Answer

Tutorial 2: The Supply & Demand Model

ECON 7110: Consumer and Firm Behaviour

1. A. FALSE. The enrollment a spectacular University unexpectedly declines hence Apartment owners in spectacular City will face a higher vacancy rates at their might the raise their range to compensate is a false statement because if there is higher number of vacancy rates they must reduce their rents to compensate the excess supply with deficient demand. The excess supply can only be cleared by reducing the price or rent of apartment. A fall in the rent of the apartment incentivizes economic agents to occupy implying a resultant surge in demand in the long run. Hence, it is false to assert that increased vacancy rates cause an increase in apartment prices

1. TRUE; Cosmetic surgery is a typical example of a giffen good whose market beats the conventional law of supply and demand because its demand curve is upward sloping. The income effect of higher prices leads to increased demand unlike a typical demand and supply curve for a normal good because the higher prices is associated with increased quality and thus higher utility.

C; TRUE; a drop in the sales, say Q units of cars in the automobile market leads to a distortion of the demand and supply equilibrium. The effect of reduced purchases is the increase in supply of the cars which prompts car dealers to mitigate by lowering the prices to attract more customers. To improve the sale of cars, car dealers will opt to mitigate the excess supply with lower prices so that the distorted demand equilibrium is restored. As such, reduced purchases year on year leads to a reduction in car prices to increase demand (the only way to restore the distorted equilibrium in car prices)

1. Higher growth of internet and online advertising will decrease the demand for newspaper advertising, shifting its demand curve to the left. The implication to the newspaper advertising is sheer drop in the cost of advertisement due to the drop in demand that distorts this market. On the other hand, the surge in internet and online advertising causes a shift in the demand curve for the internet consumption to the right as a result of the substitution effect of lower prices which may lead to the crowding out of the newspaper advertising market. In this case, the demand curve is affected because of substitution effects arising from the pricing of these commodities. However, the supply curve is not affected in this case because its shift is majorly impacted by such things as input prices, technology, the number of sellers, among others all of which do not come into play in this case.
2. Uncertain. In this case, both the supply and the demand curves shift to the right. Quantity will definitely increase, but whether prices rise, fall, or remain constant depends on the relative sizes of the supply and demand shifts because the demand shift is rela-tively larger than the shift in supply, prices increase. As shown below

FALSE; orange and tangerine are perfect substitutes within this commodity market. Decreasing orange price imply increasing demand for oranges thus shifting the demand curve to the right thus more oranges are sold. The effect of increased productivity of tangerine trees does not necessarily impact the demand for oranges because this market is price regulated for subsitutes. The shift in tangerine price has not been elaborated.

UNCERTAIN; In this case, the demand and supply curves both shift to the left. Quantity decreases, but price may rise, fall, or remain unchanged depending on the relative magnitude of the shifts. In this case, price remains unchanged as shown below

Question 4;

Given the demand function  A > 0 and α > 1, and given that

own-price elasticity of demand: =

Substituting into the formula; =

Hence, the price elasticity is equal to 1 − α everywhere along the whole curve

Question 5

The equilibrium solution with no government intervention is

1000 – 2 p = 100 + p

p * = 300

Q * = 400

When the quota is imposed at 300 units, supply cannot exceed that level, regardless of price. Thus, the supply curve becomes vertical at 300 units. The new equilibrium quantity is 300 and price is determined by where the supply curve with the quota (Squota) intersects the demand curve as shown below;

In solving for the price, plug the quota value (300) into the demand equation;

1000 – 2p = 300

Implying that p * = 350