Principles of Microeconomics ECON 231 Applied Study (1) (5 marks) Applied Project (15 marks) A key skill in economics is the ability to use supply and demand theory to analyze specific markets. In this case study, you get the chance to demonstrate your ability to analyze the effects of several 'shocks' to the coffee market. Answer all parts of each of the scenarios below Scenario 1: Suppose that as part of the international trade agreement, Saudi Arabia reduces the tariff on imported coffee. Will this affect the supply or demand of coffee? why? What determinant of demand or supply is affected? Display graphically using the before and after curves on the same axes. How would that change the equilibrium price and quantity of coffee? Explain your reasons. Scenario 2: Let's say the National Institutes of Health publishes a study that found that drinking coffee reduces the risk of liver cancer. How do you imagine this will affect the coffee market? why? What determinant of demand or supply is affected? Display graphically using the before and after curves on the same axes. How would that change the equilibrium price and quantity of coffee? Explain your reasons. Scenario 3: Combine parts 1 and 2. Suppose Saudi Arabia lowers the tariff on imported coffee, and a reputable study is published indicating that coffee drinkers have lower rates of liver cancer. What would be the combined effect on the equilibrium price and quantity of coffee? Explain your reasons and illustrate them graphically. Make sure you think about this carefully. Applied study (2) (5 marks) Suppose you as a consumer have 34 riyals per month to spend on snacks, either on pizza that costs 6 riyals each or on chocolate that costs 4 riyals each. Further, assume that preferences are given by the following gross utility table. your Quantity 1 2 3 4 5 6 7 Total Utility for pizza TU)) 60 108 138 156 162 166 166 Total Utility for chocolate(TU) 148 44 76 100 120 136 152 -First, draw the budget constraints with pizza on the horizontal axis and chocolate on the vertical axis. - Next, should you buy the chocolate first or the pizza first to get the "maximum value for money"? How can you say that? (Use the utility maximization rule.) What should you buy? Use the utility maximization rule to determine consumer equilibrium, i.e. what combination of chocolate and pizza will maximize your total utility. (eg: What do you have to buy blow your budget?) - Ensure that consumer equilibrium generates the highest aggregate utility of any affordable group of goods. For example, calculate the total benefit of some other