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					Chapter 3 Problem Sets                             Supply & Demand                                    3-1
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                              PS. CH. 3
                     MARKETS, DEMAND & SUPPLY

I’m a great believer in luck, and I find the harder I
work the more I have of it.
                                                                                              Thomas Jefferson


                          *A.       Markets
                           B.       Demand
                           C.       Supply
                           D.       Equilibrium
                           E.       Disequilibrium

A. MARKETS
PS03-A1 Markets. Economic Terminology
a. What determines the degree of competitiveness of an industry?




b. Explain why the market for bread is more or less competitive than the market for:
           1. Diamonds?

            2. Breakfast cereals?

            3. Wheat

 c. Economists argue that under competitive conditions suppliers must regard prices as given. Without a doubt, agricultural
markets (e.g., wheat & corn) are highly competitive, yet, the prices that farmers receive are highly volatile.
         How can the apparent contradiction between given and volatile prices be reconciled? Hint. What is the meaning of
the word given as economists use it? Is the price of diamonds given?




PS03-A2 Markets. Competition and the Justice Department
          One of the stated goals of public policy is the maintenance of a competitive business environment. The Antitrust
Division of the Department of Justice, which is charged with this responsibility, has frequently argued, both within the
Government and before the courts, that all corporate mergers (the joining of previously separate firms) of firms producing the
same product should be prevented. Briefly stated, the argument of the Antitrust lawyers is that mergers, because they reduce
the number of firms supplying a particular product, reduce competition. Recall that the number of firms is one of the ele-
ments of the definition of competition. On occasion, economists have been known to disagree with the antitrust lawyers and
come out in favor of a particular merger. Since economists generally favor competition, how is this possible? Hint. What
about the other elements of competition?
Chapter 3                                Supply & Demand                                      3-2
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PS03-A3 Markets. The Function of Prices
            "The price system causes the economy to conserve most, those resources which are in particularly scarce supply."
            This statement could have come from just about any economics text. However, during the 1970's many people
argued that the oil crisis refuted this statement. How is your economic world the same or different from that which existed pre-
oil crisis?
 i.e., In what way has the market responded or not responded to the oil crisis?
Chapter 3 Problem Sets                             Supply & Demand                                    3-3
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Chapter 3                                Supply & Demand                                      3-4
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B. DEMAND
PS03-B1* Demand. Individual Demand for Fairdale Beer
        The following schedule was compiled in a recent experiment conducted at the package store across the street
from Lantern Point.

                   PRICE (per case)   ¦    QUANTITY (cases purchased)
              --------------------------------------------------------
                    $10               ¦       1.0 case
                      9               ¦       2.2 cases
                      8               ¦       3.4    "
                      5               ¦       7.0    "

a. Make a visual presentation of the data from the Lantern Point experiment on the graph below.

   Price      ¦     LANTERN POINT BEER EXPERIMENT
              ¦
          $10 ¦-
              ¦
              ¦
           8 ¦-
              ¦
              ¦
           6 ¦-
              ¦
              ¦
           4 ¦-
              ¦
              +------------------------------------------ Quantity
                    1   2   3   4   5   6   7   8   9   10  cases

b. What would have been the quantity purchased at the price of $3.33 per case? Hint. Determine the algebraic equation
that fits this data.

P1 = ____ ?     Q1 = _____ ?

P2 = ____ ?     Q2 = _____ ?

  P = ____________ ?           Q = _____________?



               Dependent Variable                 (Q)
Slope =  = ----------------------------------- = --------- = ----------
               Independent Variable                 (P)


Intercept = µ = QD - (P) =


Equation:                    Q = _____ - _____ (P)

          At the price of $3.33 per case, _______ cases per day would be purchased.
Chapter 3 Problem Sets                             Supply & Demand                                    3-5
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PS03-B2 The Market Demand for Fairdale Ale
There are only three people in the Kingdom of Fairdale who consume Fairdale Ale, and experiments similar to that conducted
for the previous problem set revealed the following data.

