# Economics

## Quiz 4 :Background to Demand: Consumer Choices

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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.
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a.Demand curve will shift rightward
If the medicine to cure lung cancer is found, then the people tend to buy more cigarettes giving least importance to the health conditions. Hence, the demand for cigarettes will shift rightward.
b.Demand curve will shift leftward
Rise in price of cigarettes would reduce the number of cigarettes smoked by an individual per day; hence, the demand for cigarettes will shift leftward.
c.Demand curve will shift leftward
Increase in wage rate in the states that grows tobacco will increase the cost of producing cigarettes. As a result, the price of cigarettes will increase; thereby demand for cigarettes will fall. Hence, the demand for cigarettes will shift leftward.
d.Demand curve will shift rightward
With the discovery of a fertilizer which can increase the yield per hectare of tobacco will lead to an increase in the production of cigarettes with low cost. This will lead to a reduction in the price of cigarettes, thereby increasing its demand. Hence, the demand for cigarettes will shift rightward.
e.Demand curve will shift leftward
Sharp rise in the price of matches, lighters, and lighter fluid will cause a reduction in smoking cigarettes, as they are complementary goods to cigarettes. Hence, the demand for cigarettes will shift leftward.f.Demand curve will shift leftward
If a state passes law to restrict smoking in restaurants and public places, then the number of cigarettes smoked by an individual per day will fall. Hence, the demand for cigarettes will shift leftward.

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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?
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Change in equilibrium price:
Since steel is a close substitute for aluminum, rise in the price of aluminum will cause the demand for steel to rise. As a result, demand curve of steel will shift outward. On the other hand, increase in the wage of steel workers will cause the supply curve to shift leftward. Under such condition, price level will increase and output will remain constant to obtain an equilibrium point.

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SUBSTITUTES AND COMPLEMENTS For each of the following pair 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
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a.Complement goods:
Peanut butter and jelly are complement goods because the fall in price of one good would cause a fall in demand for another good; hence, these two are complement goods.
b.Substitute goods:
Private and public transportation are substitute goods because the increase in price of one service would increase the demand for another service. Hence, both are substitutes.
c.Substitute goods:
Coke and Pepsi are substitute goods because the increase in price of one good would increase the demand for the other good; hence, both are substitute goods.
d.Unrelated goods:
Since the price of alarm clocks does not affect the demand for automobiles or vice-versa, hence both are unrelated goods.
e.Complement goods:
Golf clubs and golf balls are complement goods because the fall in the price of one good result in a fall in the demand for the other good; hence, both products are complement goods.

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Case Study: The Market for Professional Basketball In what sense can we speak of a market for professional basketball? Who are the demanders and who are the suppliers? What are some examples of how changes in supply or demand conditions have affected this market? Reference Case Study: World of Business The Market for Professional Basketball Toward the end of the 1970s, the NBA seemed on the brink of collapse. Attendance had sunk to little more than half the capacity. Some teams were nearly bankrupt. Championship games didn't even merit prime-time television coverage. But in the 1980s, three superstars turned things around. Michael Jordan, Larry Bird, and Magic Johnson added millions of fans and breathed new life into the sagging league. Successive generations of stars, including Dwayne Wade, Kevin Durant, and LeBron James, continue to fuel interest. Since 1980 the league has expanded from 22 to 30 teams and attendance has more than doubled. More importantly, league revenue from broadcast rights jumped nearly 50-fold from $19 million per year in the 1978-1982 contract to$930 million per year in the current contract, which runs to 2016. Popularity also increased around the world as international players, such as Dirk Nowitzki of Germany and Yao Ming of China, joined the league (basketball is now the most widely played team sport in China). NBA rosters now include more than 80 international players. The NBA formed marketing alliances with global companies such as Coca-Cola and McDonald's, and league playoffs are now televised in more than 200 countries in 45 languages to a potential market of 3 billion people. What's the key resource in the production of NBA games? Talented players. Exhibit 10 shows the market for NBA players, with demand and supply in 1980 as The intersection of these two curves generated an average pay in 1980 of $170,000, or$0.17 million, for the 300 or so players then in the league. Since 1980, the talent pool expanded somewhat, so the supply curve in 2010 was more like (almost by definition, the supply of the top few hundred players in the world is limited). But demand exploded from With supply relatively fixed, the greater demand boosted average pay to \$6.0 million by 2010 for the 450 or so players in the league. Such pay attracts younger and younger players. Stars who entered the NBA right out of high school include Kobe Bryant, Kevin Garnett, and LeBron James. (After nine players entered the NBA draft right out of high school in 2005, the league, to stem the flow, required draft candidates to be at least 19 years old and out of high school at least one year. So talented players started turning pro after their first year of college; in 2008, for example, 12 college freshman were drafted including five of the top seven picks.)
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EQUILIBRIUM Consider the following graph in which 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?
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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.
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DEMAND If chocolate is found to have positive health benefits, would this lead to a shift of the demand curve or a movement along the demand curve?
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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?
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DEMAND Explain the effect of an increase in consumer income on the demand for a good.
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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.
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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.
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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.
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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.
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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?
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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?
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MARKETS How do markets coordinate the independent decisions of buyers and sellers?
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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.
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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 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.
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