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Toggle Sidebar Find Previous Next Page: of 14 슼 Tools Zoom Out Zoom In Automatic Zoom Actual Size Page Fit Page Width 50% 75% 100% 125% 150% 200% 300% 400% S-1 modern principles : macroeconomics modern principles of economics 4 4 Equilibrium: How Supply and Demand Determine Prices Facts and Tools 1. If the price in a market is above the equilibrium price, does this create a surplus or a shortage? 1. A surplus: a lot of unsold goods. 2. When the price is above the equilibrium price, does greed (in other words, self-interest) tend to push the price down or up? 2. Self-interest tends to push the price down: Business owners don't like having unsold goods, so they cut the price. Note: Greed and self-interest have the same denotation but different connotations. 3. Jon is on eBay, bidding for a first edition of the influential Frank Miller graphic novel Batman: The Dark Knight Returns. In this market, who is Jon competing with: the seller of the graphic novel or the other bidders? 3. He is competing with other bidders. 4. Now, Jon is in Japan, trying to get a job as a full-time translator; he wants to trans - late English TV shows into Japanese and vice versa. He notices that the wage for translators is very low. Who is the "competition" pushing the wage down: Does the competition come from businesses who hire the translators or from the other translators? 4. Jon is competing with other translators. 5. Jules wants to purchase a Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn't get many opportunities for tasty burgers). a. How large are the potential gains from trade if Jules and Vincent agree to make this trade? In other words, what is the sum of producer and consumer surplus if the trade happens? b. If the trade takes place at $4, how much producer surplus goes to Vincent? How much consumer surplus goes to Jules? c. If the trade takes place at $7, how much producer surplus goes to Vincent? How much consumer surplus goes to Jules? Solution Solution Solution Solution S-1 Cowen3e_CH04_Solutions.indd 1 29/06/15 12:49 PM 5. a and b and c . The potential gains from trade are $5 of value ($8 2 $3 5 $5 surplus): It might all be consumer surplus, it might be producer surplus, or it might be some mix of the two. If they trade at $4, $1 of producer surplus goes to Vincent, and $4 of consumer surplus to Jules. If the trade happens at $7, Vincent gets $4 of producer surplus, while Jules gets $1 of consumer surplus. 6. What happened in Vernon Smith's lab? Choose the right answer: a. The price and quantity were close to equilibrium but gains from trade were far from the maximum. b. The price and quantity were far from equilibrium and gains from trade were far from the maximum. c. The price and quantity were far from equilibrium but gains from trade were close to the maximum. d. The price and quantity were close to equilibrium and gains from trade were close to the maximum. 6. Option d was true: Price and quantity were close to equilibrium and gains from trade (the sum of the consumer and producer surplus) were close to the maximum. 7. When supply falls, what happens to quantity demanded in equilibrium? (This should get you to notice that both suppliers and demanders change their behavior when one curve shifts.) 7. Quantity demanded falls: This is just moving along the fixed demand curve. The re - duced supply pushes up the price and at a higher price buyers reduce their quantity demanded. 8. a . When demand increases, what happens to price and quantity in equilibrium? b. When supply increases, what happens to price and quantity in equilibrium? c. When supply decreases, what happens to price and quantity in equilibrium? d. When demand decreases, what happens to price and quantity in equilibrium? 8. a. When demand increases, price and quantity both rise in equilibrium. b. When supply increases, price falls and quantity rises in equilibrium. c. When supply decreases, price rises and quantity falls in equilibrium. d. When demand decreases, price and quantity both fall in equilibrium. 9. a. When demand increases, what happens to price and quantity in equilibrium? b. When supply increases, what happens to price and quantity in equilibrium? c. When supply decreases, what happens to price and quantity in equilibrium? d. When demand decreases, what happens to price and quantity in equilibrium? No, this is not a mistake. Yes, it is that important. 9. Same as 8. 10. What's the best way to think about the rise in oil prices in the 1970s, when wars and oil embargoes wracked the Middle East? Was it a rise in demand, a fall in de - mand, a rise in supply, or a fall in supply? 10. A fall in supply. The price spiked up, as it was tougher to get oil out of the Middle East. That fits the fall in supply story. 11. What's the best way to think about the rise in oil prices in the last 10 years, as China and India have become richer: Was it a rise in demand, a fall in demand, a rise in supply, or a fall in supply? Solution Solution Solution Solution Solution Solution S-2 • C H A P T E R 4 • Equilibrium: How Supply and Demand Determine Prices Cowen3e_CH04_Solutions.indd 2 29/06/15 12:49 PM 11. A rise in demand. The price spiked up, but more oil has been produced each year: The United States is using a bit less than before, especially since late 2007, but China and India are using more. When the price and quantity both rise, that's because of a rise in demand. Thinking and Problem Solving 1. Suppose the market for batteries looks as follows: 2 $7 4 Price Supply 30 20 10 Quantity Demand What are the equilibrium price and quantity? 1. Price: $4, Quantity: 20 2. Consider the following supply and demand tables for bread. Draw the supply and demand curves for this market. What are the equilibrium price and quantity? Price of One Loaf Quantity Supplied Quantity Demanded $0.50 10 75 $1 20 55 $2 35 35 $3 50 25 $5 60 10 2. Supply Price of butter P' P Demand Quantity Q' Q Price: $2, Quantity: 35 Solution Solution Solution Equilibrium: How Supply and Demand Determine Prices • C H A P T E R 4 • S-3 Cowen3e_CH04_Solutions.indd 3 29/06/15 12:49 PM 3. If the price of a one-bedroom apartment in Washington, DC, is currently $1,000 per month, but the supply and demand curves look as follows, then is there a shortage or surplus of apartments? What would we expect to happen to prices? Why? Demand for apartments Quantity of apartments 100,000 $1,100 Rent for apartments (per month) Supply of apartments 3. There is a shortage of apartments. We would expect rents to rise as buyers who are willing to pay more than $1000 for an apartment begin to offer higher rents just to secure an apartment; they'd rather pay more than not get an apartment at all. Demand for apartments Quantity of apartments 100,000 $1,100 $1,000 Rent for apartments (per month) Supply of apartments 4. Determine the equilibrium quantity and price without drawing a graph. Price of Good X Quantity Supplied Quantity Demanded $22 100 225 $25 115 200 $30 130 175 $32 150 150 $40 170 110 4. Quantity: 150, Price: $32 5. In the following figure, how many pounds of sugar are sellers willing to sell at a price of $20? How much is demanded at this price? What is the buyer's willingness to pay when the quantity is 20 pounds? Is this combination of $20 per pound and a quan - tity of 20 pounds an equilibrium? If not, identify the unexploited gains from trade. Solution Solution S-4 • C H A P T E R 4 • Equilibrium: How Supply and Demand Determine Prices Cowen3e_CH04_Solutions.indd 4 29/06/15 12:49 PM

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