PROBLEMS & EXERCISES


SOLUTIONS & DISCUSSION

UNIT ONE (FOR EXAM 1)

Unit One: Assignment 1: Problem 4 from page 79

4. You're a commodities trader and you've just heard a report that the winter wheat harvest will be 2.09 billion bushels, a 44 percent jump, rather than an expected 35 percent jump to 1.96 billion bushels.

a. What would you expect would happen to wheat prices?

b. Demonstrate graphically the effect you suggested in a.

The commodities market is already expecting a 35% increase and the current price of wheat reflects this expectation. The new information is the jump from 35% to 44%.

  1. We expect wheat prices to drop as a result of the additional increase in supply. The extra 9% should cause prices to decline.
  2. The supply curve will shift to the right. Equilibrium price goes down as equilibrium quantity rises.
Click here for graph.

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