# Using separate diagrams for each of the following, with supply and demand clearly labeled, please depict the effect on the equilibrium price and quantity of the good that will be produced and sold.

## Practice with demand, supply, and elasticity concepts

### Using separate diagrams for each of the following, with supply and demand clearly labeled, please depict the effect on the equilibrium price and quantity of the good that will be produced and sold.

1. The effect of an increase in incomes on the market for patch kits. 2. The effect of a decrease in the cost of grapes on the grape juice market. 3. The effect of a decrease in the number of teenagers on the market for rollerblades. 4. The effect of an increase in the price of cereal on the market for milk. 5. The effect of an increase in incomes on the market for used engine parts. 6. The effect of a decrease in the cost of chocolate eggs on the jelly bean market. 7. The effect of an increase in the cost of tomatoes on the market for spaghetti sauce. 8. The effect of an increase in the number of producers on the market for cyber pets. 9. The effect of a decrease in the price of CD players on the market for CDs. 10. The effect of a dramatic decline in the supply of shepherds on the market for cotton. 11. The effect of an improvement in production technology on the market for telephones.

### Please explain the following briefly:

1. Whats the difference between elasticity of demand (also called price elasticity), income elasticity, cross price elasticity and supply elasticity? 2. If the income elasticity of a good is .6, what does this tell you? 3. What difference does it make if the cross price elasticity of x and y is positive or negative? 4. If the price elasticity of a good is .6, what does this tell you? 5. What determines who really bears the greater portion of the burden of a sales tax on a good? 6. If the price of a good falls by 15% and sales increase by 18%, what is the approximate price elasticity of demand at that price?

### Try these problems:

20-3 "In 1987 the average price of a home rose from \$97,000 in April to \$106,800 in May. During the same period home sales fell from 724,000 to 616,000 units. If we assume that mortgage interest rates and all other factors affecting home sales are constant, what do these figures suggest about the elasticity of demand for housing?" (McConnell and Stanley L. Brue Economics: Principles, Problems, and Policies, 13th ed., McGraw-Hill, 1996, pp. 416-417)

20-15 "In the 1950s the local Boy Scout troop in Jackson, Wyoming, decided to gather and sell at auction the elk antlers shed by the thousands of elk wintering in the area. Buyers were mainly local artisans who used the antlers to make belt buckles, buttons, and tie clasps. Price per pound was 6 cents and the troop took in \$500 annually. In the 1970s a fad developed in Asia which involved grinding antlers into powder to sprinkle on food for purported aphrodisiac benefits. In 1979 the price per pound of elk antlers in the Jackson auction was \$6 per pound and the Boy Scouts earned \$51,000! Show graphically and explain these dramatic increases in price and total revenue. Assuming no shift in the supply curve of elk antlers, use the midpoints formula to calculate the coefficient for the elasticity of supply." (McConnell and Stanley L. Brue Economics: Principles, Problems, and Policies, 13th ed., McGraw-Hill, 1996, p. 417)