Question 15

15. Another supply and demand puzzle Suppose the market price of pizzas in a university town recently decreased. Economics students studying at the university are discussing potential causes of the price decrease. One group of students theorize that the price decreased because the price of dough, an important ingredient for making pizzas, has decreased. Others claim the decrease in the price of pizzas is because of a recent increase in the price of beer. Everyone agrees that the increase in the price of beer was caused by a recent increase in the price of grain, which is not generally used in making pizzas. The first group of students claim the decrease in the price of pizzas can be attributed to the fact that the price of dough, an important ingredient for making pizzas, has decreased. On the following graph, adjust the supply and demand curves to illustrate the first group's explanation for the decrease in the price of pizzas. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. O Supply Demand Supply PRICE (Dollars per pizza) Demand QUANTITY (Pizzas) The second group of students attributes the decrease in the price of pizzas to the increase in the price of beer.The second group of students attributes the decrease in the price of pizzas to the increase in the price of beer. On the following graph, adjust the supply and demand curves to illustrate the second group's explanation for the decrease in the price of pizzas. Supply Demand Supply PRICE (Dollars per pizza) Demand QUANTITY (Pizzas) Suppose that both groups of students are on the right track, and each of the events described above are partially responsible for the decrease in the price of pizzas. Based on your analysis of the explanations offered by the two groups of students, how would you determine which of the possible causes was the dominant cause of the decrease in the price of pizzas? If the equilibrium quantity of pizzas decreases, then the demand shift in the market for pizzas must have been larger than the supply shift If the price decrease was large, then the supply shift in the market for pizzas must have been larger than the demand shift. If the equilibrium quantity of pizzas decreases, then the supply shift in the market for pizzas must have been larger than the demand shift Whichever change occurred first must have been the primary cause of the change in the price of pizzas.6. Elasticity and total revenue The following graph illustrates the weekly demand curve for motorized scooters in Wilmington. Use the green rectangle (triangle symbols) to compute total revenue at various prices along the demand curve. Note: You will not be graded on any changes made to this graph. (?) 165 Total Revenue 150 135 120 PRICE (Dollars per scooter) A B Demand 12 16 20 24 22 32 38 40 62 QUANTITY (Scooters )On the following graph, use the green point (triangle symbol) to plot the weekly total revenue when the market price is $30, $45, $60, $75, $90 $105, and $120 per scooter. 1460 A 1320 Total Revenue 1180 1040 TOTAL REVENUE (Dollars) 760 820 280 340 200 0 15 30 45 60 75 90 105 120 135 150 165 180 195 PRICE (Dollars per scooter) According to the midpoint method, the price elasticity of demand between points A and B is approximately Suppose the price of scooters is currently $45 per scooter, shown as point B on the initial graph. Because the demand between points A and B is , a $15-per-scooter increase in price will lead to in total revenue per week. In general, in order for a price increase to cause a decrease in total revenue, demand must be