PS 1 Micro II 2011

# PS 1 Micro II 2011 - NAME: Problem Set #1 SOLUTION Micro II...

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NAME: Problem Set #1 SOLUTION Micro II – Spring Term 2011 DUE DATE: Saturday, Jan. 29 by 10:00am. Drop the problem set off at building J11-C NO LATE ASSIGNMENTS WILL BE ACCEPTED!!!! 1. About 100 million pounds of jelly beans are consumed in the United States each year, and the price has been about \$0.50 per pound. However, jelly bean producers feel that their incomes are too low and have convinced the government that price supports are in order. The government will therefore buy up as many jelly beans as necessary to keep the price at \$1 per pound. However, government economists are worried about the impact of this program because they have no estimates of the elasticities of jelly bean demand or supply. a. Could the program cost the government more than \$50 million per year? Under what conditions? Could it cost less than \$50 million per year? Under what conditions? Illustrate with a diagram. If the quantities demanded and supplied are very responsive to price changes, then a government program that doubles the price of jelly beans could easily cost more than \$50 million. In this case, the change in price will cause a large change in quantity supplied, and a large change in quantity demanded. In figure 9.1 (a), the cost of the program is (Q S -Q D )*\$1. Given Q S -Q D is larger than 50 million, then the government will pay more than 50 million dollars. If instead supply and demand were relatively price inelastic, then the change in price would result in very small changes in quantity supplied and quantity demanded and (Q

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## This note was uploaded on 02/13/2012 for the course ECON 121 taught by Professor Adam during the Spring '11 term at Bunker Hill.

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PS 1 Micro II 2011 - NAME: Problem Set #1 SOLUTION Micro II...

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