Victoria Berahmandpour Date: 05/03/2012Accounting GM545

Assignment Week 1Chapter 3

1. Using the figures above, answer the following questions:

a. On the Demand panel: Show an increase in demand and label it D1.

D1D0

Show a decrease in demand and label it D2.

D0

D1

Show an increase in quantity demanded.

P1

P2

Q1 Q2

Show a decrease in quantity demanded.

P1

P2 Q2 Q1

What causes demand to change?

1) Change in price of a compliment good2) Change in price for substitutes3) Change in income...for normal goods, a change will cause an increase in demand4) Change in the number of consumers5) Change in information/technology

What causes quantity demanded to change?

A movement along a given demand curve caused by a change in demand price. The only factor that can cause a change in quantity demanded is price. A related, but distinct, concept is a change in demand.

b. On the Supply panel:

Show an increase in supply and label it S1.S0

S1

Show a decrease in supply and label it S2.

S2

S0

Show an increase in quantity supplied.

Q1 Q2

Show a decrease in quantity supplied.

Q2 Q1

What causes supply to change?

1) Change in input costs (labor/natural resources/etc.)2) Change in technology3) Change in number of supplies

What causes quantity supplied to change?

A change in price cause quantity supplied to change.

11. In December of 2005, the Wall Street Journal reported that Clark Foam, a major supplier of polyurethane cores (blanks) for hand-shaped surfboards, closed its plant and went out of business (Peter Sanders and Stephanie Kang, “Wipeout for Key Player in Surfboard Industry,” The Wall Street Journal, December 8, 2005, p. B1). Clark Foam was the Microsoft of surfboard blank makers, and had been supplying foam blanks to surf shops for over 50 years. Polyurethane blanks, while light and sturdy, contain a toxic chemical, toluene diisocyanate (TDI). Over the last two decades the Environmental Protection Agency has increasingly been restricting the use of TDI. Clark Foam’s owner Gordon “Grubby” Clark indicated in a letter to customers that he was tired of fighting environmental regulators, lawsuits over injury to employees, and fire regulations. Surf historian and author of The Encyclopedia of Surfing, Matt Warshaw said, “It’s the equivalent of removing lumber for the housing industry.” a. If you owned a retail surfboard shop and read this article in the Wall Street

Journal, would you change the prices on the existing surfboards you have in the shop? Why or why not?

Because of all restriction and regulations, the price definitely would go up. If I was the owner of a retail surfboard shop, I would raise the price in order to survive. So, the wholesales would be rise as well and in retail price would increase in future.

b. If the demand for surfboards remains constant over the next few years, what

would you expect to see happen on the supply side in this industry?

If demand remains constant the price will rise and supply will fall.

12. Polysilicon is used to produce computer chips and solar photovoltaics. Currently more polysilicon is used to produce computer chips, but the demand for ultrapure polysilicon for solar panels is rising. According to a 2006 Business Week article (John Carey, “What’s Raining on Solar’s Parade,” Business Week, Feb- ruary 6, 2006, p. 78), this has created a shortage, and prices have more than doubled between 2004 and 2006.

a) High oil and energy prices, along with subsidies from U.S. and European governments for solar power, has increased demand, but suppliers are reluctant to build new factories or expand existing facilities, because they fear governments can easily eliminate incentives and at this point they do not know if solar energy is just a fad as one executive suggested, “governments can take away incentives as easily as they put them in place,” and asked “is the solar industry real or just a flash in the pan?” Are these legitimate concerns for business?

Every aspect that related to new technology always effects most business especially when concern on solar system. Solar industry is still in process of development and looks like it is good for business but maybe in later when the technology develop enough for to call benefit for business if we replace this technology. So, yes this legitimate concerns for business.

b) Given the uncertainty associated with building additional production capacity in the polysilicon industry, what might these manufacturers do to reduce the risk?

Several ways they can do. One is waits and sees what will happen and how the process will go, however the waiting can make them to be behind the solar technology and lose their business. The other is to find all possible risk and look at the budget if they can invest in the new technology and know how much they can save in future.

13. The table below represents the world supply and demand for natural vanilla in thousands of pounds. A large portion of natural vanilla is grown in Madagascar and comes from orchids that require a lot of time to cultivate. The sequence of events described below actually happened, but the numbers have been altered to make the calculations easier (See James Altucher, “Supply, Demand, and Edible Orchids,” Financial Times, September 20, 2005, p.12). Assume the orig- inal supply and demand curves are represented in the table below.

Price($/pound)

Quantity Demand (thousands )

Quantity Supply (thousands)

0 20 0 10 16 6 20 12 12 30 8 18 40 4 24 50 0 30

a. Graph both the supply (S0) and demand (D0) curves. What is the current equilibrium price? Label that point a.

