Economics 620 week 2: problem set

1.) Basic S&D concepts:

a. Describe (in terms of graphs) the basic difference between a decrease in supply of SUVs and a decrease in quantity supplied of SUVs. Give a possible cause for each change.

b.  “When there’s a shortage of gold, the price of gold will increase. This then causes the

demand for gold to decrease and the supply to increase.” There are word-&-logical errors in this statement. Rewrite it, to make it into a perfectly correct statement (about the same idea; do not write about some other idea).

c.  “If Best Buy offers a rebate on the Sony 50″ HDTV set, then the demand for the TV set will increase and that will reduce its supply.” There are word-&-logical errors in this statement. Rewrite it, to make it into a perfectly correct statement (about the same idea; do not write about some other idea).

2.) Read the article “Over a Buck for Dinner? Outrageous” (Business Week March 9, 2009, p. 57) and apply S&D analysis to answer the following questions.

a. The “sales drop” described in the third paragraph refers to a decrease in

______________ (D/Qd). The “excess dinners” that ConAgra had to peddle to discounters (3rd paragraph) refers to a _________ (shortage / surplus).

b. Rodkin’s “first priority” described in the 4th paragraph is intended to shift which side of his market: S? or D? And which way: right? or left?

c. Boxed meals and canned soup – are they normal goods, or inferior? Explain. When the economy expands, will it be a boost to the makers of these items – or a drag?

3.) S&D applications: Describe the correct shift in the S&D graph for each market identified (in bold letters) below:

a. If auto-workers receive a 20%-pay hike, how will the market for new cars be affected?

b. If the teenage population increases, how will the market for rock-music recordings be affected?

c. If cigarette taxes are reduced, how will the market for tobacco leaves be affected? (Hint: Correctly analyze the relationship between cigarettes and tobacco leaves from farms. Then analyze the S&D for tobacco leaves.)

d. When gasoline price rises significantly, how is the market for gas-guzzlers affected?

4.) Read the article “The Future of Food: Crisis prevention” (The Economist, February 26, 2011,

p.12). Focus on the first paragraph in the section titled “Idle Speculation”. It lists the following factors that are affecting food prices. Determine which side (supply vs. demand) of the “world food” market is affected by each of these factors, and also specify which way the effect goes (increase or shift right, versus decrease or shift left). The “world food market” is the global trading (S&D) of food, including grains, among countries.

a. Drought and floods that destroyed crops in major food exporters like Russia, Canada,

etc.

b. Export bans by … (read/understand the paragraph)

d. Weaker dollar making restocking easier

e. Dearer oil … (read/understand the paragraph)

f. And the remainder of the article further identifies the following factors that would affect food prices over coming decades. Analyze each of these as you did those above: Changes in diet that rising wealth brings

g. Slowdown in growth of farm crop-yields

5.) More S&D applications: Specify whether each group named will gain or lose, and discuss how/why they gain or lose.

a. If the President imposes tariffs (taxes) on imported steel, how does this affect domestic steel-makers? How does this affect the domestic appliance-manufacturers? [Hint: Draw the S&D for “imported steel”, and draw a separate S&D for “local steel”. Analyze how the tariff on imported steel will affect each of these two separate but related markets. Then draw the S&D for “appliances” and study how it is affected by your results in the steel-market analysis.]

b. If Europe removes restrictions on Chinese textiles/garments that could be sold in Europe, how does this affect European garment producers? How does this affect European buyers/consumers?

6.) “Corn Has Deep Economic Roots” (USA Today Jan 25, 2007, p.3B) discusses the wide economic reach that the corn market has, which became starkly clear a few years ago. In each of the following, identify the correct shift in the S&D graph for the bolded market (i.e., S vs D shift? right vs left?)

a. How did the heightened emphasis on ethanol as a substitute-fuel a few years ago affect the corn market?

b. How did the corn situation in (a) in turn affect the hogs/chickens market back then? Briefly explain the shift that you show in your S&D graph

c. How did the corn situation in (a) affect the soybeans market then? Briefly explain the shift that you show in your S&D graph

d. How was the farm-equipment S&D affected by the developments in corn?

e. The 5th column of the article states that livestock “producers are…reducing some  feeding” of their livestock. What does this “reduction” refer to: a decrease in D for feeds – or a decrease in Qd? Explain your answer.

f. How (or why) is the price of corn now linked to price of oil. In your answer, discuss what would happen in the corn market (draw the S&D graph for “corn”) if the price of oil falls significantly, as it did by 2009

7.) In 1999, after nearly 20 years of rent control in Berkeley (CA), the removal of the law led to a rise in rents of nearly 40%.

a. Describe how rent control affected the S&D graph for the rental-housing market: did

this cause a shift in D or S ,or was it a change in Qs and Qd? Explain.

b. Describe how the law’s elimination affected the rental-housing market. What

happened to the number of rental units in the market?

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