answers-2 - Answers to Questions for Review 1. A shortage...

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Answers to Questions for Review 1. A shortage occurs when, at a given price, quantity demanded exceeds quantity supplied. Scarcity implies that not everyone can consume as much of a good as he wants. A good can be scarce without a shortage occurring if the price of the good is set at the market equilibrium. 2. The supply curve would be a horizontal line where the price equals zero. The demand curve would be a typical demand curve. If the price is greater than zero, then the market system is acting to allocate resources; not everyone can have as much as they want. 3. Some examples: Parking places for the president of the college; giving seniors priority in class assignments. Shortage of parking spaces and students being bumped from preregistration. 4. The former implies a shift in the supply curve; the latter a movement along the supply curve. 5. a. Change in demand b. Change in quantity demanded (shift in supply) c. Change in the quantity demanded (shift in supply) d. Change in demand 6. Because consumers prefer to pay a lower price. 7. The allocative function of price is not important with vertical, or nearly vertical, supply curves, e.g., land. 8. True. D' D S S+T P Q a b a-T b-T P* Buyer's share for tax with D' = (a-P*)/T Buyer's share for tax with D = (b - P*)/T 9. For the tax burden to fall mostly on consumers rather than producers (buyers rather than sellers), you want to find a product (or products) for which the quantity supplied is very responsive to price but
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quantity demanded is less responsive to price. Addictive goods like cigarettes and alcohol may fit this description. 10. If a poor person were given $50,000 in cash, it is unlikely he would spend it on a Mercedes, since he probably has other, more pressing wants. Since the gift Mercedes would fetch less than the cash gift, most poor persons would choose the cash. Answers to Chapter 2 Problems 1. The supply curve after the tax is shown as S' in the diagram. The new equilibrium quantity will fall to 2. The equilibrium price paid by the buyers is now $4/oz. The price received by the sellers is now $2/ oz. Price ($/ounce) Quantity 5 4 3 2 1 S D 6 (tons/year) S' 1 2 3 4 5 6 2. The supply curve tells us that at a quantity of 2 tons/yr, suppliers will be willing to supply additional titanium at a price of $2/oz. At that same quantity, buyers are willing to pay $4/oz. Suppose a supplier sells one ounce to a new buyer at a price of $3. This will make the supplier better off by $1. The buyer will also be better off by $1. 3. With the tax of T = $2/oz on sellers, the supply curve shifts up by the amount of the tax from P = Q to P = 2 + Q. The intersection of the tax-ridden supply curve and the new demand curve is found by solving 8 – Q = 2 + Q for Q = 3 tons. Inserting the quantity into the demand curve yields a price buyers pay of P = 8 – 3 = 5 an ounce and hence a price sellers receive of P = 5 – 2 = 3 an ounce. The
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This note was uploaded on 04/08/2008 for the course ECON 302 taught by Professor Toossi during the Spring '08 term at University of Illinois at Urbana–Champaign.

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answers-2 - Answers to Questions for Review 1. A shortage...

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