Reference no: EM133087293
Please answer the following questions:
I. Fundamentals of Supply and Demand
1. Illustrate and explain (in terms of what happens to equilibrium price and quantity) the effect of each of the following events on the market for cigars. Label your diagrams carefully.
1a) Due to bad weather in the South, the supply of tobacco leaves in curtailed.
1b) The price of wine (a compliment to cigars) falls.
1c) The government develops an educational program designed to inform people of the risks associated with smoking and at the same time imposes a per unit tax on the producers of cigars.
1d) Tobacco producers negotiate a 10% reduction in the wages of tobacco pickers and at the same time the price of cigarettes (a substitute to cigars) falls.
2) Illustrate and explain (in terms of what happens to equilibrium price and quantity) the effect of each of the following events on the market for lattes (a coffee drink). Label your diagrams carefully.
2a) The price of milk (an input to lattes) increases significantly.
2b) Excellent growing conditions significantly increase the coffee bean harvest and at the same time, the government imposes a per-unit tax on the producers of coffee drinks.
2c) Coffee producers negotiate a 10% reduction in the wages of coffee bean workers and at the same time the price of tea (a substitute to coffee) falls.
3. Over the last 10 years the price of a cell phone has declined dramatically. At the same time, taste and preferences for cell phones has increased substantially. Using a supply and demand diagram of the market for cell phones, explain what likely caused this outcome.
4. Economists believe that if a market is not in equilibrium, there is a tendency for price to adjust so the market moves toward equilibrium. Regardless of whether the price begins too high or too low, the adjustment process will increase the quantity of the good purchased." Explain this statement, using a supply and demand diagram.
5. When the price of water in southern California rose, some analysts attributed the change to the drought, others attributed it to more people living in southern California, and those people who live there buying bigger swimming pools. Since both the drought and the influx of people who are getting richer occurred simultaneously, how would you determine which set of analysts had described the dominant cause of the price increase?
6. In Rolling Stone magazine, several fans and rock stars, including Pearl Jam, were bemoaning the high price of concert tickets. One superstar argued, "It just isn't worth $75 to see me play. No one should 2 have to pay that much to go to a concert." Assume this star sold out arenas around the country at an average ticket price of $75.
6a) How would you evaluate the arguments that ticket prices are too high?
6b) Suppose that due to this star's protests, ticket prices were lowered to $50. In what sense is this price too low? Draw a diagram using supply and demand curves to support your argument.
6c) Suppose Pearl Jam really wanted to bring down ticket prices. Since the band controls the supply of its services, what do you recommend they do? Explain using a supply and demand diagram.
6d) Suppose the band's next CD was a total dud. Do you think they would still have to worry about ticket prices being too high? Why or why not? Draw a supply and demand diagram to support your argument.
6e) Suppose the group announced their next tour was going to be their last. What effect would this likely have on the demand for and price of tickets? Illustrate with a supply and demand diagram.
7. In 1976 the New York State Public Service Commission proposed the imposition of a 10-cent charge for each directory assistance call placed from a private telephone. (At the time such calls were available free of charge to telephone subscribers). The Commission's motive for making this proposal was that free calling privileges forced the telephone companies to employ hundreds of extra operators to look up the numbers that most callers could have easily looked up for themselves. The charge was eventual adopted, but not until the Commission agreed to reduce everyone's phone bill by 30 cents per month. From a societal perspective do you think the imposition of a fee for directory assistance increased efficiency or decreased efficiency? Explain your answer (without using technical jargon).