Selected Homework Answers from Chapter 3

Transcription

1 elected Homework Answers from Chapter 3 NOTE: To save on space, I have not given specific labels to my axis, but rather stuck with just and. Ideally, you should put specific labels. For example, the vertical axis in question 4a should read rice of Housing and the horizontal axis label should read uantity of Houses old 4. For each of the following markets, indicate whether the stated change causes a shift in the supply curve, a shift in the demand curve, a movement along the supply curve, and/or a movement along the demand curve. a. The housing market: Consumers incomes fall Consumers income is one of the things we ve learned will change demand, so we know that we ll have to see a shift in the demand Housing Market curve. As income has gone down, demand decreases, and our demand curve shifts inward But the story doesn t end there... there s also been a change in quantity supplied. Why a change in quantity supplied and not supply? Because it s due to a price change caused by the decrease in demand. To put it another way, we ve HIFTE the demand curve, and MOVE ALONG the supply curve. b. The tea market: The price of sugar goes down 2 1 Tea Market ugar is a compliment to tea, and we ve seen that a decrease in the price of a compliment for a good increase the demand of that good. o a decrease in the price of sugar will correspond to an increase in the demand for tea. Again, this is a change that is caused by something other than price, so it is a HIFT in the demand curve, and a change in EMAN. imilar to last problem, we have a change in the UANTITY ULIE caused by the price change, and we move along the already existent supply curve.

2 The coffee market: There is a freeze in Brazil that severely damages the coffee crop 2 1 Coffee Market 2 1 A damaged coffee crop means that the cost of producing coffee has increased, so this is equivalent to a drop in ULY (again, a non-price related change, so it is a shift of the curve). That drop in supply (shift leftward of the supply curve) brings about a higher price, and that higher price then means that the UANTITY EMANE goes down. 2 1 This time, we have a HIFT of the supply curve, and a MOVEMENT ALONG the demand curve. c. The fast food market: The number of fast food restaurants in an area decreases 2 1 Fast Food Market 2 1 One of the things that brings about shifts in the supply curve is a change in the number of firms in the market. As the number of firms has decreased, this is equivalent to a leftward HIFT of the supply curve. Just like in the coffee example, a decrease in the supply will drive up the price, resulting in a decrease in UANTITY EMANE. 2 1 Just like in part c, we have a HIFT of the supply curve, and a MOVEMENT ALONG the demand curve.

3 6. Consider the market for automatic teller machine services in a city. The price is the fee for a cash withdrawal. a. ketch the demand curve and the supply curve for ATM transactions. e ATM Market Been there, done that. This will look just like all the other supply and demand graphs we ve drawn so far. On the price axis is the price of withdrawing money, and on the quantity axis is the number of ATMs people use to get said money. e b. How is the equilibrium price determined? The price is determined by where supply meets demand. In the above graph, that s at the point labeled e. c. If the town council imposes a ban on ATM fees, equivalent to a price ceiling in this market, what happens to quantity supplied and quantity demanded? e ATM Market This is the same as saying the price of using ATMs is now zero due to the price ceiling (call it c ). At a price of zero, suppliers are willing to provide s ATMs, but consumers demand d. As d exceeds s, we have a HORTAGE. Note there are some side effects here. For example, there are some people out there f that would be willing to pay the equilibrium s e d price ( e ) to use an ATM. If the market were allowed to do its work, the equilibrium shortage quantity, e, would be reached with an appropriate price ( e ). But now that suppliers can t charge money, some aren t willing to provide the service. Now some people that would have gladly paid the equilibrium price, and would have gotten to use ATMs before no longer have the option to use the service.

4 d. Economists frequently argue against price controls because of the incentives they give to suppliers. Explain why this interference in the market may produce bad incentives. As we just saw in part c, one of the results of this price control is the suppliers just stop providing the service. Another possible side effect, however, is that banks may start trying to find other ways to make revenue, since ATM fees are no longer allowed. For example, they may start charging for other transactions, or reduce their offered interest rate. 7. In 1991 the price of milk fell 30 percent. enator Leahy of Vermont, a big milkproducing state, supported a law in the U.. Congress to put a floor on the price. The floor was $13.09 per hundred pounds of milk. The market price was $ a. raw a supply and demand diagram. Explain the effects of the legislation. Would the legislation cause a surplus or a shortage? Milk Market $13.09 $11.47 f d e equilibrium again. s lacing a minimum price on something is creating a price floor (similar to the minimum wage example r. Allen did in class). And as we ve learned, if the price floor is above the equilibrium price, then the result will be a surplus, which is exactly what our graph shows. There is a greater supply at $13.09 than there is demand at that price, so the market won t clear. If the market were allowed to work itself out, milk suppliers would realize that they were building up inventory and lower the price to get rid of the extra milk they have lying around, until the market was back in b. The dairy farmers supported the legislation, and consumer groups opposed it. Why? Why consumers opposed this change is obvious... higher prices are never a good thing for something you want to buy. But according to our graph, there are some suppliers that lose out too. After all, now there s a bunch of milk that isn t being sold lying around, and that s a big drain on revenue (not to mention the fact that a warehouse full of old milk can t smell too great). Why would milk producers see this as a good thing? Our textbook mentions that, with agricultural price floors, the end result is that the government usually buys up the surplus. o from the milk producer s point of view, all of the product they produce gets sold, and it sells at a higher price than before. You can see why they would be in favor of situations like this.

5 8. Why is it necessary for people to stand in line for days before the sale of tickets to concerts by the most famous performers? Is the price mechanism working properly? Why are scalpers present on these occasions? eople have to wait in line for days because there is a shortage of tickets... supply is not as great as demand. If a concert hall can only hold 80,000 people, and 150,000 people want to see the concert, only those that get one of those 80,000 tickets actually gets to go. And that means lining up ahead of time to make sure you aren t the 80,001 st guy in line. The price mechanism isn t working properly here. If the price mechanism WERE working, then there would be exactly the same number of tickets supplied as there were demanded. The price would keep going up until only 80,000 people were willing to pay that price to see the concert. ince we have a shortage, there must be a price ceiling. calpers pop up because the have the opportunity to make money in this situation. If they manage to get a hold of a ticket for the selling price, they can sell it to someone for the equilibrium price, making a nice little profit. This is why black markets tend to appear when you have price ceilings. 14. a. traight-line demand and supply curves can be represented by linear algebraic equations. Given the following algebraic expression for supply and demand, calculate the equilibrium price and quantity by solving the two equations for and. s = d = 9 2 At equilibrium, s = d, or 5 + 2p = 9 2. ubtracting 5 and adding 2 to both sides gives 4 = 4 or = 1 lugging 1 in for s = 5 + 2(1) = 7 d = 9 2(1) = 7

6 b. For the equations defined in part a, show that when you substitute the equilibrium price into either the supply or the demand equation, you get the same equilibrium quantity. ee above. c. uppose that the demand curve shifts as a result of an increase in consumers incomes. The new demand equation is = Calculate the new equilibrium price and quantity. s = d = 13 2 At equilibrium, s = d, or 5 + 2p = ubtracting 5 from both sides and adding 2 to both sides gives 4 = 8 or = 2 lugging 1 in for s = 5 + 2(2) = 9 d = 13 2(2) = 9 We know our is correct, as it results in clearing of the market.