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Lobster demand

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2. Suppose that the following table describes prices, incomes, and per person lobster consumption in three U.S. cities.

City Per Person Income Lobster Price Per Person Consumption
Boston MA High Mod High
San Fran CA High High Medium
Boothbay Harbor ME Low Mod Low

Use the concepts of opportunity cost, substitution effect, and the effect of income on demand to answer the following:

(a) Before we analyze this table, suppose that lobsters come from Boothbay Harbor, ME, and that the cost of shipping them to Boston is virtually nothing. But the cost of transporting them to San Francisco is high. Explain why transportation cost would largely be responsible for the difference in price. In particular, why would the price of lobster be the same in Boston and Boothbay Harbor, even if the lobsters come from the latter not the former? Why would the price o lobsters on the West Coast exceed the price on the East Coast by only the transportation cost, even though the former starts off with all the lobsters?

(b) Given the data in the table, need we infer that people in these three cities have different preferences for lobster? Why or why not? (Keep in mind what economists mean by "preferences")

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Solution Preview

In general, we expect supply and demand to find equilibrium. When income in greater, people demand more goods. This increases price. However, we see here the price of lobster is the same in Boston, with a high income, and in Boothbay Harbor, where income is low. So other factors are influencing price.

In economics, opportunity cost is the cost of something in terms of the most valuable forgone alternative. Preference refers to the tendency for consumers to favor one good over another. In this case, we are looking at how much of their income people spend on lobsters as opposed to other types of food. The substitution effect states that a higher prices cause people to substitution less expensive alternatives. ...

Solution Summary

Use of opportunity cost, substitution effect, income effect to describe changes in the demand of lobster.