Download Unit 2 Question Solutions

Unit 2 Questions
1. You are given the following information
about quantity demanded in the competitive
market for bicycles.
a. Graph this demand schedule.
b. Suppose the price is initially $40. If price rises by $20,
what happens to the quantity demanded?
b. If price rises to $60, the quantity demanded
will fall by 300 units, from 500 to 200
bicycles.
c. Suppose the price is initially $40. If price falls by $40,
what happens to the quantity demanded?
c. If price falls to $0, the quantity demanded will increase
by 500 units, from 500 to 1,000 bicycles.
2.For each of the following situations in the table below, fill in the missing
information. First, determine whether the situation causes a shift of or a
movement along the demand curve; then, if it causes a shift, determine
whether the demand curve shifts to the right or to the left.
3. The following graph represents the supply curve for the
production of widgets in Town Center.
a. At a price of $20, how many widgets are producers willing
to supply?
3. a. At a price of $20, producers are willing to supply 40
units.
b. At a price of $40, how many widgets are producers
willing to supply?
b. At a price of $40, producers are willing to supply 80
units.
c. Suppose there are ten widget producers in Town Center and
the price of widgets is $50. If each producer produces the same
number of widgets, how many widgets will each produce?
c. At a price of $50, 100 widgets are supplied. Thus, if there are
10 producers producing exactly the same number of widgets,
then each producer must produce 10 widgets.
d. Suppose price is initially $30 but then falls to $20.
What is the change in quantity supplied?
d. When price falls from $30 to $20, the number of
widgets supplied decreases by 20 widgets (from 60
widgets to 40 widgets).
e. Suppose price is initially $30 but then rises to $50.What
is the change in quantity supplied?
e. When price rises from $30 to $50, the number of
widgets supplied increases by 40 (from 60 to 100).
f. What price must suppliers receive in order to be willing
to supply 80 widgets?
f. Suppliers are willing to supply 80 widgets if the price is
$40.
g. What price must suppliers receive in order to be willing
to supply 40 widgets?
g. Suppliers are willing to supply 40 widgets if the price is
$20.
h. What does the slope of a supply curve imply about the
relationship between price and quantity supplied?
h. There is a direct relationship.
4. For each of the following situations in the table below,
fill in the missing information: first, determine whether the
situation causes a shift or a movement along the supply
curve; then, if it causes a shift, determine whether the
supply curve shifts to the right or to the left.
5. The demand and supply schedules for Healthy Snacks, Inc.,
is provided in the table below.
a. Sketch the demand and supply curves for Healthy Snacks,
Inc. Don't worry about drawing a precise graph. Focus
on drawing the underlying relationships from the table.
Your graph should be accurate with regard to xintercepts and y-intercepts, and indicate equilibrium.
b. What are the equilibrium price and quantity in this market?
Show these on your graph.
c. Fill in the following table based on the data given to you.
Assume that for each row in the table the price is as given
and you are calculating the excess demand or excess
supply. (Hint: Some cells in the table are empty; e.g., if
there is excess supply, there is no excess demand.)
d. Why is a situation of excess demand referred to as a
shortage?
d. When there is excess demand, the quantity demanded is
greater than the quantity supplied. For some reason the
market does not provide an adequate amount of the good,
and thus there is a shortage of the good. The figure below
illustrates a shortage at a price of P1. Note that at P1. the
quantity demanded is Q1. the quantity supplied is Q2, and
the excess demand is equal to Q1 - Q2. When a market has
excess demand, this implies that the current price is below
equilibrium.
e. Why is a situation of excess supply referred to as a surplus?
e. When there is excess supply, the quantity demanded is less
than the quantity supplied. For some reason the market
provides too much of the good, and thus there is a surplus of
the good. The figure below illustrates a surplus at a price of
P1. Note that at P1 the quantity demanded is Q1. the quantity
supplied is Q2, and the excess supply is equal to 'Q2 - Q1'
When a market has excess supply of a good, this implies that
the current price is above equilibrium.
