(Solved): (a) How much is a decision at the margin. (b) People usually respond to incentives, exploiting oppo ...

(a) How much is a decision at the margin. (b) People usually respond to incentives, exploiting opportunities to make themselves better off. Q2. A study conducted by Yahoo revealed that chocolate is the most popular flavor of ice cream in the US. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream (a) A severe drought causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream. (b) A new report by the. American Medical Association reveals that chocolate has significant health benefits. (c) New technology for mixing and freezing ice cream lowers manufactures" cost of producing chocolate ice cream. Q3. Find the flaw in reasoning in the following statements, paying particular attention tofehe distinction between shifts of and movements along the supply and demand curve. Draw a diagram to illustrate what actually happens in each situation. (a) A technological innovation that lowers the cost of producing a good might seem at first to result in reduction in the price of the good to consumers. But a fall in price will increase demand for the good, and higher demand will send the price up again. It is not certain, therefore, that an innovation will really reduce price in the end. (b) A study shows that eating a clove of garlic a day can help prevent heart disease, causing many consumers to demand more garlic. This increase in demand results in a rise in the price of garlic. Consumers, see that the price of garlic has gone up, reduce their demand for garlic. This causes the demand for garlic to decrease and the price of garlic to fall. Therefore, the ultimute effect of the study on the price of garlic is uncertain.