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eonomics problem set 1

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eonomics problem set 1
INSTRUCTIONS: You must show all of your work where calculations are required and you must include a brief explanation of approximately 50 words for each answer to receive full credit:
1. Markets, Demand and Supply, part 1 (10pts):
a. What effect will each of the following have on the DEMAND for coffee (i.e. Increase Demand, Decrease Demand, or NO CHANGE)? You must include a brief explanation of approximately 50 words for each answer to receive full credit:
i. There is an increase in the price of coffee.
(a) Increase in Demand for coffee. In general, an increase in price of coffee will engender a concomitant decrease in demand. Also of importance is the amount of this change in demand and the affect on total revenue. These changes (demand and total revenue) will be determined by the price elasticity of demand. ii. There is an increase in the price of tea, which consumers view as a substitute for coffee.
(a) Increase in the Demand for Coffee. In general, an increase in the price of tea will engender a concomitant increase in the demand for coffee. As a close substitute iii. There is an increase in consumer incomes, assuming coffee is a normal good. iv. There is a decrease in the number of consumers who buy coffee.
b. What effect will each of the following have on the SUPPLY of soybeans? (i.e. Increase Supply, Decrease Supply, or NO CHANGE)? You must include a brief explanation of approximately 50 words for each answer to receive full credit:
i. There is an increase in the amount of subsidies given to soybean producers.
Increase in Supply of Soybeans: Subsidies are supply-side microeconomic policies. Suppliers are paid to encourage supply as the cost to supply is less. ii. There is a decrease in the price of fertilizer, an input needed to produce soybeans. iii. There is an increase in the price of corn, an alternative good that soybean producers could produce instead of soybeans (i.e. assume corn is a substitute in production for

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