perloff_0321374584_IM_Part3

# perloff_0321374584_IM_Part3 - PART THREE Answers to Study...

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P ART T HREE Answers to Study Guide Exercises

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Chapter 2 1. True. See Figure 2.1 and assume that the demand curve is D 0 . The quantity demanded falls from Q 2 to Q 1 , but the actual amount bought rises from Q 0 to Q 1 as producers move from point A to point B along the supply curve. 2. False. See Figure 2.1. If the price of a substitute for elbow grease falls, then people will switch away from elbow grease, causing the demand curve to shift inward, from D 0 to D 1 . This will cause the excess demand to fall from ( Q 2 Q 0 ) to ( Q 1 Q 0 ). Figure 2 . 1 3. The Drug Czar doesn’t have enough information to be sure that his explanation is correct. He assumes that demand is stable and the price rise is due to a reduction in supply. However, a price rise could also be due to a rise in demand with a stable supply curve. Without information on quantity it is impossible to say what has happened. 4. The equilibrium price is 10 cents per pound, where Q d = Q s = 50,000 pounds per year. (100,000 – 5000 p = –50,000 + 10,000 p or 150,000 = 15,000 p so p = 10.) Because this price is less than 15 cents per pound, we know that the government must buy up Wapanzo beans. At 15 cents per pound, the quantity supplied is 100,000 pounds per year. Q s = –50,000 + (10,000 × 15) = 100,000. At 15 cents per pound, the quantity demanded is 25,000 pounds per year. Q d = 100,000 – (5000 × 15) = 25,000 pounds.

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290 Part 3 Answers to Study Guide Exercises Thus, the government must buy 75,000 pounds per year at 15 cents per pound, or \$11,250 per year. Figure 2.2 shows how the government price-support program shifts the demand curve and bids up the price. (It makes little sense for the government to sell the beans because consumers will demand 100,000 pounds of beans only if the price is zero.) Figure 2 . 2 5. Initially in East Elbonia, p = \$1, Q = 500. Initially in West Elbonia, p = \$2, Q = 1400. After trade, p = \$1.50 in both. At this price Q d is 400 in East Elbonia and Q s is 900 in East Elbonia, so East Elbonia exports 500 six packs to West Elbonia. 6. No. It is important to remind students that because price and quantity are determined by the intersection of supply and demand curves, we cannot simply run a regression through a plot of points and assume that this will be the supply curve or the demand curve. In the case of blueberries, it is more likely that demand stays constant over time while the supply shifts from month to month. If this is so, any regression would identify the demand curve, not the supply curve. Explain that in most situations both supply and demand curves shift over time, meaning that the econometrician must estimate both a supply and a demand equation. Briefly explain that the econometrician will need enough information to identify each curve—for example, information on costs to identify the supply equation and information on the prices of substitutes to identify the demand equation.
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## This note was uploaded on 04/16/2008 for the course MICROECONO ECON W3211 taught by Professor Dutta during the Spring '08 term at Columbia.

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perloff_0321374584_IM_Part3 - PART THREE Answers to Study...

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