Download Markets Exercise #2

Course
Course Number
University or College
Professor’s Name
Markets Exercise #2 (
Student Name:
Section:
points)
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 the
SimEcon® software package.
Make sure that you have read the “Markets Manual” and “SimEcon® Operation
Instructions”. These materials may be found at the Class Web site prior to beginning the
exercise. For many of the exercise’s questions, it will be necessary to refer to those instructions.
For many of the exercise’s questions, it will be necessary to refer to your text.
To begin the exercise, 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.
(1)
When the price of butter is increased from $4 to $8 per pound, the _______ (supply,
demand) for wheat _______ (increases, decreases, stays the same). Why?
(2)
When the price of butter is increased from $4 to $8 per pound, the ______________
(quantity supplied, quantity demanded) for wheat _________ (increased, decreased, stayed
the same), as the _______ (supply, demand) shifted _______ (left, right).
(3)
What is the total revenue for the wheat farmers when the price of corn is $8? _______
If the price of corn falls to $2, what is the change in the total revenue to wheat farmers?
_______. Why?
.
Course
Markets Exercise #2
(4)
Page 2
Fill in the table below. Calculate the price elasticities for wheat as the number of farms is
increased from 600 to 1000, from 1000 to 1400, and from 1400 to 1800. (Round all of your
entries to the nearest hundredth).
Disturbance
Price
Quantity
Total Revenue
Price
Elasticity
#Farms = 600
$ _____
____
$ _____
#Farms = 1000
(initial values)
$
___
____
$ _____
#Farms = 1400
$
___
____
$ _____
__
#Farms = 1800
$ _____
____
$ _____
__
__
(5)
Based on your calculations in (4), you know that if farmers could
____ (raise,
lower) wheat prices they would
_____ (increase, decrease) their total revenue.
Why?
(6)
You have determined that the demand for wheat is
_____
(elastic, inelastic, unit
elastic). You should expect the demand for bread to be
_____
(more, less)
elastic than the demand for wheat, and the demand for Wonder Bread to be
__
(more, less) elastic for the demand for wheat. Why?
(7)
If income increases from $5 to $10 trillion, the demand for wheat shifts __
(up, down) since wheat is a/an
_____
(superior, normal, inferior, neutral)
good. Thus, income and the demand for wheat are _____ (indirectly, directly,
not) related.
Course
Markets Exercise #2
(8)
(9)
Page 3
For the initial equilibrium, what are the “ceteris paribus” demand variables and their
amounts?
For the initial equilibrium, what are the “ceteris paribus” supply variables and their
amounts?
(10)
List 2 supply factors (other than those in the module) that could increase supply?
(11)
List 2 demand factors (other than those in the module) that could decrease demand?
~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*
Now click on Menu to restore the original equilibrium values.
~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*
Choose "Continue" on the "Initial Conditions" screen. Now select "Regulate the Market". Select
"Control Price" and "Continue". Then, select "Impose Price Floor".
(12)
Choose an "effective" price floor. Write the value of your price floor here? _____. An
"effective" price floor will prevent the natural price from moving _____ (up, down) to its
equilibrium value. At the price floor, the _____ _____ (demand, quantity demanded)
will be _____ (less than, more than) the
_____
(supply, quantity supplied).
At the price floor, the amount of the _____ (shortage, surplus) is
_____
.
Draw a graph to confirm your answer below.
Course
Markets Exercise #2
Page 4
(13)
As a result of the price floor chosen government expenditure is
_____, this covers
government purchases of _____and storage, disposal costs of _____. Explain why this is
a reasonable result.
(14)
Now select "Change Regulation" from your tool bar. Choose "Control Price", "Continue",
and "Impose Price Ceiling". (Choose any price below $23.39 and above $6. Use whole
numbers.) What is the value of your price ceiling? _____ . An "effective" price ceiling
will prevent the natural price from _____ (rising, falling) to its equilibrium value. As a
result, _____ _____ _____
(demand, quantity demanded) will be
_____ (less
than, more than) _____ _____ (supply, quantity supplied) and the _____ (shortage,
surplus) is
_____. Show your calculation for the last answer below.
(15)
As a result of the price ceiling you picked, an illegal market has formed. Criminals are
charging a
_____ (higher, lower) price for wheat in the illegal market. Write the illegal
price here
_____. At the illegal price, criminals' profits are _____ _____. Thus, the
quantity supplied by criminals illegally is _____ .
(16)
Now, "Hire Cops" (aka the “Wheat Police”) to apprehend the illegal wheat dealers.
Write how much you spent on hiring cops here? _____. As a result the illegal price of
wheat is _____
(higher, lower) than before the cops were hired. Now, criminals’
profits are _____which is _____ (more, less) than before the cops were hired. Why?
(17)
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 more than the equilibrium quantity and write it here _____ . As
a result of this regulation, the price of wheat is _____ (higher, lower) than equilibrium,
and farmers' incomes have gone
_____ (up, down). Are the voting results logical to
you as a result of this policy? ___ (Yes, No). Why or why not?