Supply and Demand

1. When income increases, the demanded quantity of an ordinary good decreases. 2. If the price of an inferior good increases, then the demand decreases. 3. Two goods are substitutes for each other if the demand for each good decreases when the price of the other good increases. 4. The demand for a good increases as its price increases. Hence, it is a Giffen good. Figure 4.1 shows the relevant market for the car firm CarMaker. For the following questions, please take the demand x 1, the supply y 1 and the equilibrium in point a as reference point. 1. A rival firm, which produces a substitute for the cars by CarMaker, lowers the price of its cars. The new equilibrium is at a point such as i. 2. Due to a process of innovation, CarMaker can reduce the marginal costs. The new equilibrium is at a point such as h. 3. The government increases the motorway toll. The new equilibrium is at a point such as d. 4. The government reduces the mineral oil tax. The new equilibrium is at a point such as f. Assume that the market for corn is perfectly competitive. Supply is increasing and demand is decreasing in price. 1. A large amount of the crop is destroyed by storms. The equilibrium price thus increases, ceteris paribus. 2. All harvesters’ wages decrease. The market supply function shifts, ceteris paribus, to the left. 3. A new technology allows the production of gasoline from corn. The equilibrium demand for corn decreases and the equilibrium quantity increases, ceteris paribus. 4. The income of the consumers of corn increases. The equilibrium price for corn thus increases, ceteris paribus.