Steps solution to all questions :
1. The used Equation.
3. A simple explanation of the situation (two or three) lines.
4. Graph (for clarification).
*Suppose a new discovery in computer manufacturing has just made computer production cheaper. Also, the popularity and usefulness of computers continues to grow. Use
Supply and Demand analysis to predict how these shocks will affect equilibrium price and quantity of computers. Is there enough information to determine if market
prices will rise or fall? Why?
1. In 1970, Grade A large eggs cost about 61 cents a dozen. In the same year, the average annual cost of a college education at a private four-year college,
including room and board, was about $2112. By 2010, the price of eggs had risen to $1.54 a dozen, and the average cost of a college education was $21,550.
Table 1.2 shows the nominal price of eggs, the nominal cost of a college education, and the CPI for 1970-2010. (The CPI is based on 1983 = 100)
A. In real terms, were eggs more expensive in 2010 than in 1970? Had a college education become more expensive?
B. The real price of eggs fell by 55%, while the real price of college education rose by 82%. What caused this large decline in egg prices and large increase in the
price of college education? (P & R, p.13, 28)
2. From November 2007 to March 2008, the price of gold increased from $865 per pound to over $1,000 per pound. Newspaper articles during this period said there was
little increased demand from the jewellery industry but significantly more demand from investors who were purchasing gold because of the falling dollar.
A. Was this price increase due to a shift in the demand curve for gold, shift in the supply curve for gold, or both?
B. Did this price increase affect the supply curve for gold jewellery? If so, how?
Elasticities and Prediction
A. Explain why for many goods, the long-run price elasticity of supply is larger than the short-run elasticity.
B. Why is the concept of price elasticity (own and cross-price) of demand of importance to Business (firm) and Government?
11. **An analyst for a major cereal company estimates that the demand for product is given by
Log Q = 9.01 – 0.68 log P + 0.75 log A – 1.3 log M
Where Q is the quantity of cereal (in boxes), P is the price of cereal, A is the level of advertising, and M is income. Based on this information, determine the effect
on the consumption of cereal of
a. A 5% reduction in the price of cereal
b. A 4% increase in income
c. 20% reduction in cereal advertising
Suppose that, P = $2.50, A = 200, M = 450. How many boxes of cereal will be sold?
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