Question 1: From October 1994 to March 1995, the price of cotton increased from $0.65 to over $1 per pound, the highest level since the Civil War. According to Business week, “Supplies have dwindled because of poor crops in China, India and Pakistan. At the same time, consumers, undeterred by rising costs, have pumped up demand for cotton-rich casual clothing, as well as home furnishings made from cotton.”
a. Was this price increase due to a shift in the demand curve for cotton, a shift in the supply curve for cotton or both?
b. Did this price increase affect the supply curve for clothing? If so, how?
Question 2: The stock corporation makes two products, paper and cardboard. The relationship between π, the firm’ annual profit(in thousands of dollars),and its output of each good is π = -50 + 40Q1 + 30Q2 - 5Q12 - 4Q22 - 3Q1Q2 where Q1 is the firm’s annual output of paper(in tons), and Q2 is the firm’s annual output of cardboard (in tons).
a. Find the output of each good that the Stock Corporation should produce if it wants to maximize profit.
b. If the community in which the firm is located imposes a tax of $5,000 per year on the firm, will this alter the answer to part a? If so how will the answer change?