0 5 10 15 20 25 30 350

10

20

30

40

50

60

Quantity Demand (t-housands)Quantity Supply (t-housands)

S0

D0

Equilibrium price (12 , 20)

b. Assume that Madagascar is hit by a hurricane (actually occurred in 2000), and the world’s supply of vanilla is reduced by 5/6, or 83%. Label the new supply curve (S1). What will be the new equilibrium price in the market? Label that point b.

Price ($/pound) D0 S0 S10 20 0 0

10 16 6 120 12 12 230 8 18 340 4 24 450 0 30 5

0 5 10 15 20 25 30 350

10

20

30

40

50

60

D0S0S1

S0

D0

Equilibrium price (12 , 20)

S1 (4, 40 )

c. Now assume that Coca-Cola announces plans to introduce a new “Vanilla Coke,” and this increases the demand for natural vanilla by 25%. Label the new demand curve (D1). What will be the new equilibrium price? Label this new equilibrium point c. Remember that supply of natural vanilla was reduced by the hurricane earlier.

Price ($/pound) D0 S0 S1 D10 20 0 0 25

10 16 6 1 2020 12 12 2 1530 8 18 3 1040 4 24 4 550 0 30 5 0

0 5 10 15 20 25 30 350

10

20

30

40

50

60

D0S0S1D1

S0

D0

Equilibrium price (12 , 20)

S1 (4, 40 )

D1

(5,40 )

d. Growing the orchids that produce natural vanilla requires a climate with roughly 80% humidity, and the possible grower countries generally fall within 20° north or south of the equator. A doubling of prices encouraged several other countries (e.g., Uganda and Indonesia) to begin growing orchids or up their current production. Within several years, supply was back to normal (S0), but by then, synthetic vanilla had replaced 80% of the original demand (D0). Label this new demand curve (D2). What is the new equilibrium price and output?

Price ($/pound) D0 S0 S1 D1 D20 20 0 0 25 4

10 16 6 1 20 3.220 12 12 2 15 2.430 8 18 3 10 1.640 4 24 4 5 0.850 0 30 5 0 0

0 5 10 15 20 25 30 350

10

20

30

40

50

60

D0S0S1D1D2

S0

D0

Equilibrium price (12 , 20)

S1 (4, 40 )

D1

(5,40 )

D2

Chapter 55. Betty’s Bakery estimates that they can sell 400 cookies at 60¢ a cookie and will be

able to sell 500 if the price drops to 50¢. Using the midpoint formula, what is the elasticity of demand for Betty’s cookies? Will total revenue rise or fall if the price of cookies is lowered?

The elasticity of demand for Betty’s cookies is:

[(500 – 400) / (500 + 400 ) / 2] / [(0.5 - 0.6) / (0.5 + 0.4)/2 ] = 0.222 / (-0.182)

=1.22 absolute value

Revenue for 400 cookies for 0.60 is: 0.6 * 400 = $240

Revenue for 500 cookies for 0.50 is:0.5 * 500 = $250

So, the revenue will rise if betty’s cookies increase supply.

12. In 2003, London instituted a £5 congestion charge for cars or trucks entering the central city. The levy is said to have reduced congestion by 30% and raised nearly £80 million its first year. London increased the levy to £8 a day, and London’s mayor had this to say: “Congestion charging has achieved its key objective of reducing congestion and has also provided an additional stream of revenue to help the funding of other transport measures within my transport strategy. The charge increase will maintain the benefits currently witnessed in the zone and build upon its success, cutting congestion even further and raising more revenue to be invested in London’s transport system.” Given what the mayor had to say about the increase in congestion charges and the change in revenue, what must he believe about the elasticity of demand for driving into central London?

If mayor believe in increasing the charges, the demand is inelastic. However, for long term the people can find many ways to come to the city or not coming to the city more often so, the demand at that time will be less in elastic.

15. Your boss, who is the general manager of the Pontiac Rangers, an adequate AA baseball team, has heard that you are taking a principles of economics course, and has asked you to research the demand for summer night games. She has surveyed a sample of 10 people whom she feels accurately represent the potential market. We will assume that they do as well. The results of the survey are presented below:

a. What ticket price will maximize total revenue for the team?

Maximum revenue is for team whitey which is 8 * $4 = $64

b. Using the midpoint formula, what is the price elasticity of demand between$2.50 and $2.00?

Total demand for price $2 is 60 and for price $2.50 is 55 so, the midpoint formula for these two prices is:

[(60 – 55) / (60 + 55) / 2] / [(2 – 2.50) / (2 + 2.50) / 2]= 0.87 / (-0.22) = 0.395 absolute value

c. The local bowling alley has extended league play on Wednesday night. Is the cross elasticity of demand positive or negative between night baseball and bowling? If the manager schedules night games on Wednesday will that affect attendance at the game?

Cross elasticity is measure how responsive the quantity demand of one good changes compare to other product, and because bowling and baseball is substitutes so the cross elasticity of demand for bowling alley is positive.

Yes affect attendance of the game because some people like to go to bowling game.