Reference no: EM132518969

a) The market for bananas, muffins, and coffee are interrelated, and each market is perfectly competitive.

In the market for bananas, the equilibrium price is $1.00 per pound, and the equilibrium quantity is 1,000 pounds per week. Suppose the government imposes a price floor on bananas at $1.20 per pound, causing the quantity supplied to increase to 1,500 pounds per week.

i. Would the price floor result in a shortage, surplus, or neither? Explain.

II. Calculate the price elasticity of supply if the price increases from $1 to $1.20.

III. Between $1 and $1.20, is the supply elastic, unit elastic, or inelastic? Explain.

B) In the market for coffee, the equilibrium price is $3.00 per cup and the equilibrium quantity is 100 cups per week. The cross-price elasticity of coffee with respect to muffins is -2.

I. Are coffee and muffins normal goods, inferior goods, complementary goods, or substitute goods? Explain.

II. Assume the supply of coffee is perfectly elastic. Using the equilibrium price and quantity given above, draw a correctly labeled graph for the coffee market and show the impact of an increase in the price of muffins on the coffee market.

III Given the original quantity of 100 cups of coffee per week, if the increase in the price of muffins is %10, calculate the new equilibrium quantity in the coffee market. Show your work.