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Principles of Economics
Student Name:
EC 201
Section:
California State Polytechnic University, Pomona
Dr. Bresnock
Old Computer Project (100 points)
Please contain your answers to the spaces provided. Do not attach printout or additional pages. All
questions pertain to the Markets module in the SimEcon software package. Make sure you have
read the “Markets Manual” and “SimEcon Operation Instructions” materials that may be found in
the class website 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 -- particularly sections of Chapters 3, 7, and Chapter 20. (NO.
Chapter 20 will not be covered on the final!)
Due Date:
TBA
To begin the assignment, launch the Markets module and note the "original conditions" which are
the beginning values for each supply and demand variable. Write these values down for future
reference. Now, click on "Continue" in the tool bar at the top of the screen. Write down the initial
equilibrium values for the price, Pe, and quantity, Qe, of wheat. Now select "Disturb the Market"
from the tool bar.
Keep the selection on "Price of Corn" and select "Continue" from the tool bar. Now decrease the
price of corn from $10/bushel to $2/bushel. Write down the new equilibrium price and quantity of
wheat as a result of this change.
(1)
When the price of corn decreased from $10 to $2 per bushel, the demand for wheat
decreased (increased, decreased, stayed the same). Thus, wheat and corn are substitutes
(complements/ substitutes/unrelated goods).
(2)
When the price of corn decreased from $10 to $2 per bushel, this caused a change in
demand
(demand/quantity demanded), and a change in
quantity supplied
(supply/quantity supplied).
(3)
When the price of corn decreased from $10 to $2, a comparison of the two equilibrium price
and quantity points allows us to compute the price elasticity of supply (demand/supply).
That price elasticity 1.35 .
Provide a complete explanation of that price elasticity here.
The complete formula must be specified and calculation performed in this space. The supply
price elasticity of 1.35 means that a 1% increase in price leads to a 1.35% increase in quantity
supplied and visa versa.
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(4)
Now, change the price of corn from $10 to $20. (Write down the original and new
equilibrium values for the prices and quantities for your use). Use these amounts to record
the price elasticity that results when the price of corn is raised from $10 to $20 here 1.33 .
What is the total revenue of the wheat farmers when the price of corn is $10? $20,339.48 .
What is the total revenue for the wheat farmers when the price of corn is increased to $20?
$21,371.76 . As a result of the increase (increase/decrease) in the demand for wheat, the
wheat farmer's total revenue increased (increased/decreased) by $1,032.28 .
(5)
Now increase the price of butter to $8.
This causes a/an decrease
(increase/decrease) in the demand for wheat. As a result, we can say that wheat and butter
are complements (substitutes/complements/unrelated goods).
(6)
Now increase consumer income to $10 trillion. This causes a/an increase
(increase/decrease) in the demand for wheat. As a result, we can say that wheat is a/an
superior/normal (inferior/superior-normal/unrelated good).
Fill in the table below which is based on your record of price and quantity information in
the wheat market as the amount of rainfall is changed (by you). (Base your elasticity
calculations on the increases in the price of wheat as rainfall is reduced from 20 inches to 15
inches, then from 15 inches to 10 inches, etc.) (Round all of your entries to the nearest
hundredth).
Disturbance
Price
Quantity
Total Revenue
Price
Elasticity
Rainfall = 20 in.
$ 11.73
986.25
$ 11,569
Rainfall = 15 in.
$ 17.56
927.92
$ 16,294
-.153
Rainfall = 10 in.
(initial values)
23.39
869.58
$ 20,340
-.228
Rainfall = 5 in
$ 29.23
811.25
$ 23,713
-.311
EC 201
Computer Project
(8)
Page 3
As the amount of rainfall was lowered, there was a change in the
supply
(supply/
quantity supplied) of wheat. Also, there was a change in the quantity demanded
(demand/quantity demanded) of wheat. Thus, we can see that as the quantity demanded
(demand/quantity demanded of wheat decreased (increased/decreased), there was a/an
increase (increase/decrease) in the wheat farmers' total revenue. We can also see that as
this change in total revenue occurred, the price elasticity of demand
(demand/
supply) was inelastic
(elastic/unit elastic/inelastic). Does this result agree or disagree
with the discussion in McConnell/Brue? yes (yes/no). Why do we expect this result?
Food demand is inelastic – more of a necessity good demand. Thus, if the price of a food
product, or in this case, the price of a good used to make food increases, the total revenue
increases and visa versa. Also, note that the marginal utility of food consumption
decreases very rapidly as quantity increases, thus small % changes in price are associated
with relatively small % changes in quantity demanded. In other words, it would take very
large decreases in price to get people to consume more food.
(9)
Now, increase the number of farms. This produces a/an
increase (increase/decrease)
in the supply of wheat. If the number of farms is decreased the
supply
(demand/
supply) of wheat will consequently decrease (increase/decrease).
(10)
Now, increase the seed cost. This shifts the supply of wheat up (up/down) and left
(right/left). This is a/an
decrease (increase/decrease) in the supply of wheat.
(11)
List 2 other supply factors that may disturb the market: (Some possibilities)
(a) changes in wheat production costs other than seeds.
(b) changes in wheat production technology.
(12)
List 2 other demand factors that may disturb the market? (Some possible answers).
(a) consumer tastes and preferences for wheat products.
(b) consumer expectations with respect to future prices for wheat products.
