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Principles of Economics
EC 201
Cal Poly Pomona
Fall, 2009
Dr. Bresnock
Name:
Section/Time:
Markets Module Assignment Answers (50 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 you have read the “Markets Manual” which may be
found at 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/
To begin the exercise, click on “Markets” and note the “Initial Conditions” which are the
beginning values for each supply and demand variable. Write these values down for future
reference. Now, click “Continue”. You will observe the initial equilibrium for the wheat
market.
(1)
With respect to the wheat market, if income is decreased, explain what will happen to
each of the following. (Use increase or decrease of stays the same, for your answers.
Arrows are acceptable.)
(a) Demand?
(b) Quantity Demanded?
(c)
(d)
(e)
(f)
(g)
Stays the same. Or decreases by a tiny amount.
No change, or Decreases at EACH alternative
price.
Supply?
No change.
Quantity Supplied?
No change, or decreases by a tiny amount.
Equilibrium Price?
Decreases by a tiny amount, or no change.
Equilibrium Quantity?
Decreases by a tiny amount.
Offer a brief intuitive explanation of these results.
Wheat is almost a neutral good. A change in income has very little effect on
demand. If the change in income isn’t very large the impact may be too small to
detect.
(2)
With respect to the wheat market, if the seed cost is decreased, explain what happens to
each of the following. (Use increase or decrease or stays the same for your answers.
Arrows are acceptable.)
(a)
(b)
(c)
(d)
(e)
(f)
Demand?
Quantity Demanded?
Supply?
Quantity Supplied?
Equilibrium Price?
Equilibrium Quantity?
Stays the same.
Increases.
Increases.
No Change, or Increases at EACH alternative price.
Decreases.
Increases.
EC 201
Markets Module Assignment Answers
(g)
Page 2
Offer a brief intuitive explanation of these results.
As costs of production go down, supply increases. At the original equilibrium,
there is a surplus, so quantity demanded increases, equilibrium price decreases, and
equilibrium quantity increases.
(3)
In this model of the wheat market, a change in income leads to no change (an increase, a
decrease, no change) in demand (demand, supply, quantity demanded, quantity
supplied). Thus, wheat is a/an neutral (superior/normal, inferior, neutral) good.
Note, if the student noticed small changes in demand, then wheat would appear to
be a very, very slightly superior/normal good. In this case they can have either an
increase, or a decrease in demand, and superior/normal good for correct answers.
(4)
What is the total revenue for the wheat farmers when the price of butter is $8? $20,274.61
If the price of butter falls to $2, what is the change in total revenue to the wheat farmers?
$101.92. Why?
Original TR = $20.376.53 Both price and quantity along the supply curve, so TR
also increases.
New TR
- $20,374.61
Change in TR
$101.92
(5)
What is the total revenue for the initial wheat market equilibrium? $20,339.71
(a)
If the number of farms decreases from 1000 to 600, what is the new total revenue?
$25,114.57. Compared to the initial equilibrium, the total revenue has decreased
(increased, decreased, stayed the same).
Demand is price inelastic from A to B. As price decreases along the demand
curve, total revenue also decreases.
(782.63 – 869.59)
(782.63 + 869.59)
EP
=
=
-0.3333
(32.09 – 23.39)
(32.09 + 23.39)
(b)
If the number of farms increases from 1000 to 2000, what is the new total
revenue? $14,694.43. Compared to the initial equilibrium, the total revenue has
increased (increased, decreased, stayed the same). Why?
Demand is price inelastic from A to B. As price increases along the demand
curve, total revenue also increases.
EC 201
Markets Module Assignment Answers
Page 3
(948.64 – 869.59)
(948.64 + 869.59)
EP
=
=
-0.2139
(15.49 – 23.39)
(15.49 + 23.39)
(6)
If the price of corn increases from 10 to 20, what is the new total revenue? $21,371.76.
Compared to the initial equilibrium, the total revenue has increased (increased,
decreased, stayed the same). Use the initial and new wheat market equilibria to calculate
the price elasticity below. (Include the completely specified formula that you used in
order to receive full credit.) Explain why this is the price elasticity of supply and not the
price elasticity of demand.
(894.59 – 869.59)
(894.59 + 869.59)
EP
=
=
1.34
(23.89 – 23.39)
(23.89 + 23.39)
A 1% increase in price generates a 1.34% increase in quantity supplied. This is the
price elasticity of supply because the numbers represent two points on the same supply
line, observed because of a shift in demand. The price elasticity of demand could only
be determined by observing two points on the same demand line as a result of a shift in
supply.
******************************************************************************
Now, restart the “Markets Module”.
Choose “Continue” on the “Initial Conditions” screen. Now select “Regulate the Market”.
Select “Control Price” and “Continue”. Then, select “Price Ceiling”.
(7)
Put in a price ceiling of $10.
(a)
As a result of this price ceiling, there will be a shortage (surplus, shortage,
equilibrium) in the wheat market of $803.50. Show this result in a graph below.
Write your mathematical proof for this answer below your graph. (Hint: See the
Markets Manual for the complete equations for the supply and demand of wheat.)
QD = 1000 – 10(10) + 3(10) - .5(4) + .3(250) + .10(5)
QD = 1003.50
QS = 200.00
803.50 (Shortage)
(b)
As a result of the price ceiling, is it likely that an illegal market for wheat will
develop? Why?
EC 201
Markets Module Assignment Answers
Page 4
Yes. At the legal price people want more wheat than is available. It is very
possible that an illegal wheat market will develop. Wheat criminals will buy up
wheat and resell it at higher prices since they can make a profit by doing so.
(8)
Now choose a price floor of $50.
(a)
As a result of your price floor, there will be a surplus (shortage, surplus,
equilibrium) in the wheat market. Show this result in a graph below. Calculate
the size of the surplus and show your calculation below your graph.
Quantity Supplied = $2,200.00
Quantity Demanded = $ 603.50
$1,596.50 = surplus
(b)
What is the price elasticity of demand between the initial equilibrium and the
price floor? - 0.498. Show all work below and include the formula used.
(603.50 - 869.59)
(603.50 + 869.59)
EP
=
=
- 0.498
(50.00 - 23.39)
(50.00 + 23.39)
(c)
Why does farmers’ revenue go up when a price floor is imposed?
Total revenue increases as price increases when demand is inelastic because the
quantity demanded declines by a smaller proportion than the price increase. Since
total revenue is price times quantity the product gets bigger since one part (price)
goes up a lot and the other (quantity) decreases only a little bit.