SOLUTION PS1

# SOLUTION PS1 - Solutions Problem Set 1 1 Do Problem 1 on...

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Solutions Problem Set 1 1. Do Problem 1 on page 85 of Mankiw. a) Florida is a large producer of oranges. When a snap hits Florida, it is harder to produce oranges, therefore, the supply shrinks (the supply curve shifts upwards and to the left), and therefore price increases. b) New Englanders, who usually run away to the Caribbean every winter to escape the cold weather, prefer to stay home during the warm summer months. This shifts the demand curve downwards and to the left, resulting in a reduced price. c) Many oil wells are destroyed during wars. In general, the capacity to produce oil is seriously damaged in Middle Eastern countries. This constitutes a negative supply shock (reduction from S1 to S2 in the first graph). In equilibrium, the price of gasoline raises. Since old Cadillacs consume a lot of gas, most people

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prefer using public transport or more gas-efficient cars. Therefore, an increase in the price of gas reduces the demand for cadillacs. As shown in the second graph, this makes the price fall. 2. Do Problem 6 on page 86 of Mankiw. Statement b) refers to a movement along the supply curve. Statement a) refers to a shift in the supply curve. 3. Do Problem 10 on page 86 of Mankiw. The equilibrium price is \$6 The equilibrium quantity is 81. If the actual price were above the equilibrium price, there would be left-over pizzas, and sellers would be willing to reduce the price in order to sell them. If the actual price were below \$6, there would be people trying to get pizzas and not being able to, therefore they would start offering a higher price in order to get a slice. 4. Do Problem 12 on page 87 of Mankiw.
a) This supply curve is unusual in the sense that it is entirely vertical. It could be true in this case since there is no way to offer more tickets than there is space available in the stadium. b) Equilibrium price is \$8. Equilibrium quantity is 8000 tickets. c) The new demand (including demand by old and additional students is: Price Quantity Demanded (New=old+additional) 4 14,000 8 11,000 12 8,000 16 5,000 20 2,000 With the added demand, the equilibrium price becomes \$12. The new equilibrium quantity doesn’t change, it still is 8000 tickets 5. Use supply and demand diagrams to model the following situations. Each example requires shifting supply and/or demand curves. Label the shifts clearly in your diagrams, and indicate how they affect price and quantity exchanged. a. According to the Wall Street Journal (May 17, 2006), “Rising gas prices are leading to some funky economics at the rental-car counter: Prices are dropping on SUVs and big luxury cars, and increasing for the cramped, compact models that are now in greater demand.” (Model only the rental market for SUVs.) If gas becomes more expensive, more people will want to use fuel-efficient smaller cars. Therefore renting an SUV will be less appealing (i.e. demand contracts). The demand curve moves downwards and to the left, depressing the price and quantity of SUV rentals. b.

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SOLUTION PS1 - Solutions Problem Set 1 1 Do Problem 1 on...

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