Study on Microeconomics

915 Words4 Pages
1. i) If the price of wool decreases in response to an increase in wool supply, this is graphed as follows. Basically, P drops, which pushes AD to the right, which in English means the quantity demanded increases. Q1 is the original equilibrium point while Q2 is the new equilibrium point. ii) If supply of cotton decrease, the price of cotton increases. Demand should decrease as the result of the price increase, bringing the market to a new equilibrium level (Q2). iii) In this scenario, demand drops because people have less wealth and the price increases. The first part pushes P down, but the second pushes P up. We don't know which one is stronger, so we can only guess. One guess is that these two effects offset each other. If the two events are simultaneous, the equilibrium point might not move at all.
2.i) P = 8 - .08Q. To solve for Q, first do a little algebra, such that .08Q + 4 = 8 or 4 / 0.08 = 50 pies. ii) If the price is increased by 10% (to $4.4), the demand will be 45. The total revenue at the current price is 50*4 = $200. At the new price it will be $4.4*45 = $198. The president is wrong about raising the price Jenny's price delivers more revenue. iii) The price elasticity of demand for sausage rolls is:
%Î" demand / %Î" price, so: -14.8% / 8% = -1.85
This means that sausage rolls are an elastic good. Demand will decrease at a greater rate than the price increase. iv) There is cross-price elasticity at work here. This is:
% Î" quantity demanded of one
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