Homework 2

Intro Micro--

1. Consider the market for beer. Assume for now that the demand and supply curves for beer are very simple linear curves.

   1. Draw a graph with the demand and supply for beer on the same set of axes. Indicate equilibrium price and quantity on your graph. Answer to 1(a)

   2. The cost of brewer's yeast increases tremendously. Show on a graph what happens to the equilibrium price and quantity for beer. Answer to 1(b)

   3. Suppose to everyone's surprise the commercials are actually right. Suppose a study carried out at the Johns Hopkins University indicates that consumption of beer makes the consumer more attractive. Indicate on a graph what this does to the equilibrium supply and demand for beer. Answer to 1(c)

   4. The price of wine coolers falls significantly. Show what happens in the beer market as a result. Answer to 1(d)

   5. The government later decides to establish a price floor above the equilibrium beer price. Show this on a graph and indicate the amount of shortage or surplus (if any) that will result. Answer to 1(e)

2. Assume for the moment that the cost of cotton is the primary cost in the manufacture of blue jeans. Suppose a new cotton hybrid has been developed that can double cotton yields without increasing growing or harvesting costs. As a result, the cost of wholesale cotton falls.

   1. What would you expect to happen to the equilibrium price of blue jeans? What will happen to the equilibrium quantity sold? Show your results on the appropriate graphs. Answer to 2(a)

   2. Suppose at the same time that the price of cotton fell, consumers begin to fear that the price of jeans will rise next year. Graph the results of both changes and compare the new equilibrium with the original in terms of price and quantity. Answer to 2(b)

   3. Suppose jeans are an inferior good and consumer incomes rise. Ignoring part (b), graph the results of both a reduction in the cost of cotton and an increase in consumers' incomes. Compare the new equilibrium with the original in terms of price and quantity. Answer to 2(c)

3. Suppose the market for athletic shoes can be examined through simple supply and demand analysis.

   1. Show an initial equilibrium and any changes that would occur if the wages of workers in athletic shoe factories rose at the same time that consumers incomes rose (assume athletic shoes are a normal good). Can you confidently predict the direction of change in both price and quantity? Why or why not? Answer to 3(a)

   2. Show an initial equilibrium and any changes that would occur if the cost of materials used in the manufacture of athletic shoes fell while at the same time the cost of sports sandals (assume these are a substitute for athletic shoes) rose. Can you confidently predict the direction of change in both price and quantity? Why or why not? Answer to 3(b)

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