Economics Essay

8171 Words Nov 1st, 2015 33 Pages
chapter:

3

Supply and Demand
1.

A survey indicated that chocolate is Americans’ favorite ice-cream flavor. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream.
a. A severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream.
b. A new report by the American Medical Association reveals that chocolate does, in fact, have significant health benefits.
c. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream. d. New technology for mixing and freezing
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2.

In a supply and demand diagram, draw the shift of the demand curve for hamburgers in your hometown due to the following events. In each case, show the effect on equilibrium price and quantity.
a. The price of tacos increases.
b. All hamburger sellers raise the price of their french fries.
c. Income falls in town. Assume that hamburgers are a normal good for most people.
d. Income falls in town. Assume that hamburgers are an inferior good for most people.
e. Hot dog stands cut the price of hot dogs.

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CHAPTER 3

S U P P LY A N D D E M A N D

Solution
2.

a. A rise in the price of a substitute (tacos) causes the demand for hamburgers to increase. This represents a rightward shift of the demand curve from D1 to D2 and results in a rise in the equilibrium price and quantity as the equilibrium changes from E1 to E2.
Price
of hamburger

S
E2

P2
E1

P1

D2
D1
Q1

Q2
Quantity of hamburgers

b. A rise in the price of a complement (french fries) causes the demand for hamburgers to decrease. This represents a leftward shift of the demand curve from D1 to D2 and results in a fall in the equilibrium price and quantity as the equilibrium changes from E1 to E2.
Price
of hamburger

S
E1

P1
E2

P2

D1
D2
Q2

Q1
Quantity of hamburgers

c. A fall in income causes the

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