             THE MARKET FOR FAIRDALE ALE
        +----------------------------------------------------+
        ¦ PRICE    ¦    QUANTITY (cases purchased/week)      ¦
        ¦(per case)¦ You?     ¦N Kricher ¦C Clavius¦   Total ¦
        ¦----------------------------------------------------¦
        ¦   $10    ¦   1      ¦   2      ¦    3    ¦    ?    ¦
        ¦     9    ¦   2      ¦   3      ¦    3.8 ¦     ?    ¦
        ¦     8    ¦   3      ¦   4.1    ¦    4.5 ¦     ?    ¦
        ¦     5    ¦   7      ¦   8      ¦    5    ¦    ?    ¦
        +----------------------------------------------------+
           a. Market demand is nothing more than the simple aggregation of individual demands. On the table above calculate
the total (i.e., market) quantities of ale which will be purchases at the alternative prices given.

         b. Make a visual presentation of the data showing both the individual demand schedules and market demand
schedule on the graph below.

Price¦           DEMAND FOR FAIRDALE ALE
     ¦
 $10 ¦
     ¦
     ¦
   8 ¦
     ¦
     ¦
   6 ¦
     ¦
     ¦
   4 ¦
     ¦
     ¦
     +---------------------------------------------------------
           4    8    12    16    20    24   28    32   36    40
                           Quantity (cases)

         c. Determine the equation of the market demand curve for Fairdale Ale.
           Step 1. Find the slope.


          Step 2. Find the intercept.


          Step 3. Assemble & present the demand equation.


        d. At a price of $3, how much Fairdale Ale would be purchased daily?
       Plug $3 into the estimated demand equation.
Chapter 3                                Supply & Demand                                      3-6
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PS03-B3 The Market Demand for O'GOUL'S n.a. Beer
          It turns out that there are only three people in the Kingdom of Fairdale who consume O'Gouls, and experiments
similar to that conducted for the previous problem set revealed the following data. n.b., The "G" in O'Gouls stands for good!
That's the corporate motto.

           THE MARKET FOR O'GOUL'S n.a. BEER
+-----------------------------------------------+
¦ PRICE    ¦    QUANTITY (cases purchased/week)                                                       ¦
¦(per case)¦Al Marshall ¦Al Kelley ¦Al Beney ¦ Total                                                  ¦
¦-----------------------------------------------¦
¦   $6     ¦     3       ¦   1.0    ¦    0    ¦                                                       ¦
¦    5     ¦     7       ¦   1.6    ¦    2    ¦                                                       ¦
¦    4     ¦    11       ¦   2.2    ¦    4    ¦                                                       ¦
¦    1     ¦    23       ¦   4.0    ¦   10    ¦                                                       ¦
+-----------------------------------------------+
           a. Market demand is nothing more than the simple aggregation of individual demands. On the table above calculate
the total (i.e., market) quantities of beer which will be purchases at the alternative prices given.

         b. Make a visual presentation of the data showing both the individual demand schedules and market demand
schedule on the graph below.

Price¦   DEMAND FOR O'GOUL's n.a. BEER
     ¦
 $10 ¦
     ¦
     ¦
   8 ¦
     ¦
     ¦
   6 ¦
     ¦
     ¦
   4 ¦
     ¦
     ¦
     +---------------------------------------------------------
           4    8    12    16    20    24   28    32   36    40
                           Quantity (cases)

         c. Determine the equation of the market demand curve for O'GOUL'S Beer.

          ß =

           =

          QD =


         d. At a price of $3, how much O'GOUL'S would be purchased daily by the market?
Chapter 3 Problem Sets                             Supply & Demand                                    3-7
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PS03-B4 Change Demand vs. Change Quantity Demanded
        In problem set 3-B1 it was determined that the demand for Fairdale Beer (F.B.) could be approximated by the
demand equation:

                     QD = 13 - 1.2(P)                                                                      (1)

a. On the graph below, plot this equation and show the quantity demanded would change if the price fell from $8 to $4 per
case.
      Price
     10¦-
       ¦
      8¦-
       ¦
       ¦
      4¦-
       ¦
       +--------------------------- Q(Fairdale Beer)
         1        4        7

b. Consider the same person's demand for F.B. 20 years from now.
               ORIGINAL
                 PRICE ¦     QUANTITYT     ¦ QUANTITY(T+20)
            ------------¦-----------------+--------------
                  $10   ¦       1   case ¦     0.5 cases
                    9   ¦       2.2 cases ¦    1.0
                    8   ¦       3.4    "  ¦    1.5
                    5   ¦       7      "  ¦    3.0

  Find the new equation of demand.

