You are required to solve some problems related to supply, demand and market prices:

1. The price of food increased during the past year:

a. Explain why the law of demand applies to food just as it does to all other goods and services. b. Explain how the substitution effect influences food purchases and provide some examples of substitutions that people might make when the price of food rises and other things remain the same. c. Explain how the income effect influences food purchases and provide some examples of the income effect that might occur when the price of food rises and other things remain the same.

2. Place the following goods and services into pairs of likely substitutes and pairs of likely complements. (You may use an item in more than one pair.)

The goods and services are: coal, oil, natural gas, wheat, corn, rye, pasta, pizza, sausage, skateboard, roller blades, video game, laptop, iPod, cell phone, text message, email, phone call, voice mail

3. In 2008, the price of corn increased by 35 percent and some cotton farmers in Texas stopped growing cotton and started to grow corn:

a. Does this fact illustrate the law of demand or the law of supply? Explain your answer. b. Why would a cotton farmer grow corn?