Posted: March 28th, 2022

(Law of Demand) What is the law of demand?

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ANSWER THE FOLLOWING QUESTIONS:
1. (Law of Demand) What is the law of demand? Give two examples of how you have observed the law of demand at work in the “real world.” How is the law of demand related to the demand curve?
2. (Changes in Demand) What variables influence the demand for a normal good? Explain why a reduction in the price of a normal good does not increase the demand for that good.
3. (Substitution and Income Effects) Distinguish between the substitution effect and income effect of a price change. If a good’s price increases, does each effect have a positive or a negative impact on the quantity demanded?
4. (Demand) Explain the effect of an increase in consumer income on demand for a good.
5. (Income Effects) When moving along the demand curve, income must be assumed constant. Yet one factor that can cause a change in the quantity demanded is the “income effect.” Reconcile these seemingly contradictory facts.
6. (Demand) If chocolate is found to have positive health benefits, would this lead to a shift in the demand curve or a movement along the demand curve?
7. (Supply) What is the law of supply? Give an example of how you have observed the law of supply at work. What is the relationship between the law of supply and the supply curve?
8. (Changes in Supply) What kinds of changes in underlying conditions can cause the supply curve to shift? Give some examples and explain the direction in which the curve shifts.
9. (Supply) If a severe frost destroys some of Florida’s citrus crop, would this lead to a shift of the supply curve or a movement along the supply curve?
10. (Markets) How do markets coordinate the independent decisions of buyers and sellers?
11. (Income Definitions) What’s the difference between money income and real income?
ANSWER THE FOLLOWING PROBLEMS:
12. (Shifting Demand) Using demand and supply curves, show the effect of each of the following on the market for cigarettes:
a. A cure for lung cancer is found.
b. The price of cigars increases.
c. Wages increase substantially in states that grow tobacco.
d. A fertilizer that increases the yield per acre of tobacco is discovered.
e. There is a sharp increase in the price of matches, lighters, and lighter fluid.
f. More states pass laws restricting smoking in restaurants and public places.
13. (Substitutes and Complements) For each of the following pairs of goods, determine whether the goods are substitutes, complements, or unrelated:
a. Peanut butter and jelly
b. Private and public transportation
c. Coke and Pepsi
d. Alarm clocks and automobiles
e. Golf clubs and golf balls
14. (Equilibrium) “If a price is not an equilibrium price, there is a tendency for it to move to its equilibrium level. Regardless of whether the price is too high or too low to begin with, the adjustment process will increase the quantity of the good purchased.” Explain, using a demand and supply diagram.
15. (Equilibrium) Assume the market for corn is depicted as in the table that appears below.
a. Complete the table below.
b. What market pressure occurs when quantity demanded exceeds quantity supplied? Explain.
c. What market pressure occurs when quantity supplied exceeds quantity demanded? Explain.
d. What is the equilibrium price?
e. What could change the equilibrium price?
f. At each price in the first column of the table, how much is sold?
(PLEASE USE PDF ON ATTACHMENT TO SEE THE TABLE QUESTION 15 )
16. (Market Equilibrium) Determine whether each of the following statements is true, false, or uncertain. Then briefly explain each answer.
a. In equilibrium, all sellers can find buyers.
b. In equilibrium, there is no pressure on the market to produce or to consume more than is being sold.
c. At prices above equilibrium, the quantity exchanged exceeds the quantity demanded.
d. At prices below equilibrium, the quantity exchanged is equal to the quantity supplied.
17. (Demand and Supply) How do you think each of the following affected the world price of oil? (Use demand and supply analysis.)
a. Tax credits were offered for expenditures on home insulation.
b. The Alaskan oil pipeline was completed.
c. The ceiling on the price of oil was removed.
d. Oil was discovered in the North Sea.
e. Sport utility vehicles and minivans became popular.
f. The use of nuclear power declined.
18. (Demand and Supply) What happens to the equilibrium price and quantity of ice cream in response to each of the following? Explain your answers.
a. The price of dairy cow fodder increases.
b. The price of beef decreases.
c. Concerns arise about the fat content of ice cream. Simultaneously, the price of sugar (used to produce ice cream) increases.
19. (Equilibrium) Consider the graph where demand and supply are initially D and S, respectively. What are the equilibrium price and quantity? If demand increases to D’, what are the new equilibrium price and quantity? What happens if the government does not allow the price to change when demand increases?
20. (Changes in Equilibrium) What are the effects on the equilibrium price and quantity of steel if the wages of steelworkers rise and, simultaneously, the price of aluminum rises?
21. (Price Floor) There is considerable interest in whether the minimum wage rate contributes to teenage unemployment. Draw a demand and supply diagram for the unskilled labor market, and discuss the effects of a minimum wage. Who is helped and who is hurt by the minimum wage?
22. (Case Study: Rent Ceilings in New York City) Suppose the demand and supply curves for rental housing units have the typical shapes and that the rental housing market is in equilibrium. Then, government establishes a rent ceiling below the equilibrium level.
a. What happens to the quantity of housing available?
b. What happens to the quality of housing and why?
c. Who benefits from rent control?
d. Who loses from rent control?
e. How do landlords of rent-controlled apartments try to get tenants to leave?

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