Ch4,5 questions - : = 94 PARTI Introduction to Economics

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Unformatted text preview: : = 94 PARTI Introduction to Economics REVEEWTHHUWSANTECONCEPTS producer surplus, p. 90 black market, p. 84 minimum wage, p. 86 = - 1 consumer surplus, p. 89 price ceiling, p. 82 queuing, P. 83 deadweight loss, p. 92 favored customers, p. 84 price floor, p. 86 ration coupons, p. 84 price rationing, p. 79 3‘ PRGBLEMS All problems are available on www.myeconlabcom i 1. Illustrate the following with supply and demand curves: b. An increase in the price of chicken has an impact on the a. in the summer of 2010, Spanish artist Pablo Picasso’s Portrait d’Angel Femdndez de Soto was sold in London for $51.6 million. b. In 2010, hogs in the United States were selling for 81 cents per pound, up from 58 cents per pound a year before. This price of hamburger. . Incomes rise, shifting the demand for gasoline. Crude oil prices rise, shifting the supply of gasoline. At the new equi- librium, the quantity of gasoline sold is less than it was before. (Crude oil is used to produce gasoline.) was due primarily to the fact that supply had decreased dun ing the period. c. Early in 2009, a survey of greenhouses indicated that the demand for houseplants was rising sharply. At the same time, large numbers of low-cost producers started grow- ing plants for sale. The overall result was a drop in the average price of hOusepIants and an increase in the num- ber of plants sold. 7. Illustrate the following with supply and/ or demand curves: :1. A situation of excess labor supply (unemployment) caused by a “minimum wage” law. b. The effect of a sharp increase in heating oil prices on the demand for insulation material. 8. Suppose that the world price of oil is $70 per barrel and that the United States can buy all the oil it wants at this price. Suppose also that the demand and supply schedules for oil in the United 3. Every demand curve must eventually hit the quantity axis States are as followg: because with limited incomes, there is always a price so high that there is no demand for the good. Do you agree or dis— agree? Why? L): . When excess demand exists for tickets to a major sporting event or a concert, profit opportunities exist for scalpers. Explain briefly using supply and demand curves to illustrate. Some argue that scalpers work to the advantage of everyone and are “efficient.” Do you agree or disagree? Explain briefly. 4. in an effort to “support” the price of some agricultural goods, the Department of Agriculture pays farmers a subsidy in cash for every acre that they leave unplanted. The Agriculture Department argues that the subsidy increases the “cost” of planting and that it will reduce supply and increase the price of competitively produced agricultural goods. Critics argue that because the subsidy is a payment to farmers, it will reduce costs and lead to lower prices. Which argument is cor- rect? Explain. 5. The rent for apartments in New York City has been rising sharply. Demand for apartments in New York City has been rising sharply as well. This is hard to explain because the law of demand says that higher prices should lead to lower demand. Do you agree or disagree? Explain your answer. 6. Illustrate the following with supply and! or demand curves: a. The federal government “supports” the price of wheat by paying farmers not to plant wheat on some of their land. Pater. U.S. QUANTITY U.s. QUANTITY ($ PER BARREL) DEMANDED SUPPLIED 68 15 4 70 I 15 6 72 14 8 74 13 ‘ 10 76 12 12 a. On graph paper, draw the supply and demand curves for the United States. b. With free trade in oil, What price will Americans pay for their oil? What quantity will Americans buy? How much of this will be supplied by American producers? How much will be imported? Illustrate total imports on your graph of the U.S. oil market. . Suppose the United States imposes a tax of $4 per barrel on imported oil. What quantity would Americans buy? How much of this would be supplied by American producers? How much would be. imported? How much tax would the government collect? 3 . Briefly summariZe the impact of an oil import tax by explaining who is helped and who is hurt among the fol- lowing groups: domestic oil consumers, domestic oil pro- ducers, foreign oil producers, and the U.S. government. 