1 Suppose a decrease in consumers income causes a decrease i

1. Suppose a decrease in consumers\' income causes a decrease in the demand for chicken and an increase in the demand for potatoes. Which good is inferior and which is normal? How will the equilibrium price and quantity change for each good?

2. In the United States, corn is often used as an ingredient in animal feed for livestock. Why does an increase in the use of corn to make ethanol, an additive that is used in gasoline, raise the price of meat? Use supply and demand curves for the corn market and the meat market to explain your answer.

3. What is the law of supply? Give two examples of how you have observed the law of supply at work.

4. If the demand and supply curve for dish washers are:

D = 200 – 8P, S = 32 + 6P

Where P is the price of dish washers, what is the quantity of dish washers bought and sold at equilibrium?

Solution

1.

Since a decreased consumer income decreases demand for chicken and increases that for potatoes, chicken is a normal good and potatoes are inferior goods.

With decreased demand for chicken, demand curve for chicken will shift to the left, resulting in decreased equilibrium price and quantity of chicken.

Similarly, with increased demand for potatoes, demand curve for potatoes will shift to the right, resulting in increased equilibrium price and quantity for potatoes.

2.

An increase in the price of corn, an ingredient in animal food acts like an increase in input prices of raising livestock. An increase in input prices lead to a decrease in supply, shifting the supply curve to left, since producers want to earn profits and cannot increase supply when input prices are already high. Thus, a leftward shift in supply curve will increase the price of livestock (meat) and decreased quantity.

3.

Law of supply refers to the positive relation between price and quantity supplied of a good.

E.g. an increase in wages leads to increased supply of labor, and an increase in prices induces producers to increase supply, in order to earn more profits.

4.

D=200-8P

S=32+6P

At equilibrium, DD=SS

Therefore,

200-8P=32+6P

200-32=6P+8P

168=14P

P=12

Q=32+6(12) = 200-8(12)

Q=104