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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.