Problem 7 Heavy rain in Midwest delayed the harvesting of wheat in June, and wheat prices rose sharply to a six-month high. Wheat futures for July...

Problem 7

Heavy rain in Midwest delayed the harvesting of wheat in June, and wheat prices rose sharply to

a six-month high. Wheat futures for July 2015 delivery rose approximately 6% to $6.1475 a

bushel, the highest settlement price since last December.

1) Explain the increase in wheat prices with demand and supply curves. How did the rain affect

the supply of wheat? Show the impact in the graph. (4 points)

2) Assuming demand curve stays fixed, how do the new equilibrium price and quantity compare

with the old equilibrium price and quantity? (2 points)

Problem 8

(Demand Elasticities):

Given the demand function for organic processed pork

Q(D)= 190 - 20P + 20Pbeef+ 2Y + 15Z

where average Pbeef

= $4.00/kg, average Y=$12.5 thousands, and Z = 1,

(a) What is the own price elasticity at the market equilibrium you have solved in Problem3 (2)?

What is the economic meaning of the value of the own price elasticity? Suppose during one

week, the grocery store sets a promotion price for pork that is slightly lower than the

equilibrium price, will the revenue from pork increase or decrease during the promotion

week? (6 points)

(b) What is the cross price elasticity between pork and beef at the average price of beef and the

equilibrium quantity solved in Problem3 (2)? What is the economic meaning of the value of

the cross price elasticity? (4 points) （Question 3 In the back, you don't have to do it. Thank you）

(c) What is the income elasticity at the average per capita income of Y=$12.5 thousands, and the

equilibrium quantity solved in Problem3 (2)? What is the economic meaning of the value of

the income elasticity? (4 points)

Problem 9

(Pricing of Luxury Goods) Bonus Question (8 points):

For years luxury goods are priced between 25% and 40% higher in China than in Europe

excluding tax. However as more Chinese customer travel overseas and have access to internet,

Chinese consumers are shifting their purchases of luxury goods from within China to overseas to

take advantage of the more affordable prices. As a result, luxury sales within China fell 11% in

2014, but similar purchases made by Chinese consumers overseas grew by 9%. You are hired as

an Economist by the world's largest luxury company, LVMH, to help determine its pricing

strategy in China to recover revenue. What would you recommend? (See Optional Reading #3 -

Luxury Pricing)

(Hint: utilize the concept of elasticity and market's geographical boundary.)

Problem 3

(Impact of Shift in Demand on Market Equilibrium):

After revisiting market trend of demand for processed pork, you have realized that consumer

taste has shifted toward organic meat, so you decide to include an attribute variable Z (Z=1 for

organic pork, Z=0 for non-organic pork), and the new estimated function is

Q（D）= 190 - 20P + 20Pbeef+ 2Y + 15Z

(1) What is the demand function for

organic pork

at average Pbeef

= $4.00/kg, average Y=$12.5 thousands, and Z = 1? Draw the demand curve and label the intercepts on both price and

quantity axis. How does the demand curve for organic pork compare with the demand curve

for non-organic pork that you have solved in Homework 1 Problem 4? Show the direction of

the movement of demand curve. (7 points)

(2) Suppose supply function for

organic

processed pork is estimated to be

Qs = 88 + 40P

Solve for the market clearing price and quantity for organic pork.

Show your calculation.

Graph the supply curve, show the value of equilibrium

price and quantity on your graph in

(1). (3) Suppose average beef price

decreases

to $3.75/kg, what is the demand function for

organic

pork

at average

P

beef

= $3.75/kg

, average Y=$12.5 thousands, and

Z = 1

? Draw the new

demand curve and label the intercepts on both price and quantity axis. How does the new

demand curve for organic pork compare with the previous one in (1)? Show the direction of

the movement of demand curve. (7 points)