Download ECO 100Y INTRODUCTION TO ECONOMICS

Prof. Gustavo Indart
Department of Economics
University of Toronto
ECO 100Y
INTRODUCTION TO ECONOMICS
Problem Set 2
1. Illustrate on demand and supply diagrams representing the automobile market the
effects on price and quantity of each of the following events, ceteris paribus:
a. An increase in average household income.
b. A large increase in the price of public transit.
c. A large increase in the price of gasoline.
d. A decrease in the price of sheet metal.
e. An increase in the wage rate of auto workers.
2. More gasoline and more tomatoes are sold in the summer than in the winter, even
though gasoline prices tend to be at their highest and tomato prices at their lowest in
the summer. Can you make sense of these facts with supply-and-demand
diagrams?
3. The market demand and supply curves for bushels of wheat are given by the
following equations.
1000P = 8000 – Q
1000P = 2000 + 2Q
where P is the money price of one bushel of wheat and Q is the quantity of bushels
of wheat.
a. Which is the demand curve?
b. If the market for bushels of wheat is a free market, at what price is a bushel of
wheat sold? What is the total expenditure by consumers at this price?
c. Suppose the government imposes an effective price ceiling of $4 on a bushel
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of wheat. How many bushels are now sold?
d. Is there excess demand or supply at this price ceiling? How much is this
excess supply or demand?
e. A “black market” is likely to arise in this situation. What would be the black
market price?
f. Display the above information on an appropriate diagram.
4. Suppose that beef is produced in perfect competition and that the government is
considering two alternative ways of assisting beef producers. Analyze the short-run
effects of these two alternative policies using a separate demand-and-supply
diagram for each policy. The alternative policies are:
a. paying producers a subsidy on each unit produced; and
b. guaranteeing producers a higher price by offering to purchase unlimited
quantities of beef at the guaranteed price.
5. A demand and supply situation for milk is given in the accompanying diagram.
Prices are in $/litre quantities are in millions of litres.
a. What is the equilibrium price
and quantity of milk?
b. What is the total expenditure by
consumers at this equilibrium?
c. Suppose that government
imposes a price floor of
$1.00/litre for milk to sustain
small farm production by
promising to buy surplus milk.
i. What is the quantity
demanded and the
quantity supplied of milk at
this price?
ii. What is the amount of milk sold in the market? What is the amount of
the surplus or shortage of milk at this price?
iii. What must the government do to maintain this price floor in the face of
market forces? What is the cost to the government of this action?
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d. Suppose that the government abandons the price floor program in favour of a
subsidy to each farmer of $0.40 per unit of output.
i. Draw the impact of this program on Demand and Supply.
ii. What is the new equilibrium price and quantity? Why is price not $0.40
below the original equilibrium price?
iii. How much does this program cost the government?
6. The accompanying diagram shows the demand and supply curves and initial
equilibrium for gasoline. Prices are in $/litre and quantities are in millions of litres.
a. What is the equilibrium price and quantity? What is the total revenue of
producers?
b. Suppose the government imposes a price ceiling of $0.40 to conserve gasoline.
i. What is the amount sold in the market at this price ceiling?
ii. What is the surplus or shortage at this price ceiling?
iii. What is the price that will ensue if this output is sold on the 'black market'?
c. Suppose that the government now limits gasoline usage through a tax of $0.30
per unit.
i. What effect does this tax have on Demand and Supply of gas?
ii. What is the new equilibrium price and quantity?
iii. What revenue does the government receive from this tax?