ECON111Tutorial 3, Week 4

Question 1

• Think about the demand for the three popular game consoles: XBox, PS3, and Wii.

• What is the effect on the demand for XBox games and the quantity of XBox games demanded if, other things remaining the same.

• Use supply and demand diagrams to illustrate your answers.

What is the effect on the demand for XBox games and the quantity of XBox games demandeda. The price of an XBox falls? b. The prices of a PS3 and a Wii fall? c. The number of people writing and producing XBox

games increases? d. Consumers’ incomes increase? e. Programmers who write code for XBox games become

more costly to hire? f. The price of an XBox game is expected to fall?

Question 2

• Assuming that rice and noodles are substitutes, outline the effect of the following on the equilibrium price and quantity of rice: (i) an improvement in the technology for making noodles results in a fall in the price of noodles, AND (ii) the wage rate paid to workers involved in growing rice increases.

• Use diagrams to illustrate your answer..

• Since rice and noodles are substitutes, a fall in the price of noodles increases the quantity demanded of noodles and decreases the demand for rice.

• The demand curve for rice shifts leftward.

• By itself, the price of rice would fall and the quantity bought would decrease.

(i)

• The rise in the wage rate paid to rice workers raises the cost of producing rice.

• The supply of rice decreases.

• By itself, the price of rice would rise and the quantity bought would decrease.

(ii)

• Together, the fall in the price of noodles and the rise in the wage rate paid to rice workers decrease the equilibrium quantity of rice.

• But the equilibrium price might – rise, – fall or – not change

• depending on the relative magnitudes of the shifts in the demand and supply curves.

• Summary• In the rice market:• P of Noodles decreases Demand for rice decreases

Demand for rice shifts leftward• Wage of rice workers increase Supply of rice decreases

Supply of rice shifts leftward• The equilibrium quantity of rice decreases• But, the equilibrium price might rise, fall, or not change• If …. then …..

Question 3

• The figure below illustrates the market for pizza.

a. Which curve shows the willingness to pay for a pizza? b. If the price of a pizza is $16, is there a shortage or a surplus and does the price rise or fall? c. Sellers want to receive the highest possible price, so why would they be willing to accept less than $16 a pizza?

d. If the price of a pizza is $12, is there a shortage or a surplus and does the price rise or fall? e. Buyers want to pay the lowest possible price, so why would they be willing to pay more than $12 for a pizza?

• The figure below illustrates the market for pizza.

• The demand and supply equations for this pizza market are as follows

• Use these equations to find the equilibrium price and quantity.

• Find equilibrium quantity by using either demand or supply equation since in equilibrium demand = supply.