9. Use the data in the preceding problem to answer the follow— ing questions. Now suppose that the United States allows no oil imports. a. What are the equilibrium price and quantity for oil in the United States? b. If the United States imposed a price ceiling of $74 per bar- rel on the oil market and prohibited imports, would there, be an excess supply or an excess demand for oil? If so, how much? c. Under the price ceiling, quantity supplied and quantity demanded differ. Which of the two will determine how much oil is purchased? Briefly explain why. . Use the following diagram to calculate total consumer sur- plus at a price of $8 and production of 6 million meals per day. For the same equilibrium, calculate total producer surplus. Assuming price remained at $8 but production was cut to 3 million meals per day, calculate producer surplus and consumer surplus. Calculate the deadweight loss from underproduction. P 14 S 5’11 a v E as § l-q m5 D 2 __l! II II 012345678 Q Millions of meals per day early 2008, many predicted that in a relatively short period of uric, unleaded regular gasoline at the pump would be selling ' over $4. Do some research on the price of gasoline. Have ose dire predictions materialized? What is the price of nleaded regular today in your city or town? If it is below $4 per allon, what are the reasons? Similarly, if it is higher than $4, t has happened to drive up the price? Illustrate with supply demand curves. ated to the Economics in Practice on p. 8?] Many cruise offer 5-day trips. A disproportionate number of these trips ated to the Economics in Practice on p. 87] Lines for free fits to see Shakespeare in Central Park are often long. A local tician has suggested that it would be a great service if the provided music to entertain those wholare waiting in line. it do you think of this suggestion? 7 14. CHAPTER 4 Demand and Supply Applications 95 Suppose the market demand for burritOs is given by Q d = 40 —- SP and the market supply for burritos is given by Q5 = IOP — 20, where P = price (per burrito). a. Graph the supply and demand schedules for burritos. b. What is the equilibrium price and equilibrium quantity? c. Calculate consumer surplus and producer surplus, and iden- tify these on the graph. . On April 20, 2010, an oil~drilling platform owned by British Petroleum exploded in the Gulf of Mexico, causing oil to leak into the gulf at estimates of 1.5 to 2.5 million gallons per day for well over two months. Due to the oil spill, the government closed over 25 percent of federal waters, which has devastated the commercial fishing industry in the area. Explain how the reduction in supply from the reduced fishing waters will either increase or decrease ' consumer surplus and producer surplus, and show these changes graphically. 16. The following graph represents the market for DVDs. Price of DVDs Supply Demand I_I_ i. | I _J_ | l_..__l. I 0 3 6 9 12 15 18 21 24 27 30 Quantity ofDVDs (millions) a. Find the values of consumer surplus and producer surplus when the market is in equilibrium, and identify these areas on the graph. b. If underproduction occurs in this market, and only 9 million DVDs are produced, what happens to the amounts of consumer surplus and producer surplus? What is the value of the deadweight loss? Identify these areas on the graph. c. If OVerproduction occurs in this market, and 27 million DVDs are produced, what happens to the amounts of con- sumer surplus and producer surplus? Is there a deadweight loss with overproduction? If so, what is its value? Identify these areas on the graph. 96 PART I Introduction to Economics 17. The following graph represents the market for Wheat. The equi- a. Explain what will happen if the government establishes a libriurn price is $20 per bushel and the equilibrium quantity is price ceiling of $10 per bushel of wheat in this market? What 14 million bushels. if the price ceiling was set at $30? b. Explain What Will happen if the government establishes a price floor of $30per bushel of wheat in this market. What if Price of the price floor was set at $10? wheat (bushel) '18. {Related re the Economics in Practice on p. 87] Go back to the Economics in Practice on page 81. Using the numbers in the newspaper article, find the total revenue, total catch, and market prices for lobsters in the years 2008 and 2009. 