HW1
Professor Enz

1. Illustrate and explain what would happen to equilibrium price and quantity in a competitive market for Peanut Butter if the price of Fluff increases.

At P0, Qd > Qs, which indicates a shortage. There is an upward pressure on price until Qd = Qs. As the price increases, the quantity supplied increases and the quantity demanded decreases until the two are equal.

2. Explain (in terms of responsiveness) what it means if the price elasticity of demand (absolute value) is greater than 0 but less than 1. List and explain the factors that impact the price elasticity of demand. Explain what impacts which party (producers or consumers) will pay the majority of a tax and whether it depends on which party the tax is collected from.

In terms of responsiveness when the price elasticity of demand (absolute value) is greater than 0 but less than 1, it means that consumers are relatively unresponsive to the change in price. If, 0<Ed <1 = inelastic, indicates that the % change in Qd < % change in P. Meaning that consumers are relatively unresponsive to the change in Price.
Factors that Impact Ed
Necessity vs. Luxury: a necessity good is when consumers need a certain good whereas a luxury good is a good that consumers do not need but can afford for purchase. This impacts both producers and consumers because consumers buy the goods from the producers. Which is why both parties are involved. Luxury goods will have more of a tax just because the good is not needed and is bought less than necessities.
1) Availability of substitutes: Producers are required to be taxed more. When consumers can easily switch their products to another, they will be more relatively responsive in change of price to a specific good.
2) Time: Over time both producers and consumers will have changes in tax throughout the economy.
3) Definition of Market: This represents both parties because in a market there is need for a balance between both consumers and producers and depending on what good is produced and bought will determine the tax on that specific good.
4) % of budget consumers: This is an item that represents a smaller version of your budge that one will most likely to overlook.

3. Explain the assumptions that we make in order to draw a “typical” indifference curve.
Assumptions about consumer preferences
Completeness & Rankability – Allows you to say three options: as, I prefer A to B, meaning A gives you more happiness. I prefer B to A, meaning B gives you more happiness or I am indifferent, meaning I have the same level of happiness.
More is better than less. (Non-situational) – The more you consumer more of a good the better off you will be.
Transitivity –