6. For each of the following situations, sketch a graph of
the initial market demand (D1) supply (S1), equilibrium
price (P1) and equilibrium quantity (Q1) Then sketch any
changes in the market demand (D2) and/or supply (S2)
curves, and indicate the new equilibrium price (P2) and
quantity (Q2).
a. The price of gasoline increases by 40 percent. What
happens in the market for bicycles?
6. a. Gasoline and bicycles are substitutes for one another.
When the price of gasoline rises, people substitute bicycle
transportation for gasoline. This is illustrated in the graph
below with the demand curve for bicycles shifting to the
right, resulting in a higher equilibrium price (P2) and a
higher equilibrium quantity (Q2). Note that there is a shift in
the demand curve and a movement along the supply curve.
b. The price of gasoline increases by 40 percent. What
happens in the market for fuel inefficient SUVs?
b. Gasoline and SUVs are complements for each other. When the
price of gasoline rises, people find that driving SUVs is relatively
more expensive and therefore decrease their demand for SUVs at
every price. This is illustrated in the graph below with the demand
curve for SUVs shifting to the left, resulting in a lower equilibrium
price (P2) and a lower equilibrium quantity Q2. Note that there is a
shift in the demand curve and a movement along the supply curve.
c. New technology for music-playing is developed. What
happens in the market for the devices?
c. New technology shifts the supply curve to the right from
S1 to S2. This causes a movement along the demand curve
and results in a decrease in the equilibrium price and an
increase in the equilibrium quantity. This is illustrated in the
figure below.
d. The price of labor decreases. What happens in the market
for fast-food restaurants?
d. When the price of labor decreases, the supply of the good
shifts to the right because labor is an input in the production
of fast-food meals. This results in a movement along the
demand curve, a decrease in the equilibrium price, and an
increase in the equilibrium quantity as illustrated below.
e. Income increases and good X is a normal good. What
happens in the market for good X?
e. An increase in income shifts the demand curve to the right
if the good is a normal good. This shift in demand causes a
movement along the supply curve and an increase in both the
equilibrium price and the equilibrium quantity as illustrated
below.
f. Income increases and good X is an inferior good.
What happens in the market for good X?
f. An increase in income shifts the demand curve to the left if
the good is an inferior good. This shift in demand causes a
movement along the supply curve and a decrease in both the
equilibrium price and the equilibrium quantity. The graph
below illustrates this situation.
7. Use the graph below to answer the following questions:
a. Identify the equilibrium price and the equilibrium quantity.
7. a. The equilibrium price is P1 and the equilibrium quantity
is Q3.
b. Suppose a price floor of P3 is implemented by the
government in this market. Describe what will happen to
the price and quantity once this price floor is implemented.
b. This is not an effective price floor because the price floor
of P3 is less than the equilibrium price, P1 . Because it is an
ineffective price floor, the equilibrium price and quantity will
not change.
c. Suppose a price floor of P2 is implemented by the
government in this market. Describe what will happen to
the price and quantity once this price floor is
implemented.
c. This is an effective price floor because the price floor of P2
is greater than the equilibrium price P1. At P2, Q1 units of the
good will be demanded and Q4 units of the good will be
supplied. This excess supply of Q4 - Q1 will not be eliminated
by price decreases because the price is artificially set at P2 by
the government and is not allowed to decrease. An effective
price floor creates a situation of excess supply, or a surplus,
that is not eliminated by changes in the price of the good
because the price has been set at a level greater than the
market-clearing price.
d. What must be true about a price floor in a market for a
good or service in order for that price floor to be effective?
d. For a price floor to have an effect on a market, the price
floor must be set at a price greater than the equilibrium price.
e. You are told that an effective price floor has been
implemented in this market and that the resultant surplus is
greater than Q4 – Q1. What do you know about the level of
this price floor?
e. The price floor must be set at a price greater than P2
because we know from part (c) that the surplus in the market
at P2 equals Q4 - Q1.
8. Use the graph below to answer the following questions.
a. Identify the equilibrium price and the equilibrium quantity.