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Now, restart the "Markets Module". Choose "Continue" on the "Initial Conditions" screen.
Now select "Regulate the Market". Select "Control Price" and "Continue". Then, select "Impose
Price Floor". Note: Students answers vary depending on their price control choices. This is one
possible example.
(13)
Choose an "effective" price floor. Write the value of your price floor here?
$40 . An
"effective" price floor is above
(above/below) the equilibrium price. An "effective"
price floor will lead to a/an surplus (surplus/shortage). As a result of the price floor you
have chosen, the quantity supplied is greater than (greater than/less than/equal to) the
quantity demanded.
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(14) As a result of the price floor you have chosen, total government expenditure is
$40,109.13, and covers government wheat purchases of $39,860 and storage/disposal
costs of $249.13. Is this result consistent with the text's coverage of this topic? yes
(yes/no). Is this result consistent with the text's coverage of U.S. farm policy in the 1990s?
yes (yes/no).
(15)
Now select "Change Regulation" from your tool bar. Choose "Control Price", "Continue",
and "Impose Price Ceiling". What is the value of your price ceiling? $20.
An "effective" price ceiling will lead to a shortage (shortage/surplus), and record that
amount here
204.25* . As a result of the price ceiling you have chosen, the quantity
supplied is less than (greater than/less than/equal to) the quantity demanded.
(16)
As a result of the price ceiling you picked, an illegal market has formed to ration the supply
of wheat. Criminals are charging a higher (higher/lower) price for wheat in the illegal
market. Write the illegal price here
$40.35 . At the illegal price, criminals' profits are
$14,245 . Thus, the quantity supplied by criminals illegally is 700 .
(By the way (BTW), in Russia, former Soviet Union (as well as in many Central European countries), the practice of rationing wheat supplies via price
ceilings was quite common from the 1920s to the 1970s. This was done to make bread affordable to the poor in the cities (where political unrest often
resulted when bread prices were increased). Illegal selling of wheat was known as selling "nalevo" (pronounce the "v" like a "y") which means "selling
by the left hand".)
(17)
Now, you may "Hire Cops" (aka the "Wheat Police") to apprehend the illegal wheat dealers.
You are not allowed to spend more to hire cops than the total profit criminals are getting.
Write how much you spent on hiring cops here? $10,000 . As a result of this expenditure,
criminals are now making
$18,460.66 which is more (more/less) than before the
cops were hired. The illegal price of wheat is higher (higher/lower) than before the cops
were hired. Why?
More risk for criminals selling wheat illegally with wheat police monitoring the wheat
market. Wheat criminals increase the price to cover the higher risk of getting caught.
(Note: The concept of a price ceiling in the wheat market may seem a bit odd relative to the U.S. agriculture policy experience. This is not that
strange when one investigates agricultural policy experiences in other countries. A particularly interesting wheat pricing situation occurred in Poland
from the 1950s - 1970s. Basically, they set the price of wheat high to encourage supply, i.e. a price floor. Simultaneously, they set the price of bread
low to minimize political unrest in the cities, i.e. a price ceiling. Polish wheat farmers quickly realized that the price of bread was lower than the wheat
it was made from and proceeded to feed their livestock bread!)
(18)
Now choose "New Regulation", "Control Production", and "Continue". This regulation
shows you the results of another form of agricultural policy. Here you are asked to set the
quantity of wheat.
Pick a quantity of wheat less than the equilibrium quantity and write it here 800 . As a
result of this regulation, the price of wheat is
higher (higher/lower) than equilibrium,
and farmers' incomes have gone up (up/down). Are the voting results logical to you as a
result of this policy? yes (yes/no). Why or why not?
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Farmers favor the policy because their incomes (total revenues) increase. Thus they are
more likely to vote for the politicians who put a quantity regulation of this type into
practice. Non-farmers are less favorable toward the current politicians since the price
they pay for wheat has risen. If the quantity control was above equilibrium, the voting
results would be the opposite.
* Note: In question 15, the shortage that results from the implemented price ceiling is
determined by using the equation for wheat demand provided in the “Markets Manual”.
(See Class Web, “Class Materials”, “Sim Econ” to obtain a copy of this.) See below.
Qd = 1000 – 10 Pwheat + 3Pcorn - .5Pbutter + .3Pop + .25Inc
The prices of corn and butter, population and income are held constant (ceteris paribus)
along one demand curve. The original price of corn is $10, price of butter $4,
population 250 m. and income $5 t (as stated in the “Markets Manual). Thus with those
variables constant (or held at their original amounts), the equation for the demand for
wheat above allows you to determine the quantity demanded for wheat associated with
different wheat prices. With the price ceiling of $20, the quantity demanded is 904.25.
The module assumes that all of the available wheat supply is purchased by the wheat
criminals from the farmers and sold to the public. The farmers are assumed to remain
honest and not enter the illegal wheat market. Thus, when you set the price ceiling at
$20, you will notice that the quantity supplied is 700 units. And, given the quantity
demand of 904.25 and quantity supplied of 700, the shortage with a $20 price ceiling is
204.25 units.
Students are advised to draw a graph of the wheat market and label the equilibrium price
and quantity. Then put in the price ceiling of $20. Confirm that the answer above is
correct graphically. (You will find the equation for the wheat supply function in the
“Markets Manual” as well. Importantly, it is upward sloping. Using the supply equation
and holding all other factors constant, one can trace out the upward sloping supply for
alternative prices.)