Download Midterm Study Guide - Partial Answers

Use Supply and Demand to answer the following questions.
Delphi Automotive, a major Automotive Parts Supplier (a company that supplies the
parts used to assemble a car) recently went bankrupt. While the factories still exist,
they are all closed while the company is sorted out, and will not re-open for a long
time. This has caused a major disruption in the manufacture of U.S. cars. Using
supply and demand, explain;
1. What will this bankruptcy do to the supply and demand of U.S. produced
cars, in the U.S.?
Supply will shift in, as the auto parts are an input into the production process.
So the equilibrium price of cars will go up, and the quantity demanded will go
down.
2. What will this do to the supply of, and demand for, Japanese cars sold in the
U.S.?
Since the price of U.S. cars has gone up, and they are a substitute good for
Japanese cars, the demand for Japanese cars will shift out. This will increase the
equilibrium price, and the equilibrium quantity, of Japanese cars in the U.S.
market.
3. Several Thai companies are capable of manufacturing the same items that
Delphi Automotive did. What will happen to the supply and demand for
automotive parts in the U.S. if the Thai companies can quickly start
supplying the parts from their factories?
If the thai companies can quickly supply the parts to the U.S. manufactures, then
they can replace the parts that the U.S. manufactures can’t produce, but that
U.S. manufacturers still want. You could model this in one of two ways redraw supply of car parts as very elastic, so the effects on graph 1 and 2 would
be small, (and explain that the new quantity is composed of foreign parts), or you
could shift the demand for U.S. parts INWARDS, since Thai parts are now
coming in, presumably at a cheaper price.
4. What would be different about the above answer if it would instead take a
long time for Thai companies to begin supplying the parts to U.S. automakers?
Then not much happens in the short term, but you get the same effects in the
long term. Then tell me something about expectations.
Using Supply and Demand, model and explain the following….
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The demand for eggs is price - inelastic. However, the cross price-elasticity of eggs
and bacon is high (elastic). Illustrate and explain what will happen in the egg market,
if the government puts a tax on Bacon.
If the government taxes Bacon, and we assume the supply and demand for bacon
has normal elasticities, the price of bacon to the consumer will go up. Since
bacon and eggs are complements, when the price of bacon goes up, the demand
for eggs shifts inwards.
What will happen to the price and market clearing quantity of THAI WIVES IN
THAILAND, if demand for thai wives by Chinese men goes up?
A war in the middle east cuts off the supply of oil to the rest of the world. What will
happen to the price, and market clearing quantity, of oil in the short run. In the long
run, what will happen?
What effect would a price floor on Rice, set above the market clearing rate, have on
the Thai rice market. Who would stand to benefit from this program, and who would
be hurt (Hint – use consumer and producer surplus to answer that)? How would your
answer change if the supply of rice was elastic, vs. if it is elastic.
A price floor set above the market clearing price would create a surplus of rice,
with some growers not able to sell all of their rice. New growers will come into
the market, creating an excess of rice., as consumers consume other foods. If the
supply and demand for rice are both inelastic, then producers will mostly
benefit, they still sell most of their rice, and not many new suppliers come into
the market. Consumers are mostly hurt, they are not getting as much consumer
surplus as before. If the supply and demand are elastic, then those few farmers
who are still selling rice gain a bit, but most rice farmers are left with lots of rice
they can’t sell. Consumers are hurt, but not much, most of them just switch to a
good substitute.
Graph out the supply and demand for low skill workers. Assume that the market
clearing wage is 20 baht an hour (i.e. assume that low skill workers will get paid 20
baht an hour when the market set prices). If the minimum wage is 15 baht, what
effect will this have on the quantity of low skilled workers working, and the wages
they receive. What if the minimum wage is instead set to be 30 baht an hour? Then
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explain (and show) what the effects of a minimum wage set above the market clearing
price will be. Under what conditions will workers benefit from a high minimum
wage, and under what conditions will they suffer?
Draw a supply and demand graph for the labor market, be sure to label it clearly.
Then, assume that the Thai Government mandates that all Thai companies have to
provide workers with free health care benefits. What will this do to wages, the
quantity of workers employed, and the compensation of workers. Under what
circumstances would this help workers, and under what circumstances would it hurt
them.
This question is a bit harder than the other ones. Will answer it later, it will take
a while to draw a good graph of it. But basically, what will happen is demand
for workers will shift in, since the price firms have to pay (wages + mandatory
benefits) is now higher for any given worker. However, workers who receive the
benefit will still have the same demand (assuming that they value 10,000 baht of
healthcare the same as they value 10,000 – which is unlikely), so you will get a
“tax wedge”, and more workers looking for work, and workers getting higher
overall wages plus benefits, but their wages will almost certainly go down. Will
give a fuller answer later.
What are the assumptions about how people interact in a market, that makes many
economists believe that markets lead to moral behavior. Why do economists assume
this to be true, even if people are at heart selfish.
Using the concept of consumer and producer surplus, explain why economists believe
markets are a pretty good way to organize society
I like beer, so much that I would buy the first can after work for 100 baht. I would
pay 90 for the second can, 80 for the third, and 10 baht less for each successive can.
This exhibits __Decreasing______________ returns, and means that demand slopes
__Downwards________. If the price of beer is 40 baht a can, how much money
should I spend on beer?
I would purchase 6 or 7 beer, since I value them at 100 90 80 70 60 50 40. The
sixth beer I would purchase for sure, since it gives a marginal benefit of 50 but
costs me 40. The seventh beer gives a marginal benefit of 40, but it costs 40, so I
could go either way. Thus I would SPEND 240 or 280 for beer. Since they come
in six-packs, probably the 240….
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Assume three types of productive technologies, illustrated below. Which one shows
declining returns, increasing returns, and constant returns. Now below each one,
show production possibility frontier for two goods that both shared the same
productive technology would have. Be sure to label economically efficient,
economically inefficient, and technologically impossible points.
The relevant PPFs would look like……
Sorry, forgot to draw the points, but you should be able to figure that out
yourselves, drawing graphs is time consuming.
Caveman Ooog, and his cavewife Grrrr, have to decide about who will hunt, and who
will gather. Ooog can catch 1 rabbits an hour, or gather 1 coconut in an hour day.
Grrrr can catch 1 Rabbit every two hours, or gather 2 coconuts in an hour.
Draw the production possibility frontier if they each hunt/gather for themselves, and
then draw it if the cooperate and share. Who would specialize in what, and why. Is
this an example of absolute, or comparative, advantage?
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Something like the right. Ooog has a
1:1 tradeoff between coconuts and
rabbits, Grrrr trades them off at a 4:1
ratio. This is an example of absolute
advantage, though it should be noted
that both ALSO have a comparative
advantage in the thing they have an
absolute advantage in.
Define the following
Opportunity cost
Path dependency
The law of supply and demand
Elasticity
The production possibility frontier
Comparative advantage
Absolute advantage
Tax
Sales tax/VAT
Income tax
Progressive tax
Property rights
What are the three characteristics of them?
Technological innovation
TANSTAAFL
The Law of Unintended consequences
Positive Incentives
Negative Incentives
The Peltzman Effect
Price Elasticity
Cross-Price Elasticity
Income Elasticity
The Short Run and the Long Run
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Thick Markets
Cartels (OPEC)
Price Discrimination
The law of diminish returns
Declining, constant, increasing, returns.
Economic profits
Accounting profits
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