1. You are given the following information about quantity demanded in the competitive market for bicycles. a. Graph this demand schedule.

Transcription

1 Unit 2 Questions

2 1. You are given the following information about quantity demanded in the competitive market for bicycles. a. Graph this demand schedule.

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4 b. Suppose the price is initially $40. If price rises by $20, what happens to the quantity demanded?

5 b. If price rises to $60, the quantity demanded will fall by 300 units, from 500 to 200 bicycles.

6 c. Suppose the price is initially $40. If price falls by $40, what happens to the quantity demanded?

7 c. If price falls to $0, the quantity demanded will increase by 500 units, from 500 to 1,000 bicycles.

8 2.For each of the following situations in the table below, fill in the missing information. First, determine whether the situation causes a shift of or a movement along the demand curve; then, if it causes a shift, determine whether the demand curve shifts to the right or to the left.

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10 3. The following graph represents the supply curve for the production of widgets in Town Center. a. At a price of $20, how many widgets are producers willing to supply?

11 3. a. At a price of $20, producers are willing to supply 40 units.

12 b. At a price of $40, how many widgets are producers willing to supply?

13 b. At a price of $40, producers are willing to supply 80 units.

14 c. Suppose there are ten widget producers in Town Center and the price of widgets is $50. If each producer produces the same number of widgets, how many widgets will each produce?

15 c. At a price of $50, 100 widgets are supplied. Thus, if there are 10 producers producing exactly the same number of widgets, then each producer must produce 10 widgets.

16 d. Suppose price is initially $30 but then falls to $20. What is the change in quantity supplied?

17 d. When price falls from $30 to $20, the number of widgets supplied decreases by 20 widgets (from 60 widgets to 40 widgets).

18 e. Suppose price is initially $30 but then rises to $50.What is the change in quantity supplied?

19 e. When price rises from $30 to $50, the number of widgets supplied increases by 40 (from 60 to 100).

20 f. What price must suppliers receive in order to be willing to supply 80 widgets?

21 f. Suppliers are willing to supply 80 widgets if the price is $40.

22 g. What price must suppliers receive in order to be willing to supply 40 widgets?

23 g. Suppliers are willing to supply 40 widgets if the price is $20.

24 h. What does the slope of a supply curve imply about the relationship between price and quantity supplied?

25 h. There is a direct relationship.

26 4. For each of the following situations in the table below, fill in the missing information: first, determine whether the situation causes a shift or a movement along the supply curve; then, if it causes a shift, determine whether the supply curve shifts to the right or to the left.

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28 5. The demand and supply schedules for Healthy Snacks, Inc., is provided in the table below. a. Sketch the demand and supply curves for Healthy Snacks, Inc. Don't worry about drawing a precise graph. Focus on drawing the underlying relationships from the table. Your graph should be accurate with regard to x- intercepts and y-intercepts, and indicate equilibrium.

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30 b. What are the equilibrium price and quantity in this market? Show these on your graph.

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32 c. Fill in the following table based on the data given to you. Assume that for each row in the table the price is as given and you are calculating the excess demand or excess supply. (Hint: Some cells in the table are empty; e.g., if there is excess supply, there is no excess demand.)

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34 d. Why is a situation of excess demand referred to as a shortage?

35 d. When there is excess demand, the quantity demanded is greater than the quantity supplied. For some reason the market does not provide an adequate amount of the good, and thus there is a shortage of the good. The figure below illustrates a shortage at a price of P1. Note that at P 1. the quantity demanded is Q 1. the quantity supplied is Q 2, and the excess demand is equal to Q 1 - Q 2. When a market has excess demand, this implies that the current price is below equilibrium.

36 e. Why is a situation of excess supply referred to as a surplus?

37 e. When there is excess supply, the quantity demanded is less than the quantity supplied. For some reason the market provides too much of the good, and thus there is a surplus of the good. The figure below illustrates a surplus at a price of P 1. Note that at P 1 the quantity demanded is Q 1. the quantity supplied is Q 2, and the excess supply is equal to 'Q 2 - Q 1 ' When a market has excess supply of a good, this implies that the current price is above equilibrium.

