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Subject:BusinessPrice: Bought3
1. 25 points The dry weather in parts of the world and severe flooding in other parts have reduced crops of for example wheat and rice, which has pushed up the prices of these two important sources of nutrition. The increased price of wheat will filter through to consumers in form of both increased prices of wheat flour and higher prices of wheat bread. How much the prices increase depends on the slope of the demand curves and by how much the supply curves shift due to the price increase of wheat. Consider the following demand function for bread: QP = 100 – 3.p+0.0001 · Y. = — QD is kilos per year for an average person, p is the price per kilo and Y is the average income. The supply function of bread is given by, QS = 9+2·p – 3 • Pf = 0.10 · W, where Pf is the price of wheat flour per kilo and w is the hourly wage rate. = (a) Assume that Y 300000kr, Pf = 3kr, and w = 500kr. Find the di- rect demand and supply curves as functions of p (the price of wheat flour) only, derive the inverse demand curves and solve for the equi- librium quantity and price of wheat bread. (b) Now let the price of wheat flour be undetermined, but assume that Y = 300000kr and w = 500kr as before. Find and equation which expresses the equilibrium price of bread as a function of the price of flour. If the price of wheat flour increases by 50%, by how much does the price of bread (per kilo) increases? In kronor and in percent? (c) Assume that wages and income both increases by 5%, and that the price of flour is unchanged at pf = 3kr/kilo, what will the quantity consumed and equilibrium price of wheat bread be? (d) Discuss whether wheat bread is a normal or inferior good? =
