Essay on Intermediate Price Theory

1061 Words Jun 10th, 2013 5 Pages
Intermediate Price Theory

Problem Set 1 -- Supply and Demand

1. Assume that the United States demand curve for corn is

QD = 80 - 2P

where P is the price of corn (in dollars per bushels) and QD is the quantity of demanded of corn ( in billions of bushels) and that

QS = 20 + 4P

is the supply curve for corn where QS is the quantity of corn supplied (in billions of bushels).

a. What are the equilibrium price and quantity? At equilibrium, QD =QS 80 - 2P= 20 + 4P 6P = 60 P = $10 Qd = 80 – 2(10) = 80 -20 = 60 billion bushels Qs = 20 + 4(10) = 60 billion bushels

b. What is the slope of the Demand?

The slope of the demand is -2
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A magazine article notes that a tax on beer had caused the price of beer to increase by 5% over the price of beer a year earlier. The article notes, however, that the sales of beer had risen during the period. The article concludes that the law of demand does not apply to beer. Do you agree with the article’s conclusion? Explain why or why not.

The law of demand is still operating in the beer market even if sales had risen after the imposition of a tax. Note that demand shows the different quantities of beer that may be bought at each specific price of beer, with tax or without tax. An increase in the price of beer caused by the tax only leads to a decrease in quantity demanded at that specific price.

There are many factors that can cause an increase in demand for beer despite the price increase. The article probably did not look at the non-price determinants that could have caused the demand for beer to rise despite the tax on it. The non price determinants of demand are consumers tastes and preferences, number of buyers, prices of related goods, price expectation, consumers income etc.

6. Evaluate the following statement:

A decrease in the supply of steel will cause the price of steel to rise. Manufacturers who use steel to produce their products will cut back on their production, thus reducing their demand for steel. The resulting decrease in demand for steel will cause the price of steel to fall. Consequently, the decrease in
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