ECON

Topics: Supply and demand, Economics, Perfect competition / Pages: 6 (1309 words) / Published: Sep 22nd, 2013
1. Determining changes in equilibrium price and quantity for a perfectly competitive industry given changes in demand and/or supply (Ch. 2, p. 60-65; Class Notes)
A. Graphical analysis given demand and supply curves

(a) While there is increased awareness of Vitamin C available from orange juice, a hard, freezing winter occurs in most of the orange producing areas. Demand increases while supply decreases.

(b) While the technology used for tobacco production is improving, there is increased awareness of the health effects of smoking. Supply increases while demand decreases.

(c) While there is increased awareness of Vitamin C available from orange juice, highly favorable weather conditions occur in orange producing areas for most the crop season. Both demand and supply increase.

(d) While there is increased awareness of the health effects of smoking, severe drought occurs in tobacco producing areas for most of the crop season. Both demand and supply decrease.
2. Determining the cross-price elasticity of demand between two goods (Ch. 3; p. 85-88, Class Notes)

A. Arc cross-price elasticity, given discrete changes in price and quantity demanded Exy = [(Qndx - Qodx)/{(Qndx + Qodx)/2}] / [(Pny - Poy)/{( Pny + Poy)/2}] = [(Qndx - Qodx)/(Qndx + Qodx)] / [(Pny - Poy)/( Pny + Poy)] where, Qndx and Qodx are new and original quantities of good X demanded, and Pny and Poy are new and original prices of good Y.

Suppose, an increase in the price of Pepsi from $0.50 to $0.75 per 8-ounce can increases the average number of 8-ounce can coke demanded per captia per week from 4 to 8. Assuming that all other economic variables were held constant, calculate the arc cross-price elasticity of demand between Pepsi and coke.
Exy = [(8 - 4)/(8 + 4)] / [(0.75 - 0.50)/(0.75 + 0.50)] = (4/12) / (0.25/1.25) = 1.67.

The arc cross-price elasticity coefficient of 1.67 implies that a one-percent increase in the price of Pepsi would

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