   Slope (ß) = (Q)/ (P) =

   Intercept () =

   Therefore, QD =

         c. Plot this new demand curve on the graph above. Label this demand curve Q',

         d. If 20 years from now the price of F.B. is $3.33 per case, what will the quantity demanded be? Indicate this as
point "A" on the graph above. Is this quantity the same or different from the level of demand you calculated for this price in
PS03-B1? Explain what has happened.
Chapter 3                                Supply & Demand                                      3-8
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PS03-B5 Speaking of Beer: Applying Theory to Reality
The following headline appeared in an incidental Wall Street Journal Article in 1990.




                                    Coors Water Supply Was Contaminated
                                    By Solvent in 1981




Assume that this headline had appeared on the front page of American newspapers in 1981 INSTEAD OF 1990.
        a. Explain verbally how the market for Coor's beer is likely to have been affected.




         b. Explain visually how the market for Coor's beer is likely to have been affected.

            P       ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    +------------------------------------------ Q

         c. If the demand equation for Coor's beer had been estimated as:

              QD =  - (P)
         in early 1981, in what way would the estimated parameters of the equation have been affected--if at all? i.e., What
         would change, the intercept term or the slope term? Explain.
Chapter 3 Problem Sets                             Supply & Demand                                    3-9
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Name: ____________________________________                                            Section: __________________

PS03-B6        The Demand for CD’s in Fairdale
As a result of an experiment similar to the lantern Point experiment in PS03-B1, the following data for the CD market was
collected, last January:

                                         Price    of      CD’s     Quantity purchased per
                                              (Ducats)             week (millions)
                                                  15                          8
                                                  12                         14
                                                   9                         20
                                                   6                         26
                                                   3                         32

    a.   Plot this data on a graph. Use Excel if it is available to you.




    b.   If the relationship appears to be linear, find the equation that best estimated demand.




    c.   If the price of CD’s was raised to $16.49, would it be possible to estimate the quantity likely to be purchased?




    a.    In the Spring, Fairdale’s government cut personal income taxes by 20 percent. How would an economist explain
         the likely impact of the tax cut on the CD market?
Chapter 3                                Supply & Demand                                      3-10
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    b.   The data collection experiment described above was repeated shortly after the new tax changes went into effect.

                                       Price    of     CD’s    Quantity purchased per     Quantity purchased per
                                            (Ducats)           week before the tax cut    week after the tax cut
                                                               (millions)                 (millions)
                                                15                        8                          14
                                                12                        14                         20
                                                 9                        20                         26
                                                 6                        26                         32
                                                 3                        32                         38

    Create a new graph which includes the purchase data both before and after the tax cut. Be sure to distinguish the new
    and old relationships.




    f. What is the new demand equation for CD’s in Fairdale?
Chapter 3 Problem Sets                             Supply & Demand                                    3-11
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C. SUPPLY
PS03-C1* Individual Supply: Fairdale Ale (FULL)
         An enterprising Fairdale U. sophomore has just announced his intention to open a new campus business. He
intends to sell generic beer which he will produce out of the third floor lavatory of Regis Hall. His company will be
called Fairdale University Libations Limited (FULL), and as the only producer of Fairdale Ale, his individual supply
curve will coincide with the market supply. No?
         In a recent interview he reported his willingness to sell the following daily quantities of ale depending on the
prices which could be fetched:

      Price    Quantity
   -----------¦----------                              P ¦     SUPPLY OF FAIRDALE ALE
         10   ¦    19.5 cases                         $10¦-
          9   ¦    17.0                                  ¦
          8   ¦    14.5                                9 ¦-
          5   ¦     7.0                                  ¦
          3   ¦   ?                                    8 ¦-
              ¦                                          ¦
                                                       7 ¦-
                                                         ¦
                                                       6 ¦-
                                                         ¦
                                                       5 ¦-
                                                         +----------------------------- Q
                                                            3       6       9      12     15



         a.   Define SUPPLY.



         b.   On the graph above, plot FULL's supply curve.



         c.   Determine FULL's supply equation:

                     i.e., Assume : QS = c1 + c2(P)
               Step 1 Find the slope: c2

                     Q1 = ____ ? P1 = ____ ?


