Micro

Answer for Homework #2 of Managerial Economics

1. Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price and quantity of minivans. (A)people decide to have more children. (B)Engineers develop new automated machinery for the production of minivans. (C)The price of sports utility vehicles rises. (D)A stock-market crash lowers people's wealth and a strike by steelworkers raises steel prices. Answer: (A) Demand increases, so the price rises and the quantity rises. (B) Supply increases, so the price falls and the quantity rises. (C) Demand increases, so the price rises and the quantity rises. (D) Demand decreases and supply decreases, so the quantity certainly falls and the change in the price is ambiguous. 2.A survey shows an increase in drug use by young people. In the ensuing debate, two hypotheses are proposed: Hypothesis I: Reduced police efforts have increased the availability of drug on the street. Hypothesis II: Cutbacks in education efforts have decreased awareness of the dangers of drug addiction. (A)Use supply-and-demand diagrams to show how each of these hypotheses could lead to an increase in the quantity of drugs consumed. (B)How could information on what has happened to the price of drugs help us to distinguish between these explanations? Answer: (A) Hypothesis I: Supply increases and the supply curve shifts to the right, so the price falls and the quantity rises. Hypothesis II: Demand increases and the demand curve shifts to the right, so the price rises and the quantity rises. (B) Hypothesis I: the price falls; Hypothesis II: the price rises.

3.Explain why the following might be true: A drought around the world raises the total revenue that farmers receive from the sale of grain, but a drought only in Kansas reduces the total revenue that Kansas...