Problem Set 2 Demand and Supply Name According to Wikipedia, a limberjack is an

Question

Problem Set 2 Demand and Supply Name According to Wikipedia, a limberjack is an Appalachian "wooden musical instrument which consists of a doll with loose joints on the end of a long stick." This is a locally-produced subsutute for expensive "store-bought" toys and is favored by poorer families-it is an inferior good. Ofhen the limberjack is painted or clothed. Traditionally, the wood used is pine. The determinants of demand are tastes, income, wealth, prices of related goods, consumer expectations about supply are prices production, the number of producers, and taxes or subsidies on producers prices, income and wealth, and the number of buyers. The determinants inputs, technological or productivity change, prices of related goods in of Limberlocks (dolls dressed in kilts and orange hair) are a substitule in production for limberjacks. Determine what will happen in equilibrium quantity of li Use the following symbols: mberjacks in each of the following situations +increase; - decrease; 0- no change: 2- indeterminate Prics Quantity Following the election of President Obama, consumers of limberjacks believe that there will be an improvement in the economy Simultaneously, the government grants a subsidy to producers for each lim 1. 2. Limberjocks (which are also produced locally but which are uced only for export) become more popular with foreign consumers ult y, an advertising campaign increases the number of children interested in owning a limberjack 3. Children, a major segment of the limberjack market, switch their interest more than before to video games. Simultaneously, a government workshop safety campaign decreases the productivity limberja workers. 4. Penny whistles, a substitute musical toy, increase in supply. Simultaneously jaw harps, an instrument often used in conjunction with limberjacks, increase in supply. The development of cheap robotic saws, used in the construction of limberjacks, become widely available. Simultaneously, consumers come to believe that limberjacks will increase its price significantly in the near future. 5.

Explanation / Answer

Ans.

1. Price falls and Quantity rises (because of reduction in cost of production, supply rises and shifts rightward).

2. Indeterminate. As the demand for both LimberJock and Limberjack rises for the firm, but it can only produce one type as both are substitutes. The firm will choose to produce that good which has greater demand.

3. Price remains same but Quantity falls, because as the interest of children for Limberjack reduces, the demand for limberjack falls. Also, as the productivity of workers falls, the supply also falls. (Assuming the magnitude of decrease in demand curve and supply curve is same so that price remains same and quantity falls)

4. Price falls and Quantity remains same because as the supply of substitute good rises the price of substitute falls, the demand for LimberJack falls. On the other hand, the supply of input used in the production of limberjack rises and reduces the cost of production, so the supply of limberjack rises. (We are assuming that the demand for limberjack falls with the same magnitude as the supply for Limberjack rises, so that quantity remains same and price falls).

5. Price remains same and Quantity rises. This is because as the supply of inputs used in the production of limberjacks rises, the cost of production of limberjacks falls and the supply of limberjacks rises. On the other hand, if consumers expects a rise in the price of limberjack in future, they will purchase limberjack today and demand rises. As a result, both demand and supply rises, price remains same and quantity rises. We are assuming that both demand and supply rises with same magnitude.

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