1. If consumers expect the price of some good to rise next week, then we generally observe the price of the good rising this week. Explain this fact using a graph.
2. The drought in the plain states has made grain, and therefore feed, quite expensive. Many ranchers cannot afford to feed their cattle, and have sold much of their herd for slaughter. Slaughtering the cows will result in an increase in the supply of beef to the market, which will in turn lead to a decrease in the equilibrium price of beef and an increase in the equilibrium quantity of beef. See graph. Market for beef b. Chicken and beef are substitute goods. Illustrate the effect that the slaughter of the cattle herds will have on the equilibrium price and quantity of chicken. As the price of beef decreases, consumers will buy more beef and less chicken. The demand for chicken will decrease, causing a decrease in the equilibrium price and quantity of chicken. See graph. Market for chicken c. As it happens, the slaughter of beef cattle has coincided with a decrease in consumers' income. Assuming that steak is a normal good while hamburgers are an inferior good, use a supply-and-demand diagram for either market to illustrate the combined effect of the two aforementioned events on the equilibrium price and quantity of hamburgers and steak. As consumers' income decreases, the demand for normal goods (such as steak) decreases while the demand for inferior goods (such as hamburgers) increases. Keep in mind that our conclusion from part a is still valid. A lower price of beef will increase the supply of all goods in which beef is an input. Therefore in each of the two markets in question we deal with simultaneous shifts in supply and demand.
3. Assume that the markets for sugar cane, rum, and whiskey are initially in equilibrium. Assume further that Hurricane Marilyn destroys much of the Jamaican sugar cane crop. Sugar cane is a principal ingredient in rum, but it is not an ingredient in whiskey. Analyze the effect of the hurricane on the markets for each of the three goods. Explain using graphs.
Step One - The market for sugar cane The Hurricane results in a decrease in supply (at any given price, sellers are no longer able to provide as much cane as they used to). As a result, the equilibrium price of sugar cane will increase, and the equilibrium quantity will decrease. See graph. Market for sugar cane Step Two - The market for rum Step Three - The market for whiskey
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