Solution to Chapter_6

Solution to Chapter_6 - Solution to In-Class Exercise...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
Solution to In-Class Exercise (Chapter 6:page 132 – 133)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Problems and Applications 1. Lovers of classical music persuade Congress to impose a price ceiling of $40 per concert ticket. As a result of this policy, do more or fewer people attend classical music concerts?
Background image of page 2
Problems and Applications 1. Answer: If the price ceiling of $40 per ticket is below the equilibrium price, then quantity demanded exceeds quantity supplied, so there will be a shortage of tickets. The policy decreases the number of people who attend classical music concerts, because the quantity supplied is lower because of the lower price.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Problems and Applications 2. The government has decided that the free- market price of cheese is too low. a. Suppose the government imposes a binding price floor in the cheese market. Draw a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a short- age or surplus of cheese?
Background image of page 4
2a. Answer: the imposition of a binding price floor in the cheese market is shown in the following Figure. In the absence of the price floor, the price would be P 1 and the quantity would be Q 1 . With the floor set at P f , which is greater than P 1 , the quantity demanded is Q 2 , while quantity supplied is Q 3 , so there is a surplus of cheese in the amount Q 3 Q 2 .
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Problems and Applications 2. The government has decided that the free- market price of cheese is too low. b. Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain.
Background image of page 6
Problems and Applications 2b. Answer: The farmers’ complaint that their total revenue has declined is correct if demand is elastic. With elastic demand, the percentage decline in quantity would exceed the percentage rise in price, so total revenue would decline.
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Problems and Applications 2c. In response to farmers’ complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?
Background image of page 8
Problems and Applications 2c. Answer: If the government purchases all the surplus cheese at the price floor, producers benefit and taxpayers lose. Producers would produce quantity Q 3 of cheese, and their total revenue would increase substantially. However, consumers would buy only quantity Q 2 of cheese, so they are in the same position as before. Taxpayers lose because they would be financing the purchase of the surplus cheese through higher taxes.
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Problems and Applications 3. A recent study found that the demand and supply schedules for Frisbees are as follows: Price Q D Q s $11 1 million Frisbees 15 million Frisbees 10 2 12 9 4 9 8 6 6 7 8 3 6 10 1
Background image of page 10
a) What are the equilibrium price and quantity of Frisbees? Answer:
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 43

Solution to Chapter_6 - Solution to In-Class Exercise...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online