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Market Forces: Demand and Supply

1. You are the manager of an organization in America that distributes blood to hospitals in all 50 states and the District of Columbia. A recent report indicates that nearly 50 Americans contract HIV each year through blood transfusions. Although every pint of blood donated in the United States undergoes a battery of nine different tests, existing screening methods can detect only the antibodies produced by the body's immune system--not foreign agents in the blood. Since it takes weeks or even months for these antibodies to build up in the blood before it is used in transfusions. The obvious benefit of these tests is the reduced incidence of infection through blood transfusions. The report indicates that the current price of decontaminated blood is $80 per pint. However, if the new screening methods are adopted, the demand and supply for decontaminated blood will change to Q4 = 175-P and Qs = 2P - 200. What price do you expect to prevail if the new screening methods are adopted? How many units of blood will be used in the United States? What is the level of consumer and producer surplus? Illustrate your findings in a graph.

2. Rapel Valley in Chile is renowned for its ability to produce high-quality wine at a fraction of the cost of many other vineyards around the world. Rapel Valley produces over 20 million bottles of wine annually, of which 5 million are exported to the United States. Each bottle entering the United States is subjected to a $0.50 per bottle excise tax, which generates about $2.5 million in tax revenues. Strong La Nina weather patterns have caused unusually cold temperatures, devastating many of the wine producers in that region of Chile. How will La Nina affect the price of Chilean wine? Assuming La Nina does not impact the California wine-producing region, how will La Nina impact the market for Californian wines?

Solution Summary

This solution discusses two cases regarding market forces.