Download PROBLEMS

PROBLEMS
1.
Using Figure 3.7 as a guide, determine the approximate size of the market surplus
or shortage that would exist at a price of (a) $40, (b) $20.
Using Figure 3.7, and the new demand curve:(a) at a price 0f $40, there
would be surplus of 50 (b) at a price of $20, there would be a shortage of
87.5.
2.
Illustrate the different market situations for the 1992 and 1997 U2 concerts,
assuming constant supply and demand curves. What is the equilibrium price?
(See Headlines on p. 72 and p. 74)
The equilibrium price for U2 tickets is somewhere between $52.50 (the
price in 1997) and $28.50 (the price in 1992).
Supply
Surplus
$52.50
Price
$28.50
Shortage
Demand
Quantity
3.
Given the following data, (a) construct market supply and demand curves and
identify the equilibrium price; and (b) identify the amount of shortage or surplus that
would exist at a price of $4.
Participant
Price
Supply Side
Alice
Butch
Connie
Dutch
Ellen
Quantity Supplied (per week)
$5
$4
$3
$2
$1
3
7
6
6
4
3
5
4
5
2
3
4
3
4
2
3
4
3
3
2
3
2
1
0
1
Market Total 26
19
16
15
7
Supply and Demand
Price (per unit)
$6
Supply
$5
$4
Demand 2
(for problem
#4)
$3
$2
$1
Demand 1
$0
0
5
10
15
20
25
30
Quantity (per week)
(a)
Equilibrium price is $2.
(b)
4.
At a price of $4, there would be a surplus of 9, the difference between the
market quantity supplied of 19 and the market quantity demanded of 10.
Suppose that the good described in problem 3 became so popular that every
consumer demanded one additional unit at every price. Illustrate this increase in
market demand and identify the new equilibrium. Which curve has shifted?
Along which curve has there been a movement of price and quantity?
Participant
Price
Demand Side
Al
Betsy
Casey
Daisy
Eddie
Market Total
Quantity Demanded (per week)
$5
$4
$3
$2
$1
1
0
2
1
1
5
2
1
2
3
2
10
3
1
3
4
2
13
4
1
3
4
3
15
5
2
4
6
5
22
The market demand
curve will shift to the right by 5 units
at every price. Given this new
demand curve, the new equilibrium
will be approximately $3.50 and 17
units. The increase in price results in
a movement along the supply curve,
resulting in an increase in quantity
supplied.
5.
Illustrate each of the following events with supply or demand shifts in the
domestic car market:
a.
The U.S. economy falls into a recession.
b.
U.S. autoworkers go on strike.
c.
Imported cars become more expensive.
d.
The price of gasoline increases.
S2, part b
Price
S1
D3
D1
D2, parts a and d
Quantity
(a)
This would result in a decrease in demand (leftward shift of the demand
due to a decline in buyer income.
(b)
This would result in a decrease in supply (leftward shift of the supply
curve) due to reduced ability to produce output.
(c)
This would result in an increase in demand (rightward shift of the demand
curve) as consumers substitute relatively less expensive domestic cars for
the now relatively higher priced imported cars.
(d)
This would result in a decrease in demand (leftward shift of the demand
curve) due to a higher price of a complementary good, gasoline.
curve)
6.
Graph the effects on price and quantity of California’s free tuition program (See
Policy Perspectives beginning on p. 80)
Tuition
S1
S2
D2
D1
Quantity
Normally, we do not extend demand curves to the quantity axis, as we are not
concerned about the quantity when the price is zero. In this case, with a college
education being offered for free, we do need to extend the demand curve to the
axis. The first effect of free tuition is that the quantity demanded would increase,
i.e., there is a downward movement along demand curve D1. Because
expectations are altered, demand shifts to demand curve D2.
The supply of public education is administratively determined and therefore the
supply curves are vertical. In other words, the state decides how much higher
education it wants to make available, regardless of the tuition (price). The
purpose of the free tuition was to make college education accessible to more
people. That will not work unless the supply is also increased, so the state
decides to offer more education and the supply increases (the supply curve shifts
to the right).
7.
Assume the following data describe the gasoline market.
Price per gallon
$1.00 1.25 1.50 1.75 2.00 2.25 2.50
Quantity Demanded 26
25
24
23
22
21
20
Quantity Supplied
16
20
24
28
32
36
40
a.
b.
c.
d.
a.
b.
c.
What is the equilibrium price?
If the quantity supplied at every price is reduced by 5 gallons, what will
the new equilibrium price be?
If the government freezes the price of gasoline at its initial price, how
much of a surplus or shortage will exist when supply is reduced as
described above?
Illustrate your answers on a graph.
The equilibrium price is $1.50 where Qs=Qd.
If the quantity supplied at every price is reduced by 5 gallons, the new
equilibrium price would be $1.75.
If the government freezes the price of gasoline at its initial price of $1.50,
the reduction in supply will result in a shortage of gasoline of 5 gallons
(24 – 19).
Price per gallon
Supply and Demand
2.75
2.5
2.25
2
1.75
1.5
1.25
1
0.75
0.5
0.25
0
Supply 2
Supply 1
Demand
0
10
20
30
40
50
Quantity
8. Graph the response of students to higher alcohol prices, as discussed in the Headline
on pg. 62.
Price
S2
S1
$3.17
$2.17
D1
Q2
Quantity
Q1
An increase in the tax on alcohol, for example, would decrease supply from S1 to S2.
This in turn would decrease the quantity demanded from Q1 to Q2.
9. Graph the changes in the beef market during 2003, as described in the Headline on p.
76.
Price
S2
P2
S1
D2
P1
D
1
Q1
Q2
Quantity
The decrease in supply due to the decrease in imported beef from
Canada, combined with the increase in demand due to a change in
tastes, results in the equilibrium price of beef increasing. For the
equilibrium quantity to change, the magnitude of the increase in demand
must have been larger than the magnitude of the supply decrease.