Download Solutions 3 - Emilio Cuilty

ECON 101: Principles of Microeconomics – Discussion Section Week 3 – Spring 2015
TA:
General Information
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Content for Today
Demand & Supply Shift
Pricing Floor/Pricing Ceiling
Consumer/Producer Surplus
Trade & Tariff
Questions
A) The Pumpkin Market
Consider pumpkins sold in the Fresh Market. Suppose the demand for pumpkins
is given by Q = 100 – 2P, and the supply is given by Q = 2P - 20. Answer the
following questions.
1) Calculate equilibrium price and quantity in the market for pumpkins. How
large is consumer surplus at equilibrium? What about producer surplus?
At equilibrium, P=20, Q=60,
CS=(50-20)*60*1/2=900,
PS=20*20+20*40*1/2=800
2) How would the demand (supply) curve move in following scenarios? How
would equilibrium price and quantity change?
a. Halloween is coming and everyone wants a pumpkin lantern. But a
sudden storm destroys 1/3 of pumpkins in the field.
Demand moves towards the right, and supply moves towards the left
Price will increase, and quantity is indeterminate
b. A new chemical fertilizer is invented and the cost to plant pumpkins falls
by one half. Influenced by a gourmet magazine, more people at Madison
start to believe that pumpkin pies are much healthier than other pies.
Demand moves towards the right, and supply moves towards the right
Quantity will increase and price is indeterminate
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ECON 101: Principles of Microeconomics – Discussion Section Week 3 – Spring 2015
TA:
3) To make sure that people can enjoy cheap pumpkin pies, the state
government decides to set a price ceiling of $25. Would that achieve its goal?
No, the price ceiling is not binding since it’s higher than the equilibrium price
4) Would a price ceiling of 10 be effective? How large are consumer surplus and
producer surplus in this case? How large is the deadweight loss?
Yes, now the market price will be 10 instead of 20. Quantity is 40 (determined
by the supply side). Consumer surplus is (50-30)*40*1/2+(30-10)*40=1200,
and producer surplus is (40+20)*10*1/2=300
DW=1700-1500=200 (Or DW=(30-10)*20*1/2=200)
5) What should the state government do if they want to guarantee that pumpkin
planters can earn a higher profit? Is that good or bad for the entire society?
It’s an open question. The answer could be price floor, price support system
or subsidy. I think it might be good time to introduce these conceptions to
students. But it depends on you.
B) The Pumpkin Market with Trade
Suppose that initially the pumpkin market in the US is closed, the demand and
supply equations are the same as in A). Now a new law is implemented, free
trade permitted in this market. Consider following scenarios:
1) If the world price for pumpkins is $30, what will be the quantity demanded
and supplied in the domestic market? Will the US have excess demand or
supply? How large is it? How much will consumer and producer surplus
change compared to the closed market case?
In this case, demand=40, supply=80, the US has excess supply, and will
export 40 units of pumpkin. CS=(50-30)*40*1/2=400, and PS=30*20+(8020)*30*1/2=1500. CS is smaller, but PS is larger. TS is also larger (1900>1700).
2) If the world price for pumpkins is $10, what will be the quantity demanded
and supplied in the domestic market? Will the US have excess demand or
supply? How large is it? How much will consumer and producer surplus
change compared to the closed market case?
In this case, demand=80, supply=40, the US has excess demand, and will
import 40 units of pumpkin. CS=(50-10)*80*1/2=1600, PS=10*20+(4020)*10*1/2=300. CS is larger, PS is smaller, but TS is larger.
3) Suppose that the world price for pumpkins is $10, and now the US
government implements a tariff of $5, then how many pumpkins will be
imported? What’s the deadweight loss from the tariff? What if the tariff is $15?
Now world price is 15 instead of 10, so demand=70, supply=50, import=20.
CS=(50-15)*70*1/2=1125, PS=15*20+(50-20)*15*1/2=525, TS=1650, even worse
than the closed market case. If tariff is $15, then there will be no trade since
world price will be higher than domestic equilibrium price.
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