MIT14_01SCF11_soln01 - 14.01 Fall 2010 Problem Set 1...

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14.01 Fall 2010 Problem Set 1 Solutions 1. (25 points) For each of the following scenarios, use a supply and demand diagram to illustrate the effect of the given shock on the equilibrium price and quantity in the speci±ed competitive market. Explain whether there is a shift in the demand curve, the supply curve, or neither. (a) (5 points) An unexpected temporary heat wave hits the East Coast. Show the effect in the ice cream market in New England. The temporary heat wave shifts the demand curve to the right from D to D . As a result, equilibrium price and quantity both go up. (b) (5 points) The government introduces a tax on ice cream which is paid by producers. What is the effect in the ice cream market? The supply curve shifts up from S to S by the amount of the tax. As a result, the equilibrium price increases and the equilibrium quantity decreases. However, the rise in the equilibrium price from P to P is smaller than the tax. (c) (5 points) China and Mexico are major producers of textiles. Workers in Mexico decide to go on strike. Show the effect on the market for Mexican textiles. The supply curve for Mexican textiles shifts to the left. This results in a higher equilibrium price and lower equilibrium quantity in the market for Mexican textiles. (d) (5 points) Show the effect of the situation described in (c) on the market for Chinese textiles. The demand curve for Chinese textiles shifts to the right. This results in a higher equilibrium price and higher equilibrium quantity in the market for Chinese textiles. (e) (5 points) Suppose the government imposes a price cap on bottled water. Show the effect in the bottled water market. 1
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If the price ceiling P is set below the equilibrium price P , then there will be a shortage of bottled water in the amount of Q 1 Q 2 and bottled water will be rationed. If the price ceiling is above the equilibrium price, then there is no effect.
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This note was uploaded on 03/18/2012 for the course ECON 201 taught by Professor Çakmak during the Spring '10 term at Middle East Technical University.

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MIT14_01SCF11_soln01 - 14.01 Fall 2010 Problem Set 1...

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