                    Q2 = ____ ? P2 = ____ ?


              c2 = --------------- =

               Step 2 Find the intercept: c1

              c1 = QS = _____ + _____ (P)

              Step 3 Assemble the equation for the price/supply relationship


d. Estimate FULL's quantity supplied of ale if the price is $8.50 per case.
Chapter 3                                Supply & Demand                                      3-12
==============================================================================================================

PS03-C2 The Law of Supply. The Supply of Pizza
         A survey at a recent meeting of the Fairfield Pizza Association (FPA) revealed that the owners of Fairfield pizzerias
would respond with the following hourly supply of pizzas at the prices suggested:

      Price   ¦ Quantity                                       P
   -------------------                                      ¦
      $1      ¦    14                                       $5 ¦
       2      ¦    18                                          ¦
       3      ¦    22                                        4 ¦
       4      ¦    26                                          ¦
       5      ¦    30                                        3 ¦
                                                               ¦
                                                             2 ¦
                                                               ¦
                                                             1 ¦
                                                               ¦
                                                               +----------------------------- Q
                                                                   5   10   15   20   25   30

a. Define SUPPLY.




b. On the graph above, plot the supply curve for pizza.

c. Determine the supply equation of the FPA.

   Q1 = ____ ?                 P1 = ____ ?


   Q2 = ____ ?                 P2 = ____ ?




   ß = ---------------

    =          Qs = _____            +     _____ (P)



d. Estimate the supply of pizza if the market price is $8.50.




e. According to the law of supply, if the price of pizza rises (cit.par.) , the supply of pizza will rise as well?
Chapter 3 Problem Sets                             Supply & Demand                                    3-13
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PS03-C3 From Individual Firm to Market Supply: Fairdale Ale.
         Besides FULL, two additional producers of beer enter the Fairdale market: Sam Ickles Cruddy Krona (SICK) and
Sarah Long's Ordinary Brew (SLOB) The quantities they offer are listed below:

                       Cases of Beer Offered for Sale Daily in Fairdale
 PRICE/case               FULL                      SICK                     SLOB                  TOTAL
        $2                    8                        4                         9
          4                  12                        6                       19

      a. Visually present the supply schedules for these three firms on the graph below.
                                       Fairdale Ale Market
                   P
                   ¦
                   ¦
        $ 4        ¦
                   ¦
                   ¦
              3    ¦
                   ¦
                   ¦
              2    ¦
                   ¦
                   ¦
              1    ¦
                   ¦
                   ¦
                   +-------------------------------------------------- Q
                        6     12     18     24     30      36     42

      b. Market supply for any product is defined as the sum of individual supply. Aggregate the individual firm offers at
each price and complete the table above.

         c. Plot the market supply schedule on the graph above.

         d. Derive the equation for the market supply curve.

           Slope = __________


           Intercept = ___________



              QS = _______     +    ________ (P)
Chapter 3                                Supply & Demand                                      3-14
==============================================================================================================

PS03-C4 Supply v. Quantity Supplied
Consider the market for ale in Fairdale.
a. Given the supply equation you calculated above (Qs = 5 + 8(P)), plot the supply graph below.

