BUSI1083_Assignment_2_ANSWER_

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WWW.YORKVILLEU.CA BUSI 1083 MICROECONOMICS 1 BUSI 1083: MICROECONOMICS ASSESSMENTS ASSIGNMENT #2 ANSWERS • Due no later than 11:00 p.m. on Sunday of Unit 4 • Weight 5% of the final grade Description Students are to complete assignments in Word (or some other compatible word processor; no PDF or Excel file) and apply economic concepts learned in this course to the answers submitted for evaluation. Do not submit more than ONE document for your assignment. Snapshots of graphs drawn on pages are not accepted. You may use software to construct graphs or do a Google search for a supply or demand graph already created that matches what you are looking to depict. Show all calculations for numeric questions. 1. Assume Diagram 1 below represents a market for tomatoes. Answer the questions below based on the graph. (30 points) Diagram 1 a. What market change does the graph depict? (5pt) This graph depicts a shift in the supply curve shown to the right due to the equilibrium that has moved downward.

WWW.YORKVILLEU.CA BUSI 1083 MICROECONOMICS 2 b. Suggest two possible reasons for the main change shown in the graph. (5pt) Two possible reasons for the main change could be the improvement of technology that pushes the supply curve to the right, and the entry of new firms which increases supply and shifts the supply to the right. c. How does the change you identified in a) above affect the equilibrium market price? (5pt) This change affects the equilibrium market price decreasing from $2.15 to $1.50. d. Based on the movement depicted in the graph, calculate the basic (not midpoint) elasticity of demand value. (5pt) Elasticity = (q2 – q1 ÷ q1)(p2 - p1 ÷ p1) = (400-300 ÷ 300) (1.5 – 2.5 ÷ 2.5) = -0.8 The negative sign shows that the price and demand value have an inverse relation. The demand value is inelastic because it is less than 1. e. If a price floor was set at $3.00 per pound at the initial market equilibrium, how would this affect the market? (5pt) If the price floor is set at $3,00, there would be a surplus due to at $3.00, there would be more supply than demand. The surplus would. Be equal to the area of a triangle. = (100 x 1.5) 1 ÷ 2 =300 f. After the first market change has occurred, what happens if there is an overwhelming increase in the demand for tomatoes because of media news claiming that consuming tomatoes is very effective in combating prostate cancer? (5pt) Given the increase in demand for tomatoes, the demand curve will shift rightward. The equilibrium price would increase and start from the initial point where quantity would increase more than previous.

WWW.YORKVILLEU.CA BUSI 1083 MICROECONOMICS 3 2. In recent years consumers trying to save money on their high cable bill have been “cutting the cord” and switching to online content streaming for their television entertainment. (30 points) a. Draw a graph to illustrate consumers leaving cable-based television due to the high prices. Explain what is happening on the graph by referring to specific points on it. (10pt) The number of potential buyers will decrease which will shift the demand curve to the left from D1 to D2. The price will go down from P1 to P2. The quantity will decrease from Q1 to Q2. b. Draw a corresponding graph to illustrate the consumers who have left cable and switched over to online streaming services. Explain what is happening on the graph by referring to specific points on it. (10pt) The entrance of buyers in online streaming will shift the demand curve to the right from D1 to D2. The price increases from P2 to P2. The quantity increases from Q1 to Q2.

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WWW.YORKVILLEU.CA BUSI 1083 MICROECONOMICS 4 c. Draw a third graph to illustrate the effects of many new firms entering the online streaming market. Explain what is happening on the graph by referring to specific points on it. (10pt) As new firms are entered, the supply will increase. The supply curve will shift to the right from S1 to S2. Price will also decrease to P1. The quantity will increase from Q1 to Q2. 3. The owner of Grand Central Bookstore is looking into the sales of its Health & Fitness magazine section. She finds that her equilibrium is at 800 magazines per month sold at an average price of $4.75 per magazine. When the price of these Health & Fitness magazines rose to $5.00 each, the quantity sold fell to 725 magazines per month, while the quantity supplied to her increased to 900 a month. From the scenario described, answer the questions below. (40 points) a. Draw an appropriate graph for Grand Central’s Bookstore’s to illustrate this change in the Health & Fitness magazines market position when the price rises to $5.00. (10pts)

WWW.YORKVILLEU.CA BUSI 1083 MICROECONOMICS 5 b. Using the midpoint method, calculate the price elasticity of demand for the Health & Fitness magazines between prices $4.75 and $5.00. Is it elastic or inelastic? How do you know? (10pts) Price elasticity of demand= (q2 – q1 ÷ q1)(p2 – p1 ÷ p1) = (725 – 800 ÷ 800) (5 - 4.75 ÷ 4.75) = -0.09 ÷ 0.05 = -1.8 Price elasticity of demand is inelastic because it is less than 1 c. Using the midpoint method, calculate the price elasticity of supply for the Health & Fitness magazines between prices $4.75 and $5.00. Is it elastic or inelastic? How do you know based on your answer? (10pts) Price elasticity of supply = (q2 – q1 ÷ q1)(p2 – p1 ÷ p1) =(900 – 800 ÷ 800)(5-4.75 ÷ 4.75) = 0.125 ÷ 0.05 = 2.5 Price elasticity of supply is elastic because it is greater than 1. d. The owner also noticed that when she ran a 20% discount on the Health & Fitness magazines the quantity of nutritious snack bars sold at the checkout register increased by 15%. Calculate the cross elasticity of demand between the two goods. Based on your answer, are they substitutes or complements? Explain why. (10pts) Cross price elasticity = the percent change in q1 ÷ the percentage change in p2 = -(15 ÷ 20) = -0.75 Both are complimentary goods, as the sign is negative.

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