Econ 190 chapter2 and 3 exercise demand and supply Answers.doc

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ECON 1900
Nancy Carson

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Answers to Exercise 3 From the text, End of Chapter 2, questions 8 and 9 s 2-8 (Key Question) With current technology, suppose a firm is producing 400 loaves of banana bread daily. Also, assume that the least-cost combination of resources in producing those loaves is 5 units of labour, 7 units of land, 2 units of capital, and 1 unit of entrepreneurial ability, selling at prices of $40, $60, $60, and $20, respectively. If the firm can sell these 400 units at $2 per unit, will it continue to produce banana bread? If this firm’s situation is typical for the other makers of banana bread, will resources flow to or away from this bakery good? The firm will continue to produce as it is earning economic profits of $40 (Total revenue of $800 minus total cost of $760). If this firm is typical, more resources will flow toward banana bread as other potential firms are attracted to the economic profits. 2-9 (Key Question) Some large hardware stores such as Canadian Tire boast of carrying as many as 20,000 different products in each store. What motivated the producers of those individuals to make them and offer them for sale? How did producers decide on the best combinations of resources to use? Who made these resources available, and why? Who decides whether these particular hardware products should continue to be produced and offered for sale? The quest for profit led firms to produce these goods. Producers looked for and found the least- cost combination of resources in producing their output. Resource suppliers, seeking income, made these resources available. Consumers, through their dollar votes, ultimately decide on what will continue to be produced. Demand and supply questions: Using a demand and supply diagram, show the impact of the following: 1. an increases in wood prices on the market for new houses; First notice how the vertical axis is labelled. The demand Price of new and supply of new houses houses shows the relationship ($/unit) New Supply between the price and Supply quantity of new houses. Wood is an input into the P2 production of new houses. A P 1 change in the price of an input affects the supply curve. Input prices are a determinant of supply, NOT a Demand determinant of demand. Consumers of new houses respond to the change in the Q2 Q1 price of the new houses not to the change in the price of Q u a n t i t y o wood. When the price of new houses increases, we illustrate the decrease in QUANTITY demanded by moving up along the demand curve to the new equilibrium. There is no shift in the demand curve. 2. a decrease in income Price ofnew clothes ($/unit) Assuming on the market of new new clothes are a normal Supply clothes good. P1 P2 Demand New Demand Q Q 2 1 Q u a n t i t y o ( u n i t s / t i m e Price of new houses ($/unit) New Supply Supply 3. an increase in printers’
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