with the lower insurance rates will choose not to, and will switch their preferences on buying used-car or taking public transit As a result, the demand for new automobiles decrease • Is it a change in demand or a change in quantity demanded? -Change in demand -Decrease in demand for new automobiles is an outside factor affecting the demand curve. It will cause the demand curve shift down (left)

Solution to Problem 10 (2) Price of new automobiles (P) S0

D1

P0 P1

D0 0 Q1

Q0

Quantity of new automobiles (Q)

• Equilibrium is achieved where a demand curve and a supply curve intersect • Demand curve for automobiles falls (shift to left), the equilibrium price and equilibrium quantity falls.

Chapter 3, Problem 12 What will happen to the equilibrium quantity and price of potatoes if population increases and a new, higher-yielding variety of potato plant is developed?

Solution to Problem 12 (1) • • •

The increase in population of potential buyers will increases the demand for potatoes As a result, the demand for potatoes increases Is it a change in demand or a change in quantity demanded? – Change in demand – Increase in demand for potatoes is an outside factor affecting the demand curve. It will cause the demand curve shift up (right)

Solution to Problem 12 (2) •

The improvement in technology leads the production in potatoes more efficient. Enable more potatoes production As a result, the supply for potatoes increases Is it a change in supply or a change in quantity supplied?

• •

– Change in supply – Increase in supply for potatoes is an outside factor affecting the supply curve. It will cause the supply curve shift down (right) •

So, Demand curve shifts up (right), Supply curve shifts down (right)

Solution to Problem 12 (3) Price of Potato (P) D1

S0 S1

P1

P0 D0 0 Q0

Quantity of Potato (Q)

Q1

• Equilibrium is achieved where a demand curve and a supply curve intersect • IF THE INCREASE OF DEMAND IS GREATER THAN THE INCREASE IN SUPPLY, both the equilibrium price and quantity of corn increase

Solution to Problem 12 (4) Price of Potato (P) S0 D1 S1 P0 P1

D0 0 Q0

Quantity of Potato (Q)

Q1

• Equilibrium is achieved where a demand curve and a supply curve intersect • IF THE INCREASE OF DEMAND IS LESS THAN THE INCREASE IN SUPPLY, the equilibrium price of potato decrease and the equilibrium quantity of potato increase

Solution to Problem 12 (5) • To summarize, the equilibrium quantity of potato will definitely increase • The equilibrium price of potato, however, is ambiguous – It depends on the relative change in demand and change in supply

Chapter 3, Problem 14 What will happen to the equilibrium quantity and price of corn if the price of butter (a complement) increases and the price of fertilizer decreases?

Solution to Problem 14(1) • • • • •

For complement goods, as price of good A rises, demand for good B falls. Corn and butter are complements If the price of butter increases, people will demand less corn As a result, the demand for corn decreases Is it a change in demand or a change in quantity demanded? – Change in demand – Decrease in demand for corn is an outside factor affecting the demand curve. It will cause the demand curve shift down (left)

Solution to Problem 14(2) •

If price of fertilizer decreases, it decreases the cost of production of corn. Enable more crops to be produced with the same inputs. • As a result, supply for corn increases • Is it a change in supply or a change in quantity supplied? – Change in supply – Increase in supply of corn is an outside factor affecting the supply curve. It will cause the supply curve shift down (right)

•

So, Demand curve shifts down (left), Supply curve shifts down (right)

Solution to Problem 14 (3) Price of corn (P) S0 S1 D1

P0 P1

D0

0

Quantity of corn (Q)

Q1 Q0

• Equilibrium is achieved where a demand curve and a supply curve intersect • IF THE DECREASE OF DEMAND IS GREATER THAN THE INCREASE IN SUPPLY, both the equilibrium price and quantity of corn decrease

Solution to Problem 14 (4) Price of chicken (P) S0 S1

P0 P1 0 Q0

Q1

D0 D1

Quantity of chicken (Q)

• Equilibrium is achieved where a demand curve and a supply curve intersect • IF THE DECREASE OF DEMAND IS LESS THAN THE INCREASE IN SUPPLY, the equilibrium price will decrease and the equilibrium quantity will increase

Solution to Problem 14(5) • To summarize, the equilibrium price of corn will definitely decrease • The equilibrium quantity of corn, however, is ambiguous – It depends on the relative change in demand and change in supply

End of Chapter 3

What will happen to the equilibrium price and quantity of corn when the prices of corn seed and fertilizer fall?

What happens to equilibrium price and quantity when price increases?

What will happen to the equilibrium price and quantity of beef if the price of cattle feed decreases?

What happens to the equilibrium price and quantity of corn when supply and demand both increase?