This is the solution guide compiled by your instructors of Econ 1101 This is a guide for form A If you had form B you can still figure from this guide what the answers to your questions are If you have any questions please contact your TAs or instructors 2 P The amount of corn that a given acre of farmland can produce depends on the amount of rainfall so we can think of a draught as a decrease in corn farmers productivity This falls into the technology category of supply shifters we talked about during week 2 The supply curve shifts to the left from S1 to S2 while the demand curve remains fixed and we can see from the graph below that the equilibrium quantity falls while the equilibrium price rises The answer is B S2 S1 D Q 3 Ethanol powered cars and ethanol fuel are complements Since ethanol is made out of corn this means that ethanol powered cars and corn are complements A decrease in the price of a complementary good shifts demand for the original good outward so a decrease in the price of ethanol powered cars causes the demand curve for corn to shift out from D1 to D2 while the supply curve remains fixed We can see from the graph below that the equilibrium price and quantity both rise The answer is A P S D 4 1 D2 Q Sugar is a substitute for corn syrup since they re both sweeteners Since corn syrup is obviously made of corn sugar is also a substitute for corn An increase in the price of a substitute causes demand for the original good to shift outward so an increase in the price of sugar causes the demand curve for corn to shift outward from D1 to D2 while supply remains fixed The graph for question 3 applies to this question as well The answer is A 5 The development of an insect resistant strain of corn will increase the amount of corn that a given acre of farmland can produce since less of the corn that is planted gets destroyed by bugs We can think of this as an improvement in corn farmers technology which causes the supply curve to shift outward from S1 to S2 while demand remains fixed basically the opposite of question 2 From the graph below we can see that the equilibrium price falls while the equilibrium quantity rises The answer is C P S1 S2 D 6 Q This question combines the scenarios in questions 4 and 5 so we know that both the demand and supply curves shift outward In both questions 4 and 5 the equilibrium quantity rose so we know that regardless of which curve shifts more the equilibrium quantity will rise However in question 4 just demand shifts the equilibrium price rose while in question 4 just supply shifts the equilibrium price fell This means that we can t determine which direction the price will move when we combine the two scenarios To see this consider the two graphs below In the first graph the demand curve shift is small relative to the supply curve shift and we can see that the equilibrium price falls In the second graph the demand curve shift is large relative to the supply curve shift and the equilibrium price rises So we can see that the direction of the equilibrium price movement depends on which effect dominates The answer is A P S1 S2 D D2 Q 1 P S1 S2 D2 D1 Q 7 The first thing we want to do as the ISO is to arrange the bids from the buyer from the highest to lowest and the bids from the sellers from the lowest to the highest We want to do this because we want the most efficient sellers to sell first and the consumers who want the good the most to consume first We get the following table Buyers Bid Sellers Offer to buy in Bid Offer to sell in Charles 14 Allie 3 Dane 12 David 4 Bill 8 Earl 4 Elizabeth 5 Cindy 5 Aretha 3 Brett 14 We see then that the price that clears the market or the price that causes the demand and supply to be equal is 5 This is because at 5 Charles Dane Bill and Elizabeth are willing to purchase one unit of electricity so the demand is 4 and at 5 Allie David Earl and Cindy are willing to sell one unit of electricity so the supply is also 4 The answer is C 8 Here we just need to look at each answer and see whether or not the people are buying or selling in the market clearing allocation of 4 units at a price of 5 Going down the list we see that Aretha does not consume so A is not correct Charles does buy but Brett does not sell So B is incorrect as well Looking at C Bill does buy and David does sell So the answer is C 9 First realize that a change in consumer income is a demand shifter Which way it shifts depends on the type of good that we are looking at We are not given whether a widget is a normal good or inferior good so we don t know right away But we are then given that the price of widgets increase while quantity of widgets remains unchanged This tells us that the demand shift is a rightward shift and that widgets are indeed a normal good How do we know that Well if demand shifts to the left instead i e widgets being an inferior good it must be true that price goes down unless the supply curve is perfectly elastic but in this case we are given that price goes up so we know supply cannot be perfectly elastic This also tells us that the supply curve is perfectly inelastic because that s the only way that quantity won t change See the diagram on the next page So the answer is E S P1 P D1 D Q Q1 10 The first thing would be to draw the market that we have in the question We want to draw demand normally like how we do since it is unit elastic and then we want to draw supply as a horizontal line since it is perfectly elastic With cases like this it always helps to just draw a normal supply and demand diagram and see how the tax wedge is drawn If you do that you will realize that we want to draw a wedge from the demand curve DOWN to the supply curve So let s see how we can do that here PD P Ps S D Qtax Q So we see that in this industry a tax will only cause the price that consumers have to pay to go up which makes sense since supply is perfectly elastic which means that it is completely sensitive to price changes If the price increases by even just a bit they will not produce So the consumers bear the entire burden of tax …