QUESTION
A)
Variables typically included in a multivariate demand function (other than the price and quantity of the item the demand function represents) are consumer tastes and preferences, the number of buyers, spendable (disposable) income, prices of substitute goods, prices of complementary goods, advertising expenditures, weather, and expectations. Recalling that the price of the item being considered is placed on the vertical axis, and the quantity on the horizontal axis, the other variables are termed demand shifters. Please answer the following questions about the affect changes in other variables might have on the demand for the item. These changes will either cause demand to increase (shift right) or decrease (shift left). Use either word as applicable, for the short answer.
- If the future prices of the good being considered are expected to decrease, then present demand for the good being considered will likely:
- . If the demand for a good decreases then the demand for a complementary good will likely ___________ .
- The Atkins diet (promoting the virtues of a low carbohydrate food intake) became very popular in the U.S.A. This worried the pasta industry because it thought that pasta (a high-carb food) demand would likely:
- Lattes are expensive coffee drinks. If people’s spendable income increases (perhaps wages have increased due to tight labor markets), the demand for Lattes, a normal good, is likely to _______________.
- CNN Today (8-16-04) noted that orange juice is a high-carb drink. The diet rage at the time was the Atkins (low-carb) diet. Therefore, the demand for conventional orange juice concentrate was likely to decrease relative to its supply. Thus orange growers were likely to see the price of their oranges used for making orange concentrate _________________ .
B)
Variables typically included in a multivariate supply function (other than the price and quantity of the item the supply function represents) are prices of other goods that use similar input resources for production, expectations, the number of suppliers, techniques of production, taxes and subsidies, prices of input resources, and weather. Please answer the following questions about the affect changes in other variables might have on the supply of the item. These changes will either cause supply to increase (shift right) or decrease (shift left). Use either word as applicable, for the short answer.
-
The affect on the supply of Ethanol of a government subsidy to its growers is to:
-
If there is a decrease in the number of producers of the item being considered, then the supply of it is likely to:
-
Politicians voted to end the crop subsidy for growing broccoli. Thus domestic broccoli growers are likely to ______________ their supply of broccoli.
-
There has been a sharp increase in the demand for a product, whose production uses an input resource critical to the production of a product you produce. You thus expect that the price of this critical resource will increase. Because the competition for your product is intense, you will not be able to raise its price to offset increasing production costs. You also cannot request a larger budget to offset the increasing production costs. Therefore, you expect that you will need to _________________ the production (supply) of it.
-
CNN Today (8-16-04) mentioned that hurricane Charlie destroyed a large proportion of the just ripening Florida orange crop. You therefore expect the supply of newly ripened oranges will ________________ .
C)
To receive full credit, you must show the (a) correct graphical analysis on the axes provided, and (b) then restate how you perceive the market equilibrium price and quantity will be affected, as indicated in your graphics.
SITUATION
In an effort to raise revenue without hurting lower income persons, Congress imposed an excise tax on luxury goods (viz., expensive cars, large yachts, furs, personal aircraft) manufactured in the U.S. The excise tax imposed is represented on the diagram below as Stax . The revenue government anticipated it yielding is represented by the rectangle P1abc (which is the tax per unit, distance ab, times quantity Q1). The tax, however, did not work as intended. After awhile domestic producers of taxed luxury goods found business tough going and some went out of business. The tax yield actually received by government was much smaller than anticipated. Starting with the diagram below, add to it a consumer demand response that results in a smaller tax yield than the P1abc anticipated. Using your augmented graphical analysis, explain in (b) what you think consumers did in response to the imposition of the luxury tax. What revenue rectangle represents the tax yield after the consumer response?
a) GRAPHICAL ANALYSIS
b) WRITTEN
ANSWER
Answer-(A)
1)
Decrease
As the prices will decrease later the consumers will hold on the purchase of the goods for the current time and wait for the prices to decrease. This will lead to a decrease in the present demand of the goods.
2)
Decrease
Complementary goods experience joint demand and thus the decrease in the demand of one good will lead to a decrease in the demand of the complementary good as well.
3)
Decrease
Pasta will be a high carb food which is supplementary to the low carbohydrate foods. Thus an increase in the demand of low carbohydrate foods will decrease the demand of pasta.
4)
Increase
Increase in the disposable income will let people spend more on the normal goods. This will specially have an increase effect on the goods which are expensive.
5)
Decrease
A decrease in the demand will shift the new equilibrium below the current equilibrium point in the curve. Thus the price of the oranges will decrease as the oranges will have less use than before and less demand as well.
Answer B
1)
Increase
Increased subsidy will allow the growers to produce more at the same cost and thus the supply will increase.
2)
Decrease
As the number of producers decrease the remaining people will not be able to meet the demand of the market and the immediate supply of the good will decrease.
3)
Decrease
Without the subsidy broccoli will not be as effective an item to produce as the effective profits from broccoli will decrease. Thus, the supply will decrease.
4)
Decrease
It will not be possible to sustain the similar amount of production as before at the same amount of budget available. Thus, the production and hence the supply will have to be decreased.
5)
Decrease
The net production of orange will decrease due to the destroyed crops. Hence, the supply of oranges is going to eventually decrease in the market due to lower net production.
Answer C
b) Written
The new price in the market will be represented by point d which is lower than the actual increase in the tax rates which actually assumed that the selling price of the luxury goods will remain the same after the imposition of the tax compared to what they were before the imposition of the tax. As the market prices increase the demand of the goods itself will decrease which will lead to a new demand function which is represented by the demand curve D1 in the graph. This new demand function has forced the suppliers/producers to reduce the price of the goods they produce as the original prices cannot be sustained by the demand function.
There will be an increase in the price of the luxury goods due to an added tax but the increased price will not be the same as the increase in tax. Due to the new demand function the market shows the companies producing the goods will have to bear a portion of the increased costs by themselves as well. Thus, the price increase will be lower than the complete increase in the costs due to the new tax.
Similarly, the government will also not get the complete tax yield and the actual tax yield will be much lower that the originally anticipated tax yield. The actual tax yield will be equal to bcde which accounts for the increased costs of the company and thus, decreased profits. This also accounts for the decrease in the demand of the goods due to an increase in the cost price of the goods to the consumers while purchasing the luxury goods.
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