In the short run, the quantity of output supplied by firms can deviate from the natural level of output if the actual price level deviates from the expected price level in the economy. A number of theories explain reasons why this might happen. For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppor firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 110. Faced with high menu cos the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will , and firms that rely on catalogs will- respond by the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected increase in the pri level causes the quantity of output supplied to the natural level of output in the short run.. Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation: Quantity of Output Supplied Natural Level of Output + ax (Price Level Actual-Price Level Expected) The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that a$2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natura level of output by $2 billion.

December, 2006, was a difficult month for Colorado’s beef industry.  Multiple heavy snow storms caused thousands of beef cattle to be stranded in nose-high snow drifts.  They could not get food or water for themselves.  In spite of valiant attempts by the National Guard to drop hay, many died.  Beef market prices in the spring were predicted to rise.  The series of unfortunate events continued:  after the spring thaw, Colorado cattlemen experienced a couple of cases of mad-cow disease.  Beef market prices fell (contrary to the earlier prediction).  Diagram in (a) the initial impact of the bad winter on the price and quantity.  Then, on the same grid, incorporate the impact on price and quantity of the mad-cow cases.  Be sure that your final diagram indicates a market price decrease.  Using economic terminology, write a statement in (b) explaining the results of your graphical analysis in (a).   a) GRAPHICAL ANALYSIS                   b) WRITTEN

Given a linear supply function of the form QXs = 3,000 + 3PX - 2Pr - Pw, and assuming Pr = $1,000, Pw = $100, and PX=50, the PS is:  (use commas: 30,000 instead of 30000)

Two software companies sell competing products. These products are substitutes so that the number of units that either company sells is a decreasing function of its own price and an increasing function of the other product’s price. Let P1 and X1 be the price and quantity sold of product 1, and P2 and X2 the price and quantity sold of product 2. We have that  and . Each company has incurred a fixed cost for designing their software and writing programmes, but the cost of selling to an extra user is zero. As the firms compete in prices, each company will choose a price that maximises its profits.   Explain why the price that maximises each company’s profits is the same as the price that maximises its total revenue.   Write an expression for the total revenue of each company as a function of it its price and the other company’s price.     Company’s 1 best response function BR1(P2) is the price of product 1 that maximises its profits given the price of product 2 is P2. Similarly,…