Abstract
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1.
When income increases, the demanded quantity of an ordinary good decreases.
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2.
If the price of an inferior good increases, then the demand decreases.
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3.
Two goods are substitutes for each other if the demand for each good decreases when the price of the other good increases.
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4.
The demand for a good increases as its price increases. Hence, it is a Giffen good.
Figure 4.1 shows the relevant market for the car firm CarMaker. For the following questions, please take the demand x 1, the supply y 1 and the equilibrium in point a as reference point.
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1.
A rival firm, which produces a substitute for the cars by CarMaker, lowers the price of its cars. The new equilibrium is at a point such as i.
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2.
Due to a process of innovation, CarMaker can reduce the marginal costs. The new equilibrium is at a point such as h.
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3.
The government increases the motorway toll. The new equilibrium is at a point such as d.
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4.
The government reduces the mineral oil tax. The new equilibrium is at a point such as f.
Assume that the market for corn is perfectly competitive. Supply is increasing and demand is decreasing in price.
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1.
A large amount of the crop is destroyed by storms. The equilibrium price thus increases, ceteris paribus.
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2.
All harvesters’ wages decrease. The market supply function shifts, ceteris paribus, to the left.
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3.
A new technology allows the production of gasoline from corn. The equilibrium demand for corn decreases and the equilibrium quantity increases, ceteris paribus.
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4.
The income of the consumers of corn increases. The equilibrium price for corn thus increases, ceteris paribus.
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Notes
- 1.
Note that we did not analyze the fourth case, where prices run between 50 and 200. The reason for this is simple. We are looking for the intersection of a monotonically decreasing and continuous function (x(p)) and a monotonically increasing and continuous function (\(\tilde{y}(p)\)). Thus, a unique solution must exist, which we already found in the interval 20 ≤ p < 50.
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Kolmar, M., Hoffmann, M. (2018). Supply and Demand. In: Workbook for Principles of Microeconomics . Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-62662-8_4
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DOI: https://doi.org/10.1007/978-3-319-62662-8_4
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