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    Microeconomics in Tea and Soft Drink Markets

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    1. Suppose news reports predicted that the price of coffee was about to rise by about 20%. What could be the causes of the predicted price increase? What impact might this have on consumer demand for coffee in the short and long term? What might happen in the tea market or the soft drink market?

    2. Consider the market for personal computers. Suppose that the demand is stable: the demand curve doesn't change. Predict the effects of the following changes on the equilibrium price of computers. a. The cost of memory chips (one component of a computer) decreases. b. The government imposes a $100 tax on personal computers.

    3. Suppose the current equilibrium price for American cheese is $1.00 per pound. Suppose the French suddenly develop a preference for American cheese. Explain the impacts of this unlikely development on all the relevant markets.

    4. Why do candy vending machines only let you have one item after you put the coins in, but newspapers vending machines "allow" you to take as many papers as you want after the coins go in?

    5. What are the main benefits of government imposed price controls? What are the drawvabcks to these price controls?

    6. Why do policies that limit the supply of illegal drugs perhaps increase the number of burglaries and robberies?

    7. What would be the impacts of a $2.00 per gallon increase of the tax on gasoline?

    8. For each of the following goods, indicate whether you expect demand to be inelastic or elastic, and explain your reasoning:opera, foreign travel, DVD rentals, eggs.

    9. Suppose a firm wants to raise its total revenue. What are some of the things it must consider? (Hint: think about the elasticity concept).

    10. What are spillover costs? Why do they occur and what can be done about them?

    11. When the Super Bowl comes around, fans are willing to pay $2000 for a ticket with a face value of $600. What economic principle mentioned in Chapter 6 does this represent?

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    Solution Preview

    1. The causes of the predicted rise could be a shortage of coffee because of flood or drought in the coffee growing areas, an increase in input costs such as labor, or expectations of high demand for coffee. In the short run because the demand curve is downward sloping, with increase in prices the demand for coffee will decline. In the long run the supply of coffee will increase because of the high prices and the supply will adjust itself to the demand. In the long run the supply will adjust itself to the demand. The prices will decline and the new supply will adjust itself to the new demand. Since tea and soft drinks are substitutes for coffee, the demand in these markets will increase. At same prices more quantity will be demanded in the tea and soft drinks market.

    2. a. if the cost of memory chips decreases, more personal computers will be supplied at the current equilibrium prices. The equilibrium price of computers will decline.
    b. if the government imposes a $100 tax on person computers, the equilibrium price will increase as the cost goes up. There will be a lower demand and a higher equilibrium price for computers.

    3. If the French develop a preference for American cheese the demand for American cheese will increase. The equilibrium price for American cheese will increase above ...

    Solution Summary

    The answer to this problem explains eleven answers relating to microeconomics . The references related to the answer are also included.