Question 2 (2.5 points)
During Valentine’s week, more people buy chocolates and chocolatiers offer their chocolates in special red boxes, which cost more to produce than the everyday box.
a. (1.5 points) Set out the three-step process of analysis and show on a graph the adjustment process to the new equilibrium.
b. (1 point) Describe the changes in the equilibrium price and the equilibrium quantity.
Question 3 (3 points)
Drought cuts the quantity of wheat grown by 2 percent.
a. (1 point) If the price elasticity of demand for wheat is 0.5, by how much will the price of wheat rise?
b. (1 point) If pasta makers estimate that this change in the price of wheat will increase the price of pasta by 25 percent and decrease the quantity demanded of pasta by 8 percent, what is the pasta makers’ estimate of the price elasticity of demand for pasta?
c. (1 point) If pasta sauce makers estimate that, with the change in the price of pasta, the quantity of pasta sauce demanded will decrease by 5 percent, what is the pasta sauce makers’ estimate of the cross elasticity of demand for pasta sauce with respect to the price of pasta?
Question 4 (2.5 points)
The world’s largest tulip and flower market. Every day over 19 million tulips and flowers are auctioned at the Dutch market called “The Bloemenveiling.” These Dutch auctions match buyers and sellers. In a Dutch auction, the auctioneer announces the highest price. If no one offers to buy the flowers, the auctioneer lowers the price until a buyer is found.
a. (0.5 point) What method is used to allocate flowers at the Bloemenveiling?
b. (1 point) How does a Dutch flower auction influence consumer surplus and producer surplus?
c. (1 point) Are the flower auctions at the Bloemenveiling efficient?