HW3S_302 - Econ 302- Solution to 3rd Problem Set Spring...

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Econ 302- Solution to 3rd Problem Set Spring 2010-Ali Toossi Due: Wednesday, February 17 Answer to question 1. A shortage occurs when, at a given price, quantity demanded exceeds quantity supplied. Scarcity implies that not everyone can consume as much of a good as he wants. A good can be scarce without a shortage occurring if the price of the good is set at the market equilibrium. Answer to question2. The supply curve would be a horizontal line where the price equals zero. The demand curve would be a typical demand curve. If the price is greater than zero, then the market system is acting to allocate resources; not everyone can have as much as they want. Answer to question5. a . Shift in demand b. Change in quantity demanded (shift in supply) c. Change in the quantity demanded (shift in supply) d. Shift in demand Answer to question8. For the tax burden to fall mostly on consumers rather than producers (buyers rather than sellers), you want to find a product (or products) for which the quantity supplied is very responsive to price but quantity demanded is less responsive to price. Addictive goods like cigarettes and alcohol may fit this description. Answer to problem 1. a) The imposition of the ceiling price on tea causes a reduction in the quantity of tea bought, from Q 1 to Q 2 (left panel). The result is a leftward shift in the demand for lemons, resulting in a reduction in both price and quantity (right panel). Price Price S S P 1 l P 1 t P 2 t D D 2 Q 2 t Q 1 t Tea Q 2 l Q 1 l Lemons b) The ceiling price for tea lowers the quantity people are able to buy from Q 1 t to Q 2 t . There is excess demand for tea at the ceiling price P 2 t , and some of this excess demand spills over to substitute products such as coffee. The result is that the equilibrium price of coffee rises. (Note: This result may seem inconsistent with the claim that a fall in the price of a good's substitute reduces the demand for that good. But this claim refers to a fall in the equilibrium price of the 1 P 2 l D 1
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good, not a price reduction caused by a ceiling. Because of the quantity reduction caused by the ceiling, tea buyers would be willing to pay P 3 t for tea. So the price ceiling actually raises the opportunity cost of additional units of tea.) P P tea coffee Q Q D D D S S 2 1 tea coffee P P P P P Q Q Q Q 1 2 1 2 t t t t t c c c t 1 2 3 1 2 c c Answer to problem 2 . a) At prices of 35 and 14, there will be 7 DVDs traded in the market.
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This note was uploaded on 08/02/2010 for the course ECON ECON 302 taught by Professor Arvan-rad during the Spring '09 term at University of Illinois at Urbana–Champaign.

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HW3S_302 - Econ 302- Solution to 3rd Problem Set Spring...

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