         P
                    ¦
                    ¦
         $ 8        ¦
                    ¦
                    ¦
             6      ¦
                    ¦
                    ¦
             4      ¦
                    ¦
                    ¦
             2      ¦
                    ¦
                    ¦
                    +-------------------------------------------------- Q
                         12     24     36     48     60      72     84

b. On your graph indicate as point "A" the supply of ale offered for sale at a price of $2. What quantity is offered for sale at
this price?

c. If the market price of ale in Fairdale should rise to $6 a case, what quantity would be offered for sale? On your graph
indicate this point a "B."

d. Does the response to the change in market price represent a change in supply or a change in quantity supplied? Explain.




e. A year after technological change which led to a new strain of "super barley," a survey of Fairdale's three beer producers
led to an estimated market supply equation of:

                          Qs = 10 + 8(P)
Plot this equation on your graph.

f. What quantities are now offered for sale at the price of $2 and $6? Does this represent a change in supply or a change in
quantity supplied? Explain.
Chapter 3 Problem Sets                             Supply & Demand                                    3-15
=============================================================================================================

PS03-C5        The Market for CD’s in Fairdale
The following data for the CD market was collected from a survey of producers at the beginning of the year:

                                       Price    of      CD’s    Quantity supplied per
                                            (Ducats)            week (millions)
                                                15                        28
                                                12                        24
                                                 9                        20
                                                 6                        16
                                                 3                        12

    a.   Estimate the equation of supply.




    b.   Plot this data on the original graph you constructed for the CD demand problem set in section B.     Use Excel if it is
         available to you.




    c.   Identify what changes in the CD market might account for some future shift in the supply curve of CD’s.




    d.   Use the demand and supply equations you have constructed to determine the equilibrium price and quantity of
         CD’s in Fairdale.




    e.   This being an election year, the candidate running against the President of Fairdale has promised that if elected, she
         will favor the citizens of Fairfield—all of whom love music—by forcing the swine who produce CD’s to lower the
         price they charge to 6 ducats per CD. Use the model you have constructed to analyze/predict the impact on the CD
         market if this campaign promise is fulfilled.
Chapter 3                                Supply & Demand                                      3-16
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D. MARKET EQUILIBRIUM
PS03-D1 Equilibrium and the Price of Fish
                     THE FAIRDALE MARKET FOR FISH

               PRICE/lb.                     QUANTITY DEMANDED               QUANTITY SUPPLIED
                  45 Ducats                         350                               0
                  50                                300                               5
                  55                                250                              50
                  60                                200                             100
                  65                                150                             150
                  70                                100                             200

a.   Visually represent this market data on the graph space below.

                                               P



                                                                           Q
b.   What is the equilibrium price of fish in the Fairdale market?




c. Explain how would the market respond if the price of fish, for what ever reason, happened to be 45 ducats,.


d. “The price of fish is an automatic regulator which tends to keep production and consumption in line with one another."
Explain what was meant by this statement. Hint. Explain the mechanics of how buyers and sellers can be expected to respond
to a change (either up or down) in the price of fish.
Chapter 3 Problem Sets                             Supply & Demand                                    3-17
=============================================================================================================

PS03-D2 Modeling Mechanics
  a. Return to ancient history (i.e., to the carefree days when you were young--the 9th grade), and solve the following
        simultaneous equation for X and Y and plot the equations on the graph:
                     Y = 20 + 4(X)                                                 (1)
                     Y = 34 - 3(X)                                                 (2)
      Y¦
       ¦
       ¦
       ¦
       ¦
       ¦
       +--------------- X

  b. This model is a "lot harder" than question a., but give it a try, anyway. Solve for P and Q an plot the equations
        on the graph:
                    Q = 20 + 4(P)
                    Q = 34 - 3(P)
    P ¦
      ¦
      ¦
      ¦
      ¦
      ¦
      +--------------- X

c. Why does supply slope Upward?



                1940's -20ft
                1970's -1,000ft

                1990's -5,000ft




                2001 -10,000ft
Chapter 3                                Supply & Demand                                      3-18
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PS03D-3* Market Equilibrium: The Market for Fairdale Ale
Consider the market demand and supply for Fairdale Ale equations you calculated in sections B.
                    Qd = 34 - 2.8(P)                                                                      (1)
                    Qs = -5. 5 + 8(P)                                                                     (2)
                    Qd = Qs                                                                               (3)

a. Define market equilibrium conceptually.




