Accounting Profit, Satisfaction, Marginal rate, Supply & Demand

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Practice Exam - Study Guide
Please put all of the answers on the word document below. Cut and paste the excel graphs into this document. Thanks.

The following discussion is about the various economic principles and theories that are applied in day to day economic activities. In the answers to the questions below, various economic concepts like substitution goods, contraction of demand, increase of demand and production possibility curve have been discussed. In addition to it, diagrams are provided along with various questions.

Q.1 As you all know, wheat is a material for dinner roll.
1. If the price of wheat rises, how and in what direction will the equilibrium price and quantity of dinner roll change? Using a graph for the dinner roll market, give a detailed explanation for your answer.
Ans. According to basic economic theory it is seen that with the increase in the price of a commodity, the quantity demanded of the commodity decreases and thus, the demand curve moves upward. This is called contraction of demand (Marshall, 2004). Through the information given in the question it has been analyzed that with the increase in the price of wheat the quantity demanded of dinner rolls will decrease which will affect the equilibrium price and quantity of dinner rolls.

Diagram 1: Contraction of Demand

From the diagram given above it can be seen that with the increase in price of wheat from point P to P1 the equilibrium point which is determined by the intersection of demand and supply shifts upwards from point Q to Q1. In addition to it has been seen that with the increase of price of wheat the quantity demanded of dinner roles decrease to Q to Q1. Thus, the overall effect of contraction of demand is that equilibrium price is increased and the equilibrium quantity decreases (Marshall, 2004).

2. If the price of wheat rises, how and in what direction will the equilibrium price and quantity of corn bread? Using a graph for the corn bread market, give a detailed explanation for your answer. Assume that corn bread does not include any wheat at all.

Ans. Wheat is used as a direct raw-material in the production of dinner rolls. Thus, changes in the prices of wheat directly affects the quantity and prices of the dinner rolls. However, corn bread serves as a substitute good for dinner rolls (Tucker, 2010). Therefore, changes in the prices of wheat will directly affect the equilibrium quantity and prices of dinner rolls but will indirectly affect the equilibrium quantity and prices of substitute goods.
If the price of substitute good increases then the demand of a goods tends to increase. According to the information mentioned in the question, it has been seen that dinner rolls are regarded as the substitute good of the corn ...