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Supply and Demand Economics

B. A few years ago a number one best selling book proclaimed the virtues of oat bran in reducing cholesterol. More and more consumers added oat bran cereal and muffins to their diets. At the same time, producers switched over to oat bran production from other agricultural crops. Within the 2 month period, the price of a pound of oat bran increased from $.99 to $2.59. During this 2 month period, which increased more- demand, supply, both or neither? Explain in your own words with detail.

C. Southwest Airlines is concerned over low sales and announces special deals in its fares this summer. The New York to Las Vegas fare, for instance, is reduced from $500 to $420. Does Southwest think demand is elastic, unitary elastic, or inelastic? How would they know? Explain in your own words with detail.

D. Suppose Kobe Bryant of Los Angeles had an average of 33 points per game of the first 10 games of the season and then scored 20, 25, 40 50 and 20 points in the next five games. Did Kobe Bryant beat the average-marginal rule? Explain in your own words with detail

D. Assume Congress prohibits the sale of Japanese luxury cars, such as Lexus, Acura, and Infiniti in the United States. How would this affect the price elasticity of demand for Mercedes, BMWs, and Jaguars in the United States? Explain in your own words with detail.

E. Suppose a movie theater raises the price of popcorn 10% however customers do not buy any less popcorn. What does this indicate about the price elasticity of demand? What will happen to total revenue as a result of the price increase? Explain in your own words with detail.

F. Explain how a limousine service may estimate the demand for its service? Be specific by providing a description of what variables they would consider and why. What method of demand analysis would they use to determine demand and why?

Solution Preview

B. A few years ago a number one best selling book proclaimed the virtues of oat bran in reducing cholesterol. More and more consumers added oat bran cereal and muffins to their diets. At the same time, producers switched over to oat bran production from other agricultural crops. Within the 2 month period, the price of a pound of oat bran increased from $.99 to $2.59. During this 2 month period, which increased more- demand, supply, both or neither? Explain in your own words with detail.

Answer: During these 2 months the demand increases more than supply thus pushing the price higher (up from $0.99 to $2.99). Price of a commodity increases if its demand increases and supply is unable to keep up with the increased demand.

If supply increases more than demand, then there is excess of those goods in the market thus pushing the price lower (one of the reason you see sales happening at the retail stores)

If neither increase or if both increase the prices would still be stable

C. ...

Solution Summary

This solution addresses supply and demand concepts by identifying an increase in either supply or demand, price elasticity, average-marginal rule, total revenue and demand analysis.

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