30 10 0 2468101214161820222426 Quantity of wheat [millions of bushels) 1. Fill in the missing amounts in the following table: % CHANGE 9‘6 CHANGE IN PRICE IN QUANTITY ELASTICH'Y Demand for Ben BLJerry’s +10% —12% 3. Ice Cream Demand for beer at San —-20% b. a5 Francisco 49ers football games Demand for Broadway theater c. —15% 71.0 tickets in New York Supply of chickens +10% d. +1.2 Supply of beef Cattle —15% —1[}% e. 2. Use the table in the preceding problem to defend your answers to the following questions: a. Would you recommend that Ben & Jerry’s move forward with a plan to raise prices if the company’s only goal is to increase revenues? b. Would you recommend that beer stands cut prices to increase revenues at 49ers football games next year? 5. Using the midpoint formula, calculate elasticity for each of the following changes in demand by a household. P1 P2. Q1 Q2. Demand for: a. Long-distance $0.25 $0.15 300 min. 4-00 min. telephone service per min. per min. per month per month b. Orange juice 1.49 1.89 14 qt 12 qt per qt per qt per month per month 7 c. Big Macs 2.89 1.00 3 per week 6 per week ' cl. Cooked shrimp $9 $12 2 lb 1.5 lb per ib per lb per month per month 4. A sporting goods store has estimated the demand curve for a popular brand of running shoes as a function of price. Use the diagram to answer the questions that follow. 70 .7 60 Q E 50 :6 Dr 40 h 9* 30 .“a‘ g: 20 10—— | I I , 0 100 200 300 400 500 600 Shoe sales per week a. Calculate demand elasticity using the midpoint formula between points A and B, between points C and D, and between points E and F. CHAPTERS Elasticity 113 PROBLEMSWM All problems are available on www.myeconlah.com b. If the store currently charges a price of $50, then increases that price to $60, what happens to total revenue from shoe sales (calculate P X Q before and after the price change)? Repeat the exercise for initial prices being decreased to $40 and $20, respectively: I c. Explain why the answers to a. can be used to predict the answers to b. S. For each of the following scenarios, decide whether you agree or disagree and explain your answer. a. If the elasticity of demand for cocaine is -.2 and the Drug Enforcement Administration succeeds in reducing suppiy substantially, causing the street price of the drug to rise by 50%, buyers will spend less on cocaine. b. Every year Christmas tree vendors bring tens of thousands of trees from the forests of New England to New York City and Boston. During the last two years, the market has been very competitive; as a result, price has fallen by 10 percent. If the price elasticity of demand was —1.3, vendors would 10se rev- enues altogether as a result of the price decline. c. if the demand for a good has unitary eiasticity, or elasticity is “1. it is always true that an increase in its price will lead to more revenues for sellers taken as a whole. 6. For the following statements, decide whether you agree or dis“ agree and explain your answer. a. The demand curve pictured here is elastic. § e and 0 Quantity b. If supply were to increase slightly in the following diagram, prices would fall and firms would earn less revenue. Supply E 0 Quantity 7. Taxicab fares in most cities are regulated. Several years ago taxi- cab drivers in Boston obtained permission to raise their fares 10 percent, and they anticipated that revenues would increase by about 10 percent as a result. They were disappointed, however. When the commissioner granted the 10 percent increase, rev— enues increased by only about 5 percent. What can you infer 114 PART I Introduction to Economics 10. 11. 12. about the elasticity of demand for taxicab rides? What were taxicab drivers assuming about the elasticity of demand? . Studies have fixed the short—run price elasticity of demand for gasoline at the pump at —0.20. Suppose that international hos- tilities lead to a sudden cutoff of crude oil suppiies. As a result, U.S. supplies of refined gasoline drop 10 percent. a. If gasoline were selling for $2.60 per gallon before the cutoff, how much of a price increase would you expect to see in the coming months? 1). Suppose that the government imposes a price ceiling on gas at $2.60 per gallon. How would the relationship between consumers and gas station owners change? . Prior to 2005, it seemed like house prices always rose and never fell. When the demand for housing increases, prices in the housing market rise but not always by very much. For prices to rise substantiaily, the supply of housing must be relatively inelastic. That is, if the quantity supplied increases rapidly whenever house prices rise, price increases will remain small. Many have suggested government policies to increase the elas- ticity of supply. What specific policies might hold prices down when demand increases? Explain. For each of the following statements, state the relevant elasticity and state what its value should be (negative, positive, greater than one, zero, and so on). _ a. The supply of labor is inelastic but slightly backward-bending. b. The demand for BMWs in an area increases during times of rising incomes just slightly faster than income rises. c. The demand for lobsters falls when lobster prices rise {cateris parihus), but the revenue