Problem 1. Caviar and champagne are complements. Recently pollution has been a problem in the Volga River, where much of the world’s caviar originates. The sturgeon that live in these waters are laying fewer eggs than before. Show graphically and explain the effects on the market for caviar and the market for champagne.
Problem 2. Apple and oranges are substitutes. A freeze in Florida destroys most of the orange crop. What would you expect to happen to the market for the following:
• Oranges?
• Apples?
• Orange Juice?
Problem 3. The federal government recently decided to raise the excise tax on hard liquor.
a. Graphically illustrate the effects of this tax on the market for hard liquor.
b. Would a $1 increase in the excise tax on liquor increase the equilibrium price of the liquor by $1? Explain.
c. How would the excise tax on hard liquor affect a beer distributor?
Problem 4. You are the manager of Fast & Easy Donuts. Almost all of your donuts sales are derived from the drive-through window. You know from experience that coffee is a complement of your donuts. The morning newspaper says that a major storm has just destroyed 50% of this year’s coffee bean crop. Will this affect how much flour you order? Will it affect how many employees you schedule? What will happen to prices?
Problem 5: You are the manager of a firm that plans to expand the human resource base of its operation by hiring additional business school graduate over the new few years. You recently read an article in The Wall Street Journal that reports that enrollments in business school have declined as students are moving into the “hard sciences.” That same article reports that the shakeup of upper-management is over at U.S. firms, and that over the next decade there will be a nationwide surge in the demand for MBA’s. How will these events affect your firm’s ability to expand its own base of MBA’s?