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Application Problem Week 2

The document contains an economics assignment analyzing changes in supply and demand for hamburgers and airline tickets. 1) A reduction in cattle feed costs shifts the supply curve right, lowering prices and raising quantities. A drought raises bun prices, shifting supply left, raising prices and lowering quantities. With hamburgers as inferior goods, a recession shifts demand right, raising both prices and quantities. 2) Despite a recession and higher fuel costs shifting supply left, airline revenues rose. Though ticket quantities fell from 70,000 to 40,000, prices doubled from $300 to $600. The higher prices outweighed the quantity decline, raising total revenue from $21 million to $24 million.

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Aram Bebekian
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326 views3 pages

Application Problem Week 2

The document contains an economics assignment analyzing changes in supply and demand for hamburgers and airline tickets. 1) A reduction in cattle feed costs shifts the supply curve right, lowering prices and raising quantities. A drought raises bun prices, shifting supply left, raising prices and lowering quantities. With hamburgers as inferior goods, a recession shifts demand right, raising both prices and quantities. 2) Despite a recession and higher fuel costs shifting supply left, airline revenues rose. Though ticket quantities fell from 70,000 to 40,000, prices doubled from $300 to $600. The higher prices outweighed the quantity decline, raising total revenue from $21 million to $24 million.

Uploaded by

Aram Bebekian
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

GB3070

NAME:_​Aram Bebekian​_
Application Problem Week # 2

1. Consider the ​market for hamburgers, a lunch favorite among aviation maintenance crews
at NAS Lemoore. Using the S and D model and the 3-step analysis​, show graphically and
briefly describe in words ​the change in the market price and ​quantity traded at
equilibrium​ in the hamburger market, given each of the following changes.
a. A new hybrid grain reduces the cost of cattle feed.

With a reduction in cost of the feed, the supply line will shift to the right. The demand has not
changed and will remain constant. Due to the shift in the supply line, the equilibrium point
will also shift to the right because we are able to sell more at a lesser amount. This causes the
Equilibrium Price to drop and the Equilibrium Quantity to rise.

b. A drought devastates the wheat crop increasing the price of hamburger buns.

The devastation will cause the supply line to shift to the left because we have less crops. The
demand line is going to remain constant because the demand for the hamburger buns has not
changed. The Equilibrium Point will shift to the left because of this change. The Equilibrium
Price will rise, whereas the Equilibrium Quantity will fall.

c. A recession reduces consumer income. Assume hamburgers are inferior goods.

1
When there is a recession, we the consumer will have less money to spend on goods causing
their demand to normally go down. In this case, because the hamburgers are an inferior
good, they are not inversely affected by the lower income, but in fact would rise. The demand
would go up and supply would stay the same. This would cause the Equilibrium Point to shift
to the right with the Equilibrium Quantity rising and also the Equilibrium Price.

2
2. Your boss asked you about an article that said airline revenues were rising despite the
recession and rising fuel costs. Your boss knows you are taking economics and asks you to
explain how this happened. You sketch a S and D diagram in which you assume that the
initial average ticket price is $300 and the number of airline seats is 70,000. You recognize
that the recession and rising fuel costs are supply/demand shifters and you sketch these in
your diagram. You assume that new ticket price is $600 and the new number of seats is
40,000. Explain (graphically and with words) how airline revenues could rise, even if prices
have increased.

[We would have reason to believe that during a recession, all else equal, people would be
less willing to spend money on travel.]

The revenues will rise because of the assumption that is made on the quantity against price. If
we look at the initial numbers, we could estimate the revenue to be roughly $21 million, and
with the assumed new numbers, the revenue would be $24 million. Although the quantity of
tickets that are sold has gone down due to the recession, the cost of each ticket has risen due
to the higher fuel costs. Although the ticket price has doubled, the quantity only fell 33%. As
shown in the graph the demand curve has an elasticity that depicts the results found.
Although the quantity goes down, the higher price causes the overall revenue to be higher.

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