Homework #1Supply and Demand

1)As income increases, what happens to the demand for McDonald's "value menu" products, assuming McDonalds is an inferior good?

2)Suppose the price of jelly goes down.What happens to the demand for peanut butter?

3)Now suppose there is a new mutant worm that eats peanuts on peanut farms, and destroys much of the peanut crops.What happens to the price of peanut butter?What now happens to the demand for jelly?Show each in a separate graph.

4)Now suppose that the government wants to curb smoking in the United States for its enormous health costs, and decides to purchase anti-smoking ads on television, targeting young adults.What is the intended effect of these ads in terms of supply and demand?

5)For each of the following, draw a diagram that illustrates the likely effect on the market for eggs.Indicate in each case the impact on equilibrium price and equilibrium quantity.

a)A surgeon general wars that high cholesterol foods cause heart attacks.

b)The price of bacon, a complementary good, decreases

c)An increase in the price of chicken feed occurs.

d)Caesar salads become trendy at dinner parties (The dressing is made with raw eggs)

e)A technological innovation reduces egg breakage during packing.

6)Draw hypothetical supply and demand curves for tea.Show how the equilibrium price and quantity will be affected by each of the following occurrences:

a)Bad weather wreaks havoc with the tea crop.

b)A medical report implying tea is bad for your health is published.

c)A technological innovation lowers the cost of producing tea.

d)Consumer income falls. (Assume tea is a normal good.)