KEY Homework #3 Econ 460 section 1 Fall 1996

re: "Fast Food Sandwiches Boost Bacon" from the August 22 Des Moines Register.

1-2-3. The article explains that consumers are demonstrating an increased preference for bacon by buying more bacon-lettuce-tomato (BLT) sandwiches at fast-food restaurants around DesMoines. This INCREASED DEMAND is illustrated by a rightward SHIFT in the demand curve for bacon. The equilibrium price for bacon should RISE. In the short run (NO SUPPLY SHIFT), the quantity of bacon supplied increases.

4. The demand for bacon is a derived demand related to the demand for BLT sandwiches (you should be able to graph how a price increase for BLT sandwiches shifts the (derived) demand for bacon). The demand for pork bellies is also derived from the demand for bacon/demand for BLT's. The demand for feed is derived from the demand for pork bellies/bacon/BLT's. All four industries are linked to consumers' final demand for BLT's: fast-food shops, bacon processors, hog producers, and feed crop growers. When final demand for BLTs shifts (increase), the higher prices shift (increase) the derived-demands for these inputs.

5. BLT complements in demand include: bacon, lettuce, tomato, mayonnaise, bread...

6. Substitutes in supply for bacon, to pork belly processors, are sausages and ground pork products. Swine producers may (in the long run) substitute raising poultry or cattle instead of hogs.

7. Pork bellies are "used just for bacon these days" because bacon pays more per pound of pork belly than sausage or ground pork products do. The pork processors are maximizing their revenues (isorevenue curve), given the technologies of processing bacon or other products (PPF). (You should be able to graph this.)

8. Drake Diner is paying "$9.00 more for 30 pounds" or, 30 cents per pound MORE than they used to pay. Pork belly futures are at about a hundred dollars per hundredweight, or about $1.00/lb. A price ceiling of 10$/pound is probably FAR HIGHER than the price Drake Diner is paying. In an illustration, market demand and supply cross at a price indicated to be much lower than $10. The price ceiling is illustrated as a horizontal line at P=$10. Under current market conditions, this policy has NO IMPACT on the market. The price ceiling is NON-BINDING. If demand shifts, however, so much that the market-clearing price would be above $10.00/lb; there would be a SHORTAGE of bacon at that price. The ceiling would prevent the price from rising to signal increases in supplies demanded by consumers. So, there would be less supplied than demanded at that price.