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EC 201 Cal Poly Pomona Dr. Bresnock Winter, 2013 Student Name: Markets Module Assignment (50 points) Due: Feb. 13 Please limit your answers to the spaces provided. If necessary, write on the back of the page. Do not attach printout or additional pages. All questions pertain to the Markets module in SimEcon. Make sure you have read the “Markets Manual” which may be found on the ClassWeb site prior to beginning the assignment. For many of the assignment's questions, it will be necessary to refer to those instructions. For many of the assignment's questions, it will be necessary to refer to your text. Please use this website to obtain the module: http://class-ms-web.class.csupomona.edu/ or http://128.97.186.84/ To begin the exercise, launch the Markets module and note the "Initial Conditions" which are the beginning (or ceteris paribus) values for each supply and demand variable. Write these values down for future reference. Now, click "Continue". Write down the initial equilibrium values for the price, PE, and quantity, QE, of wheat. Now select "Disturb Market". (1) With respect to the wheat market, if the number of farms is increased to 1,500, explain what will happen to each of the following. (Use increase (↑), decrease (↓), of stays the same, for your answers.) (a) (b) (c) (d) (e) (f) (2) Demand? Quantity Demanded? Supply? Quantity Supplied? Equilibrium Price? Equilibrium Quantity? ________________________________. ________________________________. ________________________________. ________________________________. ________________________________. _____________________________ ___. Sketch the graph from (1) below and clearly indicate the changes that result from this market disturbance. EC 201 Markets Module Assignment Page 2 At the original equilibrium price, after the disturbance there is a temporary (shortage, surplus) of wheat. This market imbalance causes the (increase, decrease, no change) in the equilibrium price of wheat. Clearly indicate this imbalance in your graph on the previous page. (3) In this model of the wheat market, a decrease in the price of butter leads to ________ (an increase, a decrease, no change) in _____________ (demand, supply, quantity demanded, quantity supplied) for wheat. Thus, wheat is a/an ________ (complement, substitute, independent) good. (4) If the seed cost increases from 10 to 18, what is the new total revenue? $________. Compared to the initial equilibrium, the total revenue has ________ (increased, decreased, stayed the same). Show your calculations below. (5) What is the total revenue for the wheat farmers when the price of corn is $2? $________ If the price of corn rises to $15, what is the change in total revenue to the wheat farmers? $________. Show your calculations below. (6) Use the wheat market equilibria from (5) (first when the price of corn is $2, second when the price of corn is $15 to calculate the price elasticity of wheat below. (Include the completely specified formula that you used in order to receive full credit below. You must also include a complete interpretation of your price elasticity coefficient to receive full credit.) (7) If the amount of rainfall decreases from 10 to 5 inches, what is the new total revenue? $_______ _. Compared to the initial equilibrium, the total revenue has ___ _____ (increased, decreased, stayed the same). Why? (Hint: Show how elasticity ties in here? Calculate and give a complete interpretation of your price elasticity on the top of the next page.) EC 201 Markets Module Assignment Page 3 ****************************************************************************** Now click “Menu” to restart the Markets module. ****************************************************************************** Choose “Continue” on the “Initial Conditions” screen then “Regulate Market”, “Control Price”, “Continue”, and “Impose Price Ceiling”. (8) Enter a price ceiling of $12 and “Continue”. (a) As a result of this price ceiling, there will be a ________ (surplus, shortage, equilibrium) in the wheat market of . Show this result in a sketched graph below. Write your mathematical proof for this answer below your graph. (Hint: See the Markets Manual for the complete equations for the demand for wheat.) EC 201 Markets Module Assignment (9) Page 4 (b) As a result of the price ceiling there will be an (under, over) allocation of resources in the wheat market of units. Indicate this amount on the graph at the bottom of the last page. (Note: Please use the results screen values for the price ceiling to answer this question.) (c) As a result of the price ceiling, is it likely that an illegal market for wheat will develop? (Yes, No) Why? Now choose “Change Regulation”, “Control Price”, “Continue”, and “Impose Price Floor”. Enter a price floor of $42. (d) As a result of your price floor, there will be a ________ (shortage, surplus, equilibrium) in the wheat market of units. Show this result in a sketched graph below. (e) As a result of your price floor, there will be an (over, under) allocation of resources in the wheat market of units. Show this result in the graph for 9(a) above. (c) What is the price elasticity of supply between the initial equilibrium and the price floor? __ ___. Show all work below, including the formula used, and a complete interpretation of your elasticity coefficient.