Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Suppose there has been a storm in Nebraska that has destroyed part of the corn crop in the field. The demand curve for corn has

Suppose there has been a storm in Nebraska that has destroyed part of the corn crop in the field. The demand curve for corn has not changed. As a result, the market clearing prices and quantities before and after the storm are: P, = 50, Q, = 2,000; P, = 100, Q, = 1,500. (The subscripts a and b refer to "after the storm" and "before the storm.")

Assume a linear demand curve for corn; that is P = a + BQ. Calculate a, f with the provided information, and draw the demand curve with P on the y-axis and Q on the x-axis. Label the intercept and the slope on the graph.

The supply curve for the period after the storm is P = (1/15)Q, and it is parallel to the supply curve before the storm. Is the supply curve before the storm above or below that after the storm? Calculate the slope and the intercept of the supply curve before the storm. Draw both supply curves on a new graph with P on the y-axis and Q on the x-axis. Add the demand curve (calculated in part a) to the graph.

Suppose consumers care only about corn consumption and apple consumption (they live in a two-good world). How would the change in the price of corn affect the budget constraint of the typical consumer? Show graphically. How would the change in relative prices affect the typical consumer's consumption of corn versus apples? Is this result consistent with your observation from the demand and supply framework (i.e., an increase in the price of corn is associated with a decrease in the equilibrium quantity)? Explain.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Macroeconomics

Authors: Michael Parkin

10th Edition

013485330X, 978-0134853307

More Books

Students also viewed these Economics questions