b. On the graph below plot both of the equations you previously calculated. Remember to label the axes.
                  ____?
              8    ¦-
              7    ¦-
              6    ¦-
              5    ¦-
              4    ¦-
              3    ¦-
              2    ¦-
              1    ¦-
                   +------------------------------------------ _____?
                       3    6   9   12   15   18   21


c. The equations given above represent a two equation (simultaneous) model. Since economists believe that in equilibrium the
quantity demanded will equal the quantity supplied, they add an equilibrium condition to market models:

              QD =  - (P)                     = 34 - 2.8(P)                                        (1)
              QS = mu1 + mu2(P)                = -5.5 + 8(P)                                         (2)
              QD = QS                                                                                (3)

Using the actual equations whose parameters you previously calculated (I hope), determine
 1.) the equilibrium price




 2.) the equilibrium quantity for the "ale" market. Hint. The solution to the market is nothing more than the solution to the
 system of simultaneous equations.
Chapter 3 Problem Sets                             Supply & Demand                                    3-19
=============================================================================================================

PS03-D4 Market Equilibrium: The Market for Kumquats
         The following model has been estimated for Kumquats in the kingdom of Fairdale:

                   QD = 20 - 7(P)                                                                (1)
                   QS = -4 + 5(P)                                                                (2)
                   QD = QS                                                                       (3)

a. If prices are measured in drachmas and quantities in thousands of bushels, what is the equilibrium kumquat price?




b. What is the equilibrium quantity in Fairdale?




c. Visually represent this model on the graph below. Remember to label your graph.

                    ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    +------------------------------------------

d. If the citizens of Fairdale find out that excessive consumption of Kumquats makes their teeth fall out, explain, as an
economist would, how they are likely to respond. Also, demonstrate your reasoning visually, on the graph above.
Chapter 3                                Supply & Demand                                      3-20
==============================================================================================================

PS03-D5 PRICES & MARKETS: Anchovies & Comparative Static Models
                    Qd = a - b(PA)                      a = 20 b = 2.8
                     Qs = c + d(PA)                      c = -4 d = 2.1
                     Qs = Qd
where Anchovies are the pizza topping of choice for weirdoes and they are a
common protein supplement for several processed animal foods. If the Wall
Street Journal reports a change in market conditions for anchovies, are beef
lovers unaffected? Most people would think yes.
a. Suppose that the market for anchovies can be described by the following
model: the price is in dollars per pound and quantities are thousands of cases.
      What is the equilibrium price and quantity of anchovies?




b. Besides being used by followers of "the...Dead" to make tofu burghers, it turns
out that soybeans, being high in protein are also used to make animal feed,
especially for cattle. With respect to anchovies what kind of good is the
soybean?
The market for soybeans can be described with the following model which
incorporates the impact of anchovy prices (Pa) on the demand for soybeans:
      Qd = e - f(P) + g(PA)        e = 4   f = 2   g = 2
      Qs = h + i(P)                h = -8 i = 5.6
      Qs = Qd
where prices are in dollars and quantities in thousands of bushels.
What is the equilibrium price and quantity of soybeans?




c. It turns out that in the beef market soybeans are a significant component of
factor cost (Ps) and accordingly, beef producers are sensitive to soybean prices.
The following model describes the market for slaughtered beef:
          Qd = j - k(P)           j = 30    k = 1.2
          Qs = l + m(P) - n(PS)    l = 12    m =4    n = .8
          Qs = Qd
where PS represents the price of soybeans. The price of beef is in dollars per
pound. Quantity is in millions of pounds.
What is the equilibrium price and quantity of beef?
Chapter 3 Problem Sets                             Supply & Demand                                    3-21
=============================================================================================================

PS03-D5   con't
d. In 1972 there was a global shortage of anchovies. For whatever reason (El
Nino?), the anchovies failed to "run" off the coast of Peru that year. This
temporarily altered the supply situation in the anchovy market such that

                                                Qs' = -14 + 2.1(P)

The net result was that the price of anchovies rose to $6.95 a case and only 0.57
thousand cases were captured.
      Represent the initial situation (part a.) and the shortage situation on the
graph below.

    P ¦                                      i.e., Does demand change?
      ¦                                            What happens to supply?
      ¦
      ¦
      ¦
      ¦
      ¦
      +------------------ Q



e. What happened, if anything, in the soybean market?
i.e., What are the new soybean price and quantity as a result of the shortage of
anchovies?
      Represent this situation relative to that in part b above.

