Instructions: Use a demand and supply analysis to answer each of the following questions. For questions 1A, 1B, 1C, and 1D, and question 2 you need to draw a supply and demand graph to illustrate what is happening in the market. If there are changes in equilibrium, make sure to clearly show any changes in equilibrium ( equilibrium price and quantity). Use the powerpoint presentation Demand and Supply Shifts in Module 4: Supply and Demand (chapter 3) as a guide to illustrate changes in equilibrium points. You can upload your answers.
Make sure to use the elasticity information provided where it is relevant to answer the questions. Elasticities are covered in Module 6.
A few years ago the Northeast not only had to bear the brunt of a colder than average winter but also a severe recession and, therefore, declining consumer income. North-easterners, therefore, had to make some hard choices that winter. Furthermore, the price of heating oil can be volatile because the price of crude oil needed to make heating oil is volatile and because of the unpredictability of the harshness of the winter season.
Assume:
The price elasticity of demand for heating oil is 0.8
The income elasticity of demand for heating oil is positive 2.1.
The cross price elasticity of demand between wool sweaters and heating oil is positive 2.4.
The income elasticity of demand for portable electric heaters is negative 3.3
1A) How will the increase in the price of crude oil affect price and quantity in the heating oil market?
1B) Given your answer to part A), what should have happened to price and quantity in the market for wool sweaters?
1C) How will a colder than average winter affect price and quantity in the heating oil market?
1D) How should declining consumer income have affected price and quantity in the market for electric portable heaters?
1E) Given your answer to part 1A what should have happened to the revenue of sellers of heating oil ? Why ? (No graph needed, just short explanation.)
Given changing weather and market conditions agricultural prices may be very volatile. Therefore, since the 1930’s the federal government has attempted to stabilize agricultural prices. Congressmen from agricultural states and their lobbyists have been successful in implementing price floors. Price floors have resulted in government owned stockpiles of agricultural goods. Use demand and supply analysis to show how price floors have forced the government to buy excess agricultural goods
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