Problem #1 Price of Gasoline rises and Autoworkers gain 10% pay raise Price Qty SUV’s D1D1 S1S1 ------------- $30K 2 Mil. E1E1 D2D2 -------------- S2S2.

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Presentation transcript:

Problem #1 Price of Gasoline rises and Autoworkers gain 10% pay raise Price Qty SUV’s D1D1 S1S $30K 2 Mil. E1E1 D2D S2S2 Determinant of Demand Price of complement ↑ Demand decreases (Shifts left) Determinant of Supply Input Price ↑ Supply Decreases (Shifts left) Effect on Equilibrium Price is indeterminate Quantity ↓ Px ↓ Qty ↓ Px ↑ Qty ↓ E2E2 P2P2 Q2Q2

Problem #2 Government Subsidies and Price of rice increases Price Qty Wheat D1D1 S1S $ K E1E1 D2D S2S2 Determinant of Demand Price of Sub. Increases Demand Increases (Shifts Right) Determinant of Supply Subsidy ↑ Supply Increases (Shifts Right) Px ↓ Qty ↑ Px ↑ Qty ↑ Effect on Equilibrium Price is indeterminate Quantity ↑ P2P2 Q2Q2 E2E2

Answers to Multiple Choice Questions 1) C 2) E 3) A 4) B 5) B

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