    ? ¦                              i.e., What happens to demand?
      ¦                                    What happens to supply
      ¦
      ¦
      ¦
      ¦
      ¦
      +------------------ Q




f. What about the beef market? How are the beef lovers affected? Is there any
change in the equilibrium price and quantity of beef as a result of the anchovie
shortage? What are the new values? Represent the new situation graphically
relative to the initial situation.

    P ¦                                  Is demand affected?
      ¦                                  How about supply?
      ¦
      ¦
      ¦
      ¦
      ¦
      +------------------ ?
Chapter 3                                Supply & Demand                                      3-22
==============================================================================================================

*E. DISEQUILIBRIUM: GOV'T PRICE SETTING POLICIES
PS03-E1 Disequilibrium and the Price of Fish
                     THE FAIRDALE MARKET FOR FISH

               PRICE/lb.                      QUANTITY DEMANDED               QUANTITY SUPPLIED
                  45 Ducats                          350                               0
                  50                                 300                               5
                  55                                 250                              50
                  60                                 200                             100
                  65                                 150                             150
                  70                                 100                             200

a. If the government of Fairdale set a ceiling price for fish of 55ducats, what would occur, if anything?



b. What would happen if a price floor of 50 ducats were imposed?




c. What would happen if a price floor of 70 ducats were imposed?
Chapter 3 Problem Sets                             Supply & Demand                                    3-23
=============================================================================================================

PS3-E2 Market Intervention: Blue Jeans
The blue jeans market is perfectly competitive in the kingdom of Fairdale, and the following model has been estimated
for blue jeans:

                   QD = 700 - 5(P)                                                                    (1)
                   QS = 100 + 7(P)                                                                    (2)
                   QD = Q S                                                                           (3)

a. What does it mean to say that the blue jeans market is perfectly competitive?
n.b., You may have to use the index in your text to get a good understanding of this concept.



b. What is the equilibrium price and quantity in this market?




c. Visually represent the market solution for blue jeans.

                  Price
                   ¦
             80    ¦-
                   ¦
             60    ¦-
                   ¦
             40    ¦-
                   ¦
             20    ¦-
                   ¦
                   +------------------------------------------
                        1   2    3    4   5    6     7   Quantity (00)

d. What is a shortage?




e. What is a surplus?
Chapter 3                                Supply & Demand                                      3-24
==============================================================================================================

f. If the government sets a ceiling price of 60d per pair will their be a shortage or a surplus of blue jeans? i.e., How will
the market outcome be affected by this government intervention?




g. What will happen to the market solution (i.e., to quantity demanded and supplied) if the government changes the ceiling
to 35d?




h. Would the government be serving the public interest by setting a ceiling price of 35d? Explain.




i. If, instead of a ceiling price, the government set a support price for blue jeans at 80d, what would happen in the
marketplace?




j. If, instead of government intervention, the demand relationship changed and became:

                   QD = 820 -5(P)

would demand increase or decrease? What would be the new equilibrium price and quantity?
Chapter 3 Problem Sets                             Supply & Demand                                    3-25
=============================================================================================================

PS03-E3 Market Intervention: Government Regulation
         You know that if markets are competitive (i.e., the elements of perfect competition prevail), the interaction of
demand and supply lead to an equilibrium price and quantity--citeras paribus. Assume that the apple knocker market is
such a market. Economists have estimated that:

              QD = 17.8 - 1.9(P)                                                    (1)
              QS = -9.0 + 4.8(P)                                                    (2)
              QD = Q S                                                              (3)


a. What is the equilibrium price of apple knockers?

                            PE = __________



b. What is the equilibrium quantity of apple knockers which will be exchanged in the market?

