EOC 4 Solutions - modern principles of economics 4 modern...

This preview shows page 1 - 2 out of 14 pages.

S-1 MODERN PRINCIPLES : MACROECONOMICS MODERN PRINCIPLES OF ECONOMICS 4 4 Equilibrium: How Supply and Demand Determine Prices Facts and Tools 1. If the price in a market is above the equilibrium price, does this create a surplus or a shortage? 1. A surplus: a lot of unsold goods. 2. When the price is above the equilibrium price, does greed (in other words, self-interest) tend to push the price down or up? 2. Self-interest tends to push the price down: Business owners don’t like having unsold goods, so they cut the price. Note: Greed and self-interest have the same denotation but different connotations. 3. Jon is on eBay, bidding for a first edition of the influential Frank Miller graphic novel Batman: The Dark Knight Returns. In this market, who is Jon competing with: the seller of the graphic novel or the other bidders? 3. He is competing with other bidders. 4. Now, Jon is in Japan, trying to get a job as a full-time translator; he wants to trans- late English TV shows into Japanese and vice versa. He notices that the wage for translators is very low. Who is the “competition” pushing the wage down: Does the competition come from businesses who hire the translators or from the other translators? 4. Jon is competing with other translators. 5. Jules wants to purchase a Royale with cheese from Vincent.Vincent is willing to offer this tasty burger for $3. The most Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn’t get many opportunities for tasty burgers). a. How large are the potential gains from trade if Jules and Vincent agree to make this trade? In other words, what is the sum of producer and consumer surplus if the trade happens? b. If the trade takes place at $4, how much producer surplus goes to Vincent? How much consumer surplus goes to Jules? c. If the trade takes place at $7, how much producer surplus goes to Vincent? How much consumer surplus goes to Jules? Solution Solution Solution Solution Cowen3e_CH04_Solutions.indd 1 29/06/15 12:49 PM
Image of page 1

Subscribe to view the full document.

5. a and b and c . The potential gains from trade are $5 of value ($8 2 $3 5 $5 surplus): It might all be consumer surplus, it might be producer surplus, or it might be some mix of the two. If they trade at $4, $1 of producer surplus goes to Vincent, and $4 of consumer surplus to Jules. If the trade happens at $7,Vincent gets $4 of producer surplus, while Jules gets $1 of consumer surplus. 6. What happened in Vernon Smith’s lab? Choose the right answer: a. The price and quantity were close to equilibrium but gains from trade were far from the maximum. b. The price and quantity were far from equilibrium and gains from trade were far from the maximum. c. The price and quantity were far from equilibrium but gains from trade were close to the maximum.
Image of page 2
You've reached the end of this preview.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern