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ECON 110
Problem Set 2 Solutions

Chapter 3: Problem 4
a. The price of a recordable CD will rise, and the quantity of recordable CDs sold will increase. Recordable CDs and MP3 downloads are substitutes. If the price of an MP3 download rises, people will buy more recordable CDs and fewer MP3 downloads. The demand for recordable CDs will increase. The price of a recordable CD will rise, and more recordable CDs will be sold.




b. The price of a recordable CD will fall, and fewer recordable CDs will be sold. Recordable CDs and iPods are substitutes. If the price of an iPod falls, more iPods will be bought. The demand for recordable CDs will decrease. The price of a recordable CD will fall, and people will buy fewer recordable CDs.




c. The price of a recordable CD will rises and more recordable CDs will be sold. CD players and recordable CDs are complements. The increase in the supply of CD players will lower the price of a CD player. With CD players cheaper than they were, some people will buy CD players. The demand for recordable CDs will increase. The price of a recordable CD will rise, and people will buy more recordable CDs.




d. The price of a recordable CD will rise, and the quantity sold will increase. A recordable CD is a normal good. An increase in consumers income will increase the demand for recordable CDs. As a result, the price of a recordable CD will rise and the quantity sold will increase.




e. The price of a recordable CD will rise, and the quantity sold will decrease. If the workers who make recordable CDs get a pay raise, the cost of making a recordable CD increases and the supply of recordable CDs decreases. The price will rise, and people will buy fewer recordable CDs.




f. The price will rise but the quantity sold might decrease, increase, or stay the same. Recordable CDs and MP3 downloads are substitutes. If the price of an MP3 download rises, fewer MP3 downloads will be bought and so the demand for recordable CDs will increase. The price of a recordable CD will rise and people will buy more recordable CDs. If the wages paid to workers who make recordable CDs rise, the supply of recordable CDs decreases. The quantity of recordable CDs sold will decrease and the price of a recordable CD will rise. Taking the two events together, the price definitely rises, but the quantity sold might increase, decrease, or stay the same.




Chapter 3: Problem 8
a. The equilibrium price is 65 cents a bag, and the equilibrium quantity is 145 million bags a week. The price of a bag adjusts until the quantity demanded equals the quantity supplied. At 65 cents a bag, the quantity demanded is 145 million bags a week and the quantity supplied is 145 million bags a week.



b. At 60 cents a bag, there will be a shortage of potato chips and the price will rise. At 60 cents a bag, the quantity demanded is 150 million bags a week and the quantity supplied is 140 million bags a week.