Download HOMEWORK 2: Review of Microeconomics

HOMEWORK 2: Review of Microeconomics
30 Points
th
Due: Wednesday, January 28 , 2015
LEARNING OBJECTIVES
 Prices measure the trade-offs available in the market place and coordinate the
independent decisions of the consumers and producers, i.e. supply and demand.
 Economic shocks affect equilibrium price and quantity.
 Measure how one economic variable affects another, i.e. elasticity and tax
INSTRUCTIONS
Carefully read the question before answering. Make sure your pages are in order and stapled
together. Your work should be clear and easy to follow. When prompted, make sure you that
you explain your answer completely.
QUESTION
1. (5 points) Twenty-one states recently voted to increase the minimum wage:
http://www.usatoday.com/story/money/business/2014/12/29/minimum-wage-increaseson-new-years-day/20880945/. What are the economic arguments against a minimum
wage (i.e. price floor)? Use a graph to illustrate the impact on the labor market and the
welfare (consumer/producer surplus) of the labor market. Explain the equilibrium before
and the outcome after the price floor is implemented. Would all laborers/employers be
made worse off with a minimum wage? Provide at least a paragraph (4+ sentences)
explanation.
2. (7 points) Consider the market for diabetes medicine (insulin, specifically).
a. Is the demand of insulin somewhat elastic, somewhat inelastic, perfectly elastic, or
perfectly inelastic? Explain with at least 3 sentences.
b. Draw the demand curve for insulin.
c. Suppose 150,000 insulin shots are required annually, and the annual supply of
insulin is 𝑄𝑆 = 50,000 + 25,000𝑃. What is the equilibrium price and quantity of insulin
shots?
d. Suppose, through exercise and diet, some individuals begin to manage their
diabetes without insulin shots. As a result, the annual insulin shots required annually
falls to 75,000. What is the new equilibrium price and quantity?
e. In one graph, illustrate c. and d.
3. (5 points) The supply of oil is partly to blame for the fall in oil prices:
http://www.economist.com/blogs/economist-explains/2014/12/economist-explains-4.
Suppose Venezuela’s inverse supply function of oil is:
𝑝 = 200 + 4.00𝑄1
and for other OPEC countries is:
𝑝 = 200 + 2.00𝑄2
a. Find OPEC’s total supply function (market supply).
b. Graph all three supply curves (Venezuela, other OPEC countries, and market
supply).
Homework 2
4. (8 points) We can use information about demand and supply to answer an important
public policy question: Would selling oil from the Arctic National Wildlife Refuge (ANWR)
substantially affect the price of oil? Established in 1980, ANWR covers 20 million acres
and is the largest of Alaska’s 16 national wildlife refuges. It is believed to contain
massive deposits of petroleum. For decades, a debate has raged over whether ANWR’S
owners—the citizens of the United States—should keep it undeveloped or permit oil
drilling. Let’s say oil demand is 𝑄𝐷 = 114.80 − 0.656𝑝 and oil supply is 𝑄𝑠 = 57.40 +
0.492𝑝.
a. What is the initial equilibrium using the demand and supply equations listed
above? Make sure you describe the equilibrium for both price and quantity.
b. Now incorporate a negative oil shock of 8 million barrels a day, due to a
hurricane in the Gulf of Mexico. Without the ANWR production, how much will
prices rise compared to the equilibrium price in part a.?
c. Still assuming a negative oil shock of 8 million barrels a day, how much will
prices rise if the ANWR produces 0.8 million barrels of oil a day? Compare your
new price to the equilibrium price in part a.
d. Given your analysis from parts b. and c., should the U.S. permit oil drilling?
(Note: of course, other analysis like environmental valuation would have to be
done before you could completely answer this question.)
5. (5 points) Under what two conditions will consumers bear the entire burden of a tax (or
when will consumers pay the entire amount of the tax). Explain with a graph and at least
4 sentences.