1.

Use the following table to answer the question:

Jif Peanut Butter Skippy Peanut Butter Smucker’s Grape Jelly

Price Quantity Price Quantity Price Quantity
$1.50 75 $1.75 75 $3.25 75
$1.75 65 $1.75 100 $3.15 65
$2.00 50 $1.75 105 $3.10 55
$2.50 20 $1.75 110 $3.07 45

a. Calculate the price elasticity of demand for Jif Peanut Butter: using the first
two rows of the table, using the middle two rows of the table, using the last
two rows of the table.
b. Calculate the price elasticity of demand for Jif Peanut Butter using the first
and third row of the table. Why is your answer not equal to the average of the
first two elasticity’s from part a?
c. Calculate the price elasticity of demand for Skippy Peanut Butter using the
first two rows of the table. (Trick question alert!)
d. Calculate the price elasticity of demand for Smucker’s Grape Jelly using the
first and last row of the table.
e. Using the first two rows of the table, calculate the cross-price elasticity of
demand of Skippy for Jif.
f. Using the middle two rows, calculate the cross-price elasticity of demand of
Skippy for Jif.
g. A cross-price elasticity of demand near zero means that the items are not very
closely related. A cross-price elasticity that is high in absolute value means
the goods are closely related. Does the change in cross-price elasticity
between parts e and f make sense? Why or why not?
h. Calculate the cross-price elasticity of demand of Skippy for Smucker’s using
the first two rows in the table. What does this tell us about the relationship
between Skippy and Smucker’s?
i. Calculate the cross-price elasticity of demand of Skippy for Smucker’s using
the last two rows in the table. What does this tell us about the relationship
between Skippy and Smucker’s?

2. In response to higher oil prices, the United States rapidly increased production of
ethanol, a fuel made using corn.

a. Using a supply and demand diagram show what would happen to the price of
corn. Explain why you moved the curves that you did.
b. Given what happened in part a, show the effect on the market for corn tortillas.
Explain.
c. On February 1, 2007 75,000 Mexicans protested their government to institute
price controls (fix the price at a certain level) on corn tortillas. If the Mexican
government followed the will of this group, what would happen in the corn tortilla
market in Mexico? (Hint: The market should include the shift in your graph from
part b, but keep the original price.)
 d. Not all Mexicans are unhappy about the changes in the corn market. Which
groups of people benefit from the change? Why?

3. The internet has given college students from all over the world the ability to
communicate with each other more easily. Among other things this has allowed
students more options for disposing of textbooks they no longer desire and more
options for acquiring used textbooks.

a. Using a supply and demand diagram show the effect this would have on the
market for used textbooks. Shift only the Supply curve. Explain the reasons
why you made any changes.
b. Using a supply and demand diagram show the effect this would have on the
market for used textbooks. Shift only the Demand curve. Explain the reasons
why you made any changes.
c. Which effect do you think would have more of an impact, the effect in part a, or
the effect in part b? Carefully explain why you gave the answer you did?
d. Combine your graphs from parts a and b in order to tell a story that is consistent
with the following data: The price of new textbooks has been rising. (Hint: new
and used textbooks are substitutes.) Your answer to part d should contain graphs
of both the new and used textbook markets.

4. A frost in California has resulted in damage to Tropicana orange groves.

a. Draw a single supply and demand diagram showing the market for Tropicana
oranges before and after the frost. Underneath your diagram explain why you
made the changes that you did.
b. After the frost, Senator Snort (R- S.C.) notices that the prices of both Sunkist (a
Florida orange grower) and Tropicana oranges have risen. In televised Senate
hearings, Snort admonishes tearful witness Anita Bryant (the spokesperson for
Sunkist): “These price increases are direct evidence of corporate piracy on the
part of Sunkist, lining its pockets at the expense of the widows and orphans who
depend upon oranges for their health and well-being. This is immoral and un-
American behavior that will not stand” Use a diagram for Sunkist oranges along
with a written explanation to explain why Senator Snort is incorrect.

5. A new technological breakthrough in the manufacturing of fiberglass allows twice as

much fiberglass to be made in a day than was previously possible.
a. Use a supply and demand diagram to show what would happen to the market for
fiberglass.
b. Use a supply and demand diagram to show what would happen to the market for
skateboards (fiberglass is an input to skateboard production).
c. At the X-games, two different skateboarders fall and paralyze themselves. This
makes people think that skateboarding is much more dangerous. Show the effect
this would have of the market for skateboards.
d. What is the overall effect on the market for skateboards? Draw one graph that
combines the shifts from parts b and c.