8. a. The equilibrium price is P1 and the equilibrium quantity
is Q3.
b. Suppose a price ceiling of P2 is implemented by the
government in this market. Describe what will happen to the
price and quantity once this price ceiling is implemented.
b. This is not an effective price ceiling because the price ceiling
of P2 is greater than the equilibrium price P1. Since it is a
nonbinding/ineffective price ceiling, the equilibrium price and
quantity will not change.
c. Suppose a price ceiling of P3 is implemented by the
government in this market. Describe what will happen to the
price and quantity once this price ceiling is implemented.
c. This is an effective price ceiling because the price ceiling
of P3 is less than the equilibrium price P1. At P3, Qs units of
the good will be demanded and Q2 units of the good will be
supplied. This excess demand of Q5 - Q2 will not be
eliminated by price increases because the price is artificially
set at P3 by the government and is not allowed to increase.
An effective price ceiling creates a situation of excess
demand, or a shortage, that is not eliminated by changes in
the price of the good because the price has been set at a
level that is less than the market-clearing price.
d. What must be true about a price ceiling in a market for
a good or service for it to be effective?
d. For a price ceiling to have an effect on a market, the price
ceiling must be set at a price that is less than the equilibrium
price.
e. You are told that an effective price ceiling has been
implemented in this market and that the resultant shortage
is smaller than Q5 - Q2. What do you know about the level
of this price ceiling?
e. The price ceiling must be set at a price that is greater than
P3 but still less than the equilibrium price of P1. We know
this because when the price ceiling is set at P3 , the shortage
is equal to Q5 - Q2 and the new price ceiling results in a
smaller shortage than the shortage at price P3.
9. Consider the market for housing in Metropolitan City, where
all housing units are exactly the same. Currently, the
equilibrium price of housing is $2,000 a month and local
residents consume 1,500 units of housing. The local residents
argue that housing is too expensive and an effective price
ceiling is implemented. When the price ceiling is implemented
by the local government council, only 1,200 units of housing
are supplied. Is this an efficient level of housing for
Metropolitan City?
Explain.
To support your answer, provide two sketches: in the first
sketch, indicate the equilibrium quantity and price; in the
second sketch, indicate the price ceiling and the quantity
provided by the market. Is the price consumers are willing to
pay for the last unit equal to the price suppliers must receive to
supply the last unit? Explain.
9. The market is in equilibrium when there are 1,500 units of housing offered at the price of
$2,000 per month, so 1,200 is not an efficient level of housing. The price ceiling forces
consumers to reduce their consumption of the good from the efficient level. In the first sketch
below, the housing market is represented and the equilibrium price and quantity are where the
demand and supply curves intersect. In the second sketch, the price ceiling is imposed on the
housing market and this results in suppliers reducing the number of apartments they supply in
the market from 1,500 units to 1,200 units. Consumers are willing to pay more for the last unit
than suppliers must receive in order to produce this last unit of housing. This indicates that the
value to consumers of an additional unit of housing is greater than the cost to producers for
providing this additional unit of housing: provision of more housing would lead to greater
efficiency.
10. The market for taxi rides in Metropolia this week is described
in the following table. Assume that all taxi rides are the same in
Metropolia.
a. What is the equilibrium price and quantity of taxi rides in
Metropolia per week? Suppose the government of
Metropolia institutes a medallion system that limits the
number of taxi rides available in Metropolia per week to 80.
10. a. Equilibrium occurs when the quantity demanded equals
the quantity supplied. According to the data in the table, the
equilibrium price is $5 and the equilibrium quantity is 120 taxi
rides per week.
b. At what price will consumers want to purchase 80 taxi
rides per week?
b. Consumers will demand 80 taxi rides per week at a price of $7.
c. At what price will suppliers be willing to supply 80 taxi
rides per week?
c. Suppliers are willing to supply 80 taxi rides per week for a
price of $3.
d. What price will a taxi medallion rent for in this market?
Explain your answer.
d. The medallion will rent for $4 per taxi ride, or the
difference between the demand price and the supply price
when the quantity of taxi rides is limited to 80 per week.
e. Draw a graph of the taxi ride market in Metropolia.
On this graph, indicate the quota limit, the demand
price, the supply price, and the medallion's rental
price.
f. What is the total value of the taxi medallions
per week in Metropolia?
f. The taxi medallions are worth the product of the medallion
rent per ride times the number of taxi rides per week or ($4
per ride)(80 rides), or $320.
The End!