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econ101_ps3 - METU Department of Economics Econ 101...

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1 METU Department of Economics Econ 101: Introduction to Economics I Sections 01-02-03 Fall 2010 PROBLEM SET 3 PART A: PROBLEMS Q-1) For each of the following events, show the shift in the demand curve and/or supply curve that results from the event, and the change in equilibrium price and quantity. a) Medical reports show that oat bran does not reduce cholesterol, contrary to earlier beliefs. What happens to the demand and/or supply curves for oat bran? What happens to the equilibrium price and quantity of oat bran sold? b) The price of water sold to agricultural producers in Adana is raised. What happens to the demand and/or supply curves for vegetables? What happens to the equilibrium price and quantity of vegetables sold? c) An insect pest attacks the coffee crop around the world. What happens to the demand and/or supply curves for tea? What happens to the equilibrium price and quantity of tea sold? Q-2) Suppose that the Mo ğ ollar will give a concert to the METU Students in METU Studium in the forthcoming days. METU has approximately 25000 students. The percentage distribution of all METU Students in terms of the demand for the concert ticket is as follows: 30 % of the students are willing to pay 20 TL or more 50 % of the students are willing to pay 15 TL 75 % of the students are willing to pay 10 TL 90 % of the students are willing to pay 5 TL 100 % of the students are willing to pay 1 TL a) Derive the demand schedule. b) Carefully draw the demand curve. c) 25000 students want to go to the concert. However, only 12500 concert ticket will be sold due to the capacity constraint of the stadium. If the ticket sales are based on willingness to pay, what would be the equilibrium price of the concert ticket? Show the result on your graph. d) If the university administration intervenes to the price in the way that ticket price cannot go above 10 TL, is this a price ceiling or a price floor? What will be the quantity exchanged at new price? Will there be an excess supply or excess demand in the market? Show this on your graph. e) How can this quantity exchanged be allocated?
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2 Q-3) Each of the following statements is misguided. Explain what is wrong with the reasoning. a) "The supply curve for personal computers must be downward sloping, since output keeps rising and prices keep coming down." b) "Rent control in Eryaman has forced the landlords in neighboring communities to keep rents low in order to compete with Eryaman low-rent housing." c) "Fines for illegal parking should be doubled. This would provide the city with twice as much revenue from parking fines, as well as reducing the amount of illegal parking." d) "There is no opportunity cost associated with the time that a retired person spends on volunteer work, since the retired person would not have been paid for the time anyway." Q-4) A life-extending drug is very expensive to produce. The equilibrium price for the drug is very high, such that some people who could benefit from the drug simply cannot afford to buy it. The government is considering a program that would cover 50% of the price of the
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