Solution to Chapter_6

# Solution to Chapter_6 - Solution to In-Class...

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Solution to In-Class Exercise (Chapter 6:page 132 – 133)

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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?
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.

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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?
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 .

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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.
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.

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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?
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.

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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
a) What are the equilibrium price and quantity of Frisbees? Answer:

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

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