Download Markets Exercise #2key

Course
Course Number
University or College
Professor’s Name
Markets Exercise #2 Answers (
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
Demand
(supply,
demand) for wheat
Decrease
(increases, decreases, stays the same). Why?
Butter and wheat are complementary goods. If the price of butter goes up the
demand for wheat will fall and visa versa.
(2)
When the price of butter is increased from $4 to $8 per pound, the Quantity Supplied
(quantity supplied, quantity demanded) for wheat Decreased (increased, decreased, stayed
the same), as the Demand (supply, demand) shifted Left (left, right).
(3)
What is the total revenue for the wheat farmers when the price of corn is $8? $20,136.30
If the price of corn falls to $2, what is the change in the total revenue to wheat farmers?
$604.23 . Why?
The old TR is $20,136.30. New TR is $19,532.07. The difference is $604.23
As the price of a substitute good – corn – falls, the demand for wheat falls. This
causes the new equilibrium price and quantity to be less than they were at the original
equilibrium.
Course
Markets Exercise #2 Answers
(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
(5)
Price
Quantity
Total Revenue
Price
Elasticity
#Farms = 600
$ 32.09
782.63
$ 25,114.60
#Farms = 1000
(initial values)
$ 23.39
869.59
$ 20,339.70
-.33
#Farms = 1400
$ 19.04
913.06
$ 17,384.66
-.23
#Farms = 1800
$ 16.44
939.15
$ 15,439.63
-.19
Based on your calculations in (4), you know that farmers can
Raise (raise, lower)
wheat prices to Increase (increase, decrease) their total revenue. Why?
The demand for wheat is inelastic. Thus, as the price of wheat increases, due
to a supply shift, the total revenue of wheat will increase and visa versa.
(6)
You have determined that the demand for wheat is Inelastic
(elastic, inelastic, unit
elastic). You should expect the demand for bread to be
More
(more, less) elastic
than the demand for wheat, and the demand for Wonder Bread to be
More
(more, less) elastic for the demand for wheat. Why?
There are more substitutes for Wonder Bread than bread.
There are more substitutes for bread than wheat.
(7)
If income increases from $5 to $10 trillion, the demand for wheat shifts Up
(up, down) since wheat is a/an
Superior, Normal (superior, normal, inferior,
neutral good). Thus, income and the demand for wheat are Directly (indirectly,
directly, not) related.
Course
Markets Exercise #2 Answers
Page 3
(8)
For the initial equilibrium, what are the “ceteris paribus” demand variables and their
amounts? Must have 3 of the following 4: Price of Corn = $10, bu., Price of
Butter
= $4, lb., Consumer Income = $5 trillion, and, or Population = 250
million.
(9)
For the initial equilibrium, what are the “ceteris paribus” supply variables and their
amounts? Rainfall = 10 in., #Farms = 1,000, and Seed Cost = $10, lb.
(10)
List 2 supply factors (other than those in the module) that could increase supply?
(a)
(b)
(11)
Costs other than seed cost decrease, i.e. water, fuel, fertilizer, irrigation, etc.
Technological improvement.
(Other answers may include: decrease in a tax, increase in a subsidy,
optimistic producer expectations, i.e. expect future cost decrease, future price
increase for wheat, resources used to produce wheat will be more plentiful in
the future, profits, revenues will be higher in the future.)
List 2 demand factors (other than those in the module) that could decrease demand?
(a)
(b)
Consumer tastes and preferences decrease.
# of Consumers decreases
(Other answers may include: consumers expect future income to decrease,
future availability of wheat to increase, and future price of wheat to fall.
~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*~*
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.”
(12)
(Note: For (12) and (13) any price above $23.39 can be used. For example…)
Choose an "effective" price floor. Write the value of your price floor here? $30 . An
"effective" price floor will prevent the natural price from moving Down (up, down) to its
equilibrium value. At the price floor, the Quantity Demanded (demand, quantity
demanded) will be Less Than (less than, more than) the
Quantity Supplied
(supply, quantity supplied). At the price floor, the amount of the
Surplus
(shortage,
surplus) is 396.50 . Draw a graph to confirm your answer below.
At the price floor of $30, the QS is 1200.00 and the QD is 803.50. Thus, the shortage is
396.50. Graph would show this above equilibrium. The original equilibrium has an
equilibrium price of $23.39 and an equilibrium quantity of 869.59.
Course
Markets Exercise #2 Answers
(13)
(14)
Page 4
As a result of the price floor you have chosen, total government expenditure is
$11,994.13, and covers government wheat purchases of $11,895
and storage, disposal
costs of $99.13 . Explain why this is a reasonable result. See text discussion regarding
what can be done with the surplus.
((Note: For (14), (15), and (16) any price below $23.39 can be used. For example…)
Now select "Change Regulation" from your tool bar. Choose "Control Price,” "Continue,”
and "Impose Price Ceiling.” (Choose any price ceiling other than $20. Use whole
numbers.) What is the value of your price ceiling? $21 . An "effective" price ceiling will
prevent the natural price from Rising (rising, falling) to its equilibrium value. As a result,
Quantity Demanded (demand, quantity demanded) will be Greater Than (less than,
more than) Quantity Supplied (supply, quantity supplied) and the Shortage (shortage,
surplus) is
143.50 . Show your calculation for the last answer below.
QD = 1000 –10(PW) +3(PC) -.5(PB) + .3(Pop) + .10(Inc) Then insert default values.
= 1000 –210 +30
-2
+75
+ .50
Using the Pceiling = $21
= 893.50
Then QD – QS at the ceiling price is: 893.50– 750 = 143.50
(15)
As a result of the price ceiling you picked, an illegal market has formed. Criminals are
charging a Higher (higher, lower) price for wheat in the illegal market. Write the illegal
price here $35.35 . At the illegal price, criminals' profits are $10,762.50 . Thus, the
quantity supplied by criminals illegally is 750 .
(16)
Now, "Hire Cops" (aka the “Wheat Police”) to apprehend the illegal wheat dealers.
(Note: This depends on user’s input. Can’t spend more than the amount of the
criminals’ profits. For example…)
Write how much you spent on hiring cops here? $10,000. As a result of this expenditure,
the illegal price of wheat is Higher (higher, lower) than before the cops were hired.
Now, criminals’ profits are $8117.16 which is Less (more, less) than before the cops
were hired. Why?
The police force some wheat into the legal market. With less available on the illegal market
and the same size shortage at the legal price, the shortage causes a larger increase in price
in the illegal market. In the real world such markets have extra costs, such as bribes for
cops, fees for defense lawyers, etc., but those are not present in this module.
(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. (Note: Any quantity greater than 869.59 may be used.)
Pick a quantity of wheat more than the equilibrium quantity and write it here 900 . As a
result of this regulation, the price of wheat is Lower (higher, lower) than equilibrium, and
farmers' incomes have gone Down (up, down). Are the voting results logical to you as a
result of this policy? Yes (Yes, No). Why or why not? As quantity increases, the price
falls and farmers’ incomes are lower. Thus they are less inclined to vote favorably for the
current administration. Non-farm voting support rises due to lower prices.