                            QE = _________



c. Plot the demand and supply equations on the graph below and indicate the equilibrium price and quantity. n.b., Do not
forget to label the axes.
                    ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    ¦
                    +-----------------------------

d. Senator John Beluchi, who was a student at Fairdale U. during the sixties, has long been sympathetic to the plight of the
apple knocker industry, which is centered in his home state of New York and has consistently supported his re-election
campaigns. The Senator has proposed legislation which would mandate a national minimum price for apple knockers of
$6.00 per glass. Under his plan, the Federal Government would stand ready to purchase all apple knockers produced at the
support price.
         You have been called upon to testify before Congress as to the likely impact that adoption of this legislation
would have on the marketplace. In your testimony please include an estimate of both the likely buyer and supplier
responses to the $6 support price. Also, show your results on the graph above which will be part of your presentation.
Chapter 3                                Supply & Demand                                      3-26
==============================================================================================================

PS03-E4 Trade, Employment, and the Interrelationship of Markets
In 1993, the Wall Street Journal reported that the market price of durum wheat
in the U.S. was $4.75 per bushel. Durum wheat happens to be the preferred type
of wheat used by both foreign and domestic pasta producers.
Recall that U.S. agricultural markets are in permanent disequilibrium because
of Government price support and quantity limitation programs. In order to draw
down its huge surpluses of wheat, the Federal Government subsidizes—to the tune
of $1.75 per bushel—wheat sales totaling 30 million bushels per year to foreign
pasta producers.
The Journal reported that between 1985, when the U.S. started “dumping” wheat
abroad, and 1993, annual pasta imports to the U.S. doubled.
Using your understanding of supply and demand and your graphic analysis skills
write a brief essay explaining what has been happening.
Chapter 3 Problem Sets                             Supply & Demand                                    3-27
=============================================================================================================

PS03-E5 A Step to Reality. Rent Control as Market Intervention
         The following model refers to the market for rental housing in Fairdale:
                   QD = 700 - 5(P)                                                    (1)
                   QS = 100 + 7(P)                                                    (2)
                   QD = QS                                                            (3)
         a. Is equation 1 consistent with the law of demand? Explain.




         b. What is the equilibrium quantity and price (rent) in Fairdale?




         c. What is the difference between a ceiling and a floor price?




           d. If the government sets a ceiling rent of 35 ducats per month, what will be the excess demand or supply? What
if the ceiling is set at 60D per month?




         e. If the government set a support (i.e., floor) rent of 60 D per month, what would be the resulting surplus or
shortage?




        f. If demand shifts and becomes:
                            QD = 820 - 5(P)                                                      (4)
has demand increased or decreased? What is the new equilibrium rent and quantity?




    g. If, instead of demand shifting, supply becomes:
                             QS = 40 + 7(P)
has supply increased or decreased? What is the new equilibrium rent and quantity?
Chapter 3                                Supply & Demand                                      3-28
==============================================================================================================


Name: ___________________                                       Section Time:          8:00     or    9:30
PS03-E6 Trade Restrictions                                     n.b., Good exercise for EXCEL
It has been estimated by the Department of Commerce that the monthly demand and supply of Ox Carts in Fairdale from
 both domestic and foreign (i.e., the rest of the world (ROW)) sources is as follows:

Price              Demand                  Demand                 Supply                Supply
(ducats)           (Fairdale)              (ROW)                  (Fairdale)            (ROW)
    200                  267                   324                      80                  374
    300                  236                   287                      87                  382
    400                  217                   263                      92                  388
    500                  203                   246                      95                  393
    600                  192                   233                      97                  397
    700                  183                   222                      98                  399
a.   If free trade is allowed , what will be the equilibrium price of ox carts in Fairdale and in the rest of the world?



b.    What will be the equilibrium quantity of ox carts in Fairdale and in the rest of the world?




c. How many ox carts will be imported into Fairdale?



d. Create a graph showing the free market solution.




e. If it is suspected that terrorists plan to introduce the plague to Fairdale (biological warfare?) in imported ox carts and
Fairdale responds by placing severe restrictions on imports—specifically by imposing a quota of 95 ox carts
per month—will be price and quantity in Fairdale be affected in any way?




f. Could you represent the Fairdale Market graphically after the quota imposition?
Graphing tip: By definition if a quota is imposed the foreign supply has a maximum value equal to the size of the quota at
every price.




g. Who wins and who loses as a result of imposition of a quota on imports?

				
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