38 6. For each of the following situations, sketch a graph of the initial market demand (D 1 ) supply (S 1 ), equilibrium price (P 1 ) and equilibrium quantity (Q 1 ) Then sketch any changes in the market demand (D 2 ) and/or supply (S 2 ) curves, and indicate the new equilibrium price (P 2 ) and quantity (Q 2 ). a. The price of gasoline increases by 40 percent. What happens in the market for bicycles?

39 6. a. Gasoline and bicycles are substitutes for one another. When the price of gasoline rises, people substitute bicycle transportation for gasoline. This is illustrated in the graph below with the demand curve for bicycles shifting to the right, resulting in a higher equilibrium price (P2) and a higher equilibrium quantity (Q2). Note that there is a shift in the demand curve and a movement along the supply curve.

40 b. The price of gasoline increases by 40 percent. What happens in the market for fuel inefficient SUVs?

41 b. Gasoline and SUVs are complements for each other. When the price of gasoline rises, people find that driving SUVs is relatively more expensive and therefore decrease their demand for SUVs at every price. This is illustrated in the graph below with the demand curve for SUVs shifting to the left, resulting in a lower equilibrium price (P2) and a lower equilibrium quantity Q2. Note that there is a shift in the demand curve and a movement along the supply curve.

42 c. New technology for music-playing is developed. What happens in the market for the devices?

43 c. New technology shifts the supply curve to the right from S1 to S2. This causes a movement along the demand curve and results in a decrease in the equilibrium price and an increase in the equilibrium quantity. This is illustrated in the figure below.

44 d. The price of labor decreases. What happens in the market for fast-food restaurants?

45 d. When the price of labor decreases, the supply of the good shifts to the right because labor is an input in the production of fast-food meals. This results in a movement along the demand curve, a decrease in the equilibrium price, and an increase in the equilibrium quantity as illustrated below.

46 e. Income increases and good X is a normal good. What happens in the market for good X?

47 e. An increase in income shifts the demand curve to the right if the good is a normal good. This shift in demand causes a movement along the supply curve and an increase in both the equilibrium price and the equilibrium quantity as illustrated below.

48 f. Income increases and good X is an inferior good. What happens in the market for good X?

49 f. An increase in income shifts the demand curve to the left if the good is an inferior good. This shift in demand causes a movement along the supply curve and a decrease in both the equilibrium price and the equilibrium quantity. The graph below illustrates this situation.

50 7. Use the graph below to answer the following questions: a. Identify the equilibrium price and the equilibrium quantity.

51 7. a. The equilibrium price is P1 and the equilibrium quantity is Q3.

52 b. Suppose a price floor of P 3 is implemented by the government in this market. Describe what will happen to the price and quantity once this price floor is implemented.

53 b. This is not an effective price floor because the price floor of P3 is less than the equilibrium price, P1. Because it is an ineffective price floor, the equilibrium price and quantity will not change.

54 c. Suppose a price floor of P 2 is implemented by the government in this market. Describe what will happen to the price and quantity once this price floor is implemented.

55 c. This is an effective price floor because the price floor of P2 is greater than the equilibrium price P1. At P2, Q1 units of the good will be demanded and Q4 units of the good will be supplied. This excess supply of Q4 - Q1 will not be eliminated by price decreases because the price is artificially set at P2 by the government and is not allowed to decrease. An effective price floor creates a situation of excess supply, or a surplus, that is not eliminated by changes in the price of the good because the price has been set at a level greater than the market-clearing price.

56 d. What must be true about a price floor in a market for a good or service in order for that price floor to be effective?

57 d. For a price floor to have an effect on a market, the price floor must be set at a price greater than the equilibrium price.

58 e. You are told that an effective price floor has been implemented in this market and that the resultant surplus is greater than Q 4 Q 1. What do you know about the level of this price floor?

59 e. The price floor must be set at a price greater than P2 because we know from part (c) that the surplus in the market at P2 equals Q4 - Q1.

60 8. Use the graph below to answer the following questions. a. Identify the equilibrium price and the equilibrium quantity.

61 8. a. The equilibrium price is P1 and the equilibrium quantity is Q3.

62 b. Suppose a price ceiling of P 2 is implemented by the government in this market. Describe what will happen to the price and quantity once this price ceiling is implemented.

