Introductory Economics
Eco 108
HW 2

1. Suppose we can observe the market for rice in Japan. We see that the demand for rice is Q = 100-2P and the supply for rice is Q = 10P-20.

   • [a.] What is the equilibrium price and quantity of rice?
   • [b.] Suppose the supply for rice shifts to Q = 10P-44. Is this an increase or decrease in supply? What might have caused this shift (recall the four categories we discussed in class)? What is the new equilibrium price and quantity?
   • [c.] Suppose we have the supply given in part b, and demand shifts to Q = 136-2P. Is this an increase or decrease in demand? What might have caused this shift? What is the new equilibrium price and quantity?

2. Using supply and demand diagrams, explain what happens to the equilibrium price and quantity of white grapes under the following circumstances. You must justify your answer by explaining how each circumstance changes supply or demand or both.

   • [a.] The price of red grapes rises.
   • [b.] The wages paid to workers to harvest grapes rise.
   • [c.] Income falls for all consumers.
   • [d.] There is technological breakthrough in fertilizers which makes it easier to grow grapes.
   • [e.] The price of cheese rises, and the number of white grape suppliers falls.

3. Suppose Mike spends all of his income on caviar from Russia and kilts from Scotland. Suppose the price of caviar is $30/lb. and the price of a kilt is $25. The marginal utility Mike receives from caviar is 15 utils and the marginal utility that he receives from kilts is 10 utils. Is Mike maximizing his utility? If not, how should he change his purchases so that he is?

4. Suppose steaks are $5.00 per pound, hot dogs are $1.00 per pound, and Beth's daily income is $20.00.

   • [a.] Draw Beth's budget set.
   • [b.] Suppose the price of steaks falls to $2.00 per pound. Draw Beth's new budget set on the same diagram as part a.
   • [c.] Draw in some indifference curves for Beth (on the same diagram as parts a and b), and show how much steak she will choose to consume when the price of steak is $5 and how much she will consume when it is $2. (You get to choose Beth's indifference curves here.)
   • [d.] Given the information you gathered in part c, draw Beth's demand curve for steak.

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