Questions:
1. In each of the following examples, discuss which market model appears to best explain the behavior described:
a. Dry weather unexpectedly cut the 2003 soybean harvest by 15 percent, making it the smallest harvest in seven years. China increased its demand for soybeans, acquiring a record 300 million U.S bushels between September 2003 and April 2004. The Bush administration expected that U.S farmers would respond to the high prices by planting more soybeans in the next cycles.
b. In spring 2004, General Motors launched another round of discounts, offering zero percent financing for five-year loans and $1,000 additional givebacks to customers. Following GM's move, Ford increased rebates on certain pickup models from $1,000 to $1,500, while DaimlerChrysler announced that 2005 minivans would come with a $1,000 rebate.
c. In spring 2004, the U.S. wireless telecommunications industry hoped that mergers among firms would decrease the number of rivals and eliminate cutthroat competition. However, the wireless carriers faced new challenges from new technologies and a rush of new entrants into the market. Unlike their counterparts in the traditional phone industry, wireless companies never enjoyed a period of monopoly status.
d. Chinese cooking is the most popular food in America that isn't dominated by the big national chains. Chinese food is typically cooked in a wok that requires high heat and a special stove. Specialized chefs are also required. Small mom-and-pop restaurants comprise nearly all of the nation's 36,000 Chinese restaurants, which have more locations than McDonald's, Burger King, and Wendy's combined.
2. Consider the demand for computers. For each of the following, state the effect on demand:
a. An increase in consumer incomes-
b. An increase in the price of computers-
c. A decrease in the price of Internet service providers-
d. A decrease in the price of semiconductors-
e. It is October, and consumers expect that computers will go on sale just before
3. The demand curve is given by:
QD = 500 - 5Px + 0.5I + 10PY - 2 PZ
Where
QD= quantity demand of good X
Px = price of good X
I = consumer income, in thousands
PY = price of good Y
PZ = price of good Z.
a. Based upon the demand curve above, is X a normal good? Justify your answer.
b. Based upon the demand curve above, what is the relationship between good X and good Y? Justify your answer.
c. Based upon the demand curve above, what is the relationship between good X and good Z? Justify your answer.
d. What is the equation of the demand curve if consumer incomes are $30,000, the price of good Y is $10, and the price of good Z is $20?
4. Suppose that the demand and supply curves for a product are given by:
QD = 500 - 2P
QS = -100 + 3P
a. Algebraically find the equilibrium price and quantity.
b. If the current price of the product is $100, what would be the quantity demanded and the quantity supplied? How would you describe this situation, and what would you expect to happen in this market?
c. If the current price of the product is $150, what would be the quantity demanded and the quantity supplied? How would you describe this situation, and what would you expect to happen in this market?