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UNIVERSITY OF MASSACHUSETTS BOSTON Accounting and Finance MBAAF 601 Prof. Konan Managerial Economics Problem Set # 3 Applications of Supply and Demand 1. Discuss how the effects on the market equilibrium of a change (increase or decrease) in supply depend on the elasticity of demand. 2. Suppose the demand for some product is highly but not perfectly price elastic, and the supply is price inelastic but not perfectly so. If supply decreases, what happen to total expenditures (revenues) on the product? 3. Robberies soar in central cities after a Federal drug bust as addicts desperately try to get more money to buy the drugs remaining on the streets. How does the soaring crime rate relate to the addicts’ elasticity of demand for drugs? 4. What attributes of the demand and supply for agricultural products have contributed to the steady decline in parity? 5. How do you explain the huge increase in the supply of the agricultural products in the United States since World War II despite the large migration of people off the farms and into urban areas? 6. Why is good weather not necessarily “good” for all farmers? How does your answer depend on the price elasticity of demand? 7. The direct costs of creating an on-the-street parking space are not very high. Yet, the supply curve for metered parking spaces is very steep in the central city. How do you explain this? 8. What are the arguments in favor of rent control for low income housing? What kind of problem does it cause? 9. “The attractiveness of price ceilings or price floors depends in part on the elasticities of supply and demand.” Demonstrate the truth of this statement. 10. Define marginal cost and marginal value and describe their relationships to the market demand and supply curves and to the market price. 1
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11. Using a supply and demand diagram, illustrate the following concepts at market equilibrium: total cost, total value, net value (total surplus), consumer surplus, producer surplus. 12. Using supply and demand analysis, depict a situation in which: (1) Producers capture all the net value from producing and consuming the good. (2) Consumers capture all the net value from producing and consuming the good. 13. Compare and contrast: (1) The original price support scheme in which the government buys crops at the price floor; and (2) The target price scheme, in which the government lets the market price prevail and gives the farmers cash grants. Who gains, who loses, and what are the efficiency implications of each type of price floor? 14. Many people have long supported very high taxes on cigarettes to discourage people from smoking. Do you think that the burden of a high tax is likely to fall more on the smokers or on the cigarette manufacturers, or shared somewhat equally between them? 15.
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