63 b. This is not an effective price ceiling because the price ceiling of P2 is greater than the equilibrium price P1. Since it is a nonbinding/ineffective price ceiling, the equilibrium price and quantity will not change.

64 c. Suppose a price ceiling of P 3 is implemented by the government in this market. Describe what will happen to the price and quantity once this price ceiling is implemented.

65 c. This is an effective price ceiling because the price ceiling of P3 is less than the equilibrium price P1. At P3, Qs units of the good will be demanded and Q2 units of the good will be supplied. This excess demand of Q5 - Q2 will not be eliminated by price increases because the price is artificially set at P3 by the government and is not allowed to increase. An effective price ceiling creates a situation of excess demand, or a shortage, that is not eliminated by changes in the price of the good because the price has been set at a level that is less than the market-clearing price.

66 d. What must be true about a price ceiling in a market for a good or service for it to be effective?

67 d. For a price ceiling to have an effect on a market, the price ceiling must be set at a price that is less than the equilibrium price.

68 e. You are told that an effective price ceiling has been implemented in this market and that the resultant shortage is smaller than Q 5 - Q 2. What do you know about the level of this price ceiling?

69 e. The price ceiling must be set at a price that is greater than P3 but still less than the equilibrium price of P1. We know this because when the price ceiling is set at P3, the shortage is equal to Q5 - Q2 and the new price ceiling results in a smaller shortage than the shortage at price P3.

70 9. Consider the market for housing in Metropolitan City, where all housing units are exactly the same. Currently, the equilibrium price of housing is $2,000 a month and local residents consume 1,500 units of housing. The local residents argue that housing is too expensive and an effective price ceiling is implemented. When the price ceiling is implemented by the local government council, only 1,200 units of housing are supplied. Is this an efficient level of housing for Metropolitan City? Explain. To support your answer, provide two sketches: in the first sketch, indicate the equilibrium quantity and price; in the second sketch, indicate the price ceiling and the quantity provided by the market. Is the price consumers are willing to pay for the last unit equal to the price suppliers must receive to supply the last unit? Explain.

71 9. The market is in equilibrium when there are 1,500 units of housing offered at the price of $2,000 per month, so 1,200 is not an efficient level of housing. The price ceiling forces consumers to reduce their consumption of the good from the efficient level. In the first sketch below, the housing market is represented and the equilibrium price and quantity are where the demand and supply curves intersect. In the second sketch, the price ceiling is imposed on the housing market and this results in suppliers reducing the number of apartments they supply in the market from 1,500 units to 1,200 units. Consumers are willing to pay more for the last unit than suppliers must receive in order to produce this last unit of housing. This indicates that the value to consumers of an additional unit of housing is greater than the cost to producers for providing this additional unit of housing: provision of more housing would lead to greater efficiency.

72 10. The market for taxi rides in Metropolia this week is described in the following table. Assume that all taxi rides are the same in Metropolia. a. What is the equilibrium price and quantity of taxi rides in Metropolia per week? Suppose the government of Metropolia institutes a medallion system that limits the number of taxi rides available in Metropolia per week to 80.

73 10. a. Equilibrium occurs when the quantity demanded equals the quantity supplied. According to the data in the table, the equilibrium price is $5 and the equilibrium quantity is 120 taxi rides per week.

74 b. At what price will consumers want to purchase 80 taxi rides per week?

75 b. Consumers will demand 80 taxi rides per week at a price of $7.

76 c. At what price will suppliers be willing to supply 80 taxi rides per week?

77 c. Suppliers are willing to supply 80 taxi rides per week for a price of $3.

78 d. What price will a taxi medallion rent for in this market? Explain your answer.

79 d. The medallion will rent for $4 per taxi ride, or the difference between the demand price and the supply price when the quantity of taxi rides is limited to 80 per week.

80 e. Draw a graph of the taxi ride market in Metropolia. On this graph, indicate the quota limit, the demand price, the supply price, and the medallion's rental price.

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82 f. What is the total value of the taxi medallions per week in Metropolia?

83 f. The taxi medallions are worth the product of the medallion rent per ride times the number of taxi rides per week or ($4 per ride)(80 rides), or $320.

84 The End!