2. Consider the market for cigarettes. For each of the following events, indicat

Question

2. Consider the market for cigarettes. For each of the following events, indicate whether supply or demand is impacted. State which variable in supply or demand is changing. Also, state the impact on the equilibrium price and equilibrium quantity.
a) A cure for lung cancer is found.
b) The price of vapor cigarettes increases.
c) Farm workers in the tobacco growing industry unionize which increase their wages.
d) A fertilizer that increases the yield per acre of tobacco is discovered.
e) There is a sharp increase in the price of matches, lighters, and lighter fluid.
f) More states pass laws restricting smoking in restaurants and public place.

3. Consider the market for chicken. For each of the following events, indicate whether supply or demand is impacted. State which variable in supply or demand is changing. Also, state the impact on the equilibrium price and equilibrium quantity.
a) A drought in the Midwest causes a shortage of corn, thus the price of corn increases significantly (assume chicken eat corn feed).
b) Genetic engineering allows for chickens to mature twice as fast as before.
c) The price of beef falls sharply.
d) A global recession begins (rising unemployment).
e) A new advertising campaign begins featuring cartoon cows trying to convince everyone to eat chicken rather than beef.

4. When the economy is at full employment, is the unemployment rate at zero percent? Why or why not? How would a more generous unemployment insurance system affect the full employment figure?

5.. A firm has won the bid to complete a renovation of a hotel and you are to manage the labor to complete the job. The firm is assigning two workers named Ben and Jerry. The floors and walls must be redone and there are 60 hotel rooms to complete. The firm is not receiving payment by the hour but by the job. The firm's goal is to minimize time spent on this project. The table below shows the time it takes to complete a single room which has two aspects of the job.
Floors     Walls
Ben     3 hours    4 hours
Jerry   2 hours    3 hours
a) Who has the absolute advantage in each task?
b) What is the opportunity cost of each task for each worker?
c) Who has the comparative advantage in each task?
d) How many hours would it take for Ben and Jerry to complete the entire hotel if each worker completed an entire room before moving on to the next?
e) How many hours would it take to complete the entire hotel if each worker specialized in a task in which they had the comparative advantage? Do not let time pass with idle workers.

Explanation / Answer

(2)

(a) A cure for lung cancer will encourage smokers to smoke more, which will favorably impact consumer tastes and preferences, increasing demand. The demand curve will shift rightward, increasing price and increasing quantity.

(b) Increase in price of vapor cigarettes, a substitute, lowers the quantity demanded of vapor cigarettes and increases the demand for cigarettes. The demand curve will shift rightward, increasing price and increasing quantity.

(c) Increase in wages will increase the production cost for cigarette producers, who will lower supply. The supply curve will shift leftward, increasing price and decreasing quantity.

(d) The new fertilizer will decrease the production cost due to increased efficiency. This will increase supply. The supply curve will shift rightward, decreasing price and increasing quantity.

(e) Increase in price of matches etc, complements to cigarettes, will decrease the demand for cigarettes. The demand curve will shift leftward, decreasing price and decreasing quantity.

(f) Restrictive usage will decrease the demand for cigarettes. The demand curve will shift leftward, decreasing price and decreasing quantity.

NOTE: As per Answering Policy, 1st question has been answered.

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