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EMBA62

1. In 2004, Bob's Burgers charged $3.50 for a quarter-pound hamburger with all the fixin's,
and sold 7,500 of them. In 2005, although Bob raised the price to $3.75, sales of his
burgers rose to 8,200. Use the concepts of a shift in the demand curve versus a
movement along the demand curve to explain why this increase in sales does not
represent a violation of the law of demand.
- It does not violate the law of demand because there are many possibilities that
could happen in one year. The consumer income may have risen, Consumer
taste for hamburgers may have increased, Bob’s burger competitor may have
risen their price, and many more. All the conditions combined can make the
situation occur.

2. In 2004, the price of soybeans was $3.50 a bushel, and the Jones family farm planted
7,500 acres of them. In 2005, although the price of soybeans fell to $3.25 a bushel, the
Jones family farm planted 8,200 acres of them. Use the concepts of a shift in the supply
curve versus a movement along the supply curve to explain why this increase in
soybean acreage does not represent a violation of the law of supply.
- It does not violate the law of supply because there are many possibilities that
could happen in one year. The cost of fertilizer or other inputs may have fallen.
There may have been a significant increase in pesticide technology. Farmers
may expect that foreign demand will pick up and soybean prices will rise in the
future. The government may have begun a program to subsidize soybean
production. All the conditions combined can make the situation occur.
3. Stuffed-Crust Pizza is a new pizza introduced by Pizza Hut. What happens to the
equilibrium price and equilibrium quantity of Stuff-Crust Pizza in each of the following
situations?
a. Due to weather conditions, the output of wheat decreased and the price of wheat
flour increased.
b. The price of beer decreased
c. Dominos Pizza introduced a similar pizza that sold for $1 less than the one sold
by Pizza Hut.
d. A recession reduced households’ income.
e. A new oven technology reduced the time it takes to bake a pizza.

- A reduction in the supply of wheat raises its price. Since the cost of producing a
unit of pizza rises, the supply curve for pizza shifts to the left, the equilibrium
price rises, and the equilibrium quantity decreases.

- For many people, beer and pizza are complementary goods. A decrease in the
price of beer increases the quantity of beer demanded, and shifts the demand
curve for pizza to the right. As a result, the equilibrium price of pizza rises, as
does the equilibrium quantity.
- If households think of the two brands of pizza as substitutes, the quantity
demanded for Domino's pizza rises and this decreases the demand for Pizza
Hut's pizza, which lowers its equilibrium price and equilibrium quantity.

- If Stuffed-Crust Pizza is a normal good, a reduction in consumers' income lowers


the demand, which decreases both the equilibrium price and the equilibrium
quantity of pizza. (The exact opposite would happen if Stuffed-Crust Pizza were
an inferior good.)

- The new technology lowers the cost of producing a unit of pizza. The supply
curve shifts to the right, the equilibrium quantity rises, and the equilibrium price
decreases.
4. John and Steve are roommates at Siberian University. They are planning to have a party
this coming weekend and need to go shopping for munchies. They know all of their
friends like nacho cheese flavored tortilla chips, so that is the only type of munchie they
plan to buy. After pooling their cash, they take $18 and head out to the nearest grocery
store. Walking down the chip aisle, they fill their cart with 6 bags of Tostada brand chips
at $3 per 14-ounce bag. Continuing down the chip aisle, they see Durango brand chips
are available at $2 per 14-ounce bag, so they put all of the Tostada chips back and
instead purchase 9 bags of Durango chips. Is John and Steve’s behavior consistent with
“the law of demand?” Explain. (Extra Credit: If they hadn’t changed their minds, would
they have violated the law of demand?)
- John and Steve increased the number of bags of chips purchased from 6 to 9
(supply increase) as the price went down from $3 per bag to $2 per bag (price
decrease).
- If they hadn't changed their minds they would not have necessarily violated the
law of demand if they do not believe Durango chips are as good as Tostada
chips. (It's about consumer taste)

5. Sandy is an excellent student at Hildegard College. To earn money to pay her tuition,
Sandy sells “Lecture Summaries” from her class notes. She charges $5 for one week of
lecture summaries, and $15 for four weeks of lecture summaries. Is Sandy’s behavior
consistent with “the law of supply?” Explain
- Yes, Sandy is consistent with the law of supply because prices will move up with
rising rises.According to the law of demand, if the price goes down it will give
consumers the ability to buymore. The difference is the price in four weeks,
because Sandy must set a price of $ 20 but only set at$ 15, that is because
Sandy gives discounts for taking products with a four week package to get more
attention from consumers.