received by restaurants from the sale of lobsters stays the same. d. Demand for many goods rise when the price of substi~ tutes rise. e. Land for housing development near Youngstown, Ohio, is in plentiful supply. At the current price, there is essentially an infinite supply. {Related to the Economics in Practice on p. 108] A number of towns in the United States have begun charging their resi‘ dents for garbage pickup based on the number of garbage cans filled per week. The town of Chase decided to increase its per— can price from 10 cents to 20 cents per week. In the first week, Chase found that the number of cans that were brought to the curb fell from 550 to 525 (although the city workers com— plained that the cans were heavier). The town economist ran the numbers, informed the mayor that the demand for dis- posal was inelastic, and recommended that the city raise the price more to maximize town revenue from the program. Six months later, at a price of 30 cents per can, the number of cans has fallen to 125 and town revenues are down. What might have happened? [Related to the Economics in Practice on p. 199] At Frank’s Delicatessen, Frank noticed that the elasticity of customers dif— fered in the short and longer term. Pranl: also noticed that his increase in the price of sandwiches had other effects on his store. In particular, the number of sodas sold declined while the number of yogurts sold went up. How might you explain this pattern? *Note: Problems marked with an asterisk are more challenging. i3. 14. 16. Price ($) Describe what will happen to total revenue in the follow— ing situations. a. Price decreases and demand is elastic. b. Price decreases and demand is inelastic. c. Price increases and demand is elastic. d. Price increases and demand is inelastic. e. Price increases and demand is unitary elastic. f. Price decreases and demand is perfectly ineiastic. g. Price increases and demand is perfectly elastic. The crossaprice elasticity values for three sets of products are listed in the table below. What can you conclude about the relam tionships between each of these sets of products? PRODUCTS PRODUCTS PRODUCTS A AND B C AND D E AND F Cross-price 78.7 +5.5 0.0 elasticity . Income elasticity of demand measures the responsiveness of demand to changes in income. Explain what is happening to demand and what kind of good is being represented in the fol‘ lowing situations. a. Income is rising, and income elasticity of demand is positive. b. income is rising, and income elasticity of demand is negative. Using the midpoint formula and the following graph, calcuiate the price elasticity of demand and the price elasticity of supply when the price changes from $4 to $9 and when the price changes from $9 to $15. Supply Demand Quantity CHAPTERS Elasticity 115 1?. Use the following total revenue graph to identify which sections l 8_ For each of the following products, explain whether demand is f. Newspapers of the total revenue curve reflect elastic demand, melastic likely to be elastic or inelastic. '1. demand, and unitary elastic demand. Explain your answers. a. Cigarettes b. Tacos ' c. Gasoline Total (1. Milk twin” e. Honda Accord automobiles Total revenue Quantity ! demanded 5 APPENDIX ‘ Point Elasticity (Optional) Two different elasticities were calculated along the demand curve in Figure 5.3 on p. 104. Between points A and B, we dis covered that Herb’s demand for lunches in the fancy dining room was very elastic: A price decline of only 10.5 percent resulted in his eating 66,7 percent more lunches in the dining room (elasticity : —6.4). Between points C and D, however, on the same demand curve, we discovered that his demand for meals was very inelastic: A price decline of 40 percent resulted in only a modest increase in lunches consumed of 11.76 percent (elasticity = —0.294). Now consider the straight-line demand curve in Figure 5A.1. We can write an expression for elasticity at point C as follows: Price per unit 52.100 :12 Q 1f. ¥%AQ_ Q ;Q1_ AQ_P1 eas1c1tY _ o/DAP _ g 100 — é-p — AP Q1L Unitsofoutput P P1 A FIGURE SAIL Elasticity at a Point Along a A Demand Curve- AQ/ AP is the reciprocal of the slope of the curve. Slope m the diagram is constant along the curve, and it is negative. To calculate the reciprocal of the slope to plug into the previous Because the length of CQ1 is equal to P1, we can write elasticity equation, we take QIB, or M1, and divide by minus the length of line segment CQI. Thus, AQ M1 ...
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Ch4,5 questions - : = 94 PARTI Introduction to Economics

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