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					Econ 222 – Macroeconomics                                                              Homework 2
Fall 2010                                                                        Dr. Jennifer Smith

1) Suppose that the tuition charged by public universities increases. Draw a supply-demand
   diagram to illustrate the effects of the tuition hike on the market for private college education.
   (5 points)

2) As summer approaches, the equilibrium price of rental cabins increases and the equilibrium
   quantity of cabins rented increases. Draw a supply-demand diagram that explains these
   changes. (3 points)

3) American baseball bats do not sell well in Japan because they do not meet the specifications
   of Japanese baseball officials. If the Japanese change their specifications to accommodate
   American made bats, what will happen to the price of American bats? (5 points)

4) What is the effect of each of the following events on the equilibrium price and quantity of
   a) An increase in the price of steak. (3 points)
   b) An increase in the price of French fires. (3 points)
   c) A given population becomes older. (3 points)
   d) The government requires that all the ingredients of hamburgers be absolutely fresh (that
      is, nothing can be frozen). (3 points)
   e) Beef becomes more expensive. (3 points)
   f) More firms enter the hamburger business. (3 points)

5) “An increase in demand causes an increase in price, but an increase in price causes a
   decrease in demand. Increases in demand, therefore, largely cancel themselves out.”
   Comment. (2 points)

6) Illustrate the following with supply and demand curves:
   a) During the year 2002, unusually good weather conditions led to cranberry growers
       yielding an enormous crop. (3 points)
   b) During 2002 and 2003 the number of payroll jobs in the United States fell by about 1.5
       million. As a result, there was a sharp drop in demand for office space in American cities.
       (3 points)
   c) Before economic reforms were implemented in the countries of Eastern Europe,
       regulation held the price of bread substantially below equilibrium. When reforms were
       implemented, prices were deregulated. (3 points)

7) The following two sets of statements contain common errors. Identify and explain each.
   a) Demand increases, causing prices to rise. Higher prices cause demand to fall. Therefore,
      prices fall back to their original levels. (1 point)
   b) The supply of meat in Russia increases, causing meat prices to fall. Lower prices always
      mean that Russian households spend more on meat. (1 point)

8) Do you agree or disagree with each of the following statements? Briefly explain your
   answers and illustrate with supply and demand curves.
   a) The price of a good rises, causing the demand for another good to fall. The two goods are
      therefore substitutes. (1 point)
Econ 222 – Macroeconomics                                                                 Homework 2
Fall 2010                                                                           Dr. Jennifer Smith

   b) During 2003, incomes rose sharply for most Americans. This change would likely lead to
      an increase in the prices of both normal and inferior goods. (2 points)
   c) The price of good A falls. This causes an increase in the price of good B. Goods A and B
      are therefore complements. (1 point)

9) The supply and demand schedules for apples are as follows:
                               Demand                           Supply
                   Price Per   Quantity demanded    Price per   Quantity supplied
                    Pound          per year          pound          per year
                    $0.90          100,000           $0.60          100,000
                    $0.80          110,000           $0.70          120,000
                    $0.70          120,000           $0.80          140,000
                    $0.60          135,000           $0.90          150,000
   Use graphs to answer the following questions.
   a) What is the market equilibrium price and quantity? (1 point)
   b) The government agrees to purchase as many pounds of apples as growers will sell at a
      price of $0.80. How much will the government purchase, how much will consumers
      purchase, and how much will be produced? (2 points)
   c) Suppose the government policy is part b remains in effect, but consumer demand
      increases by 10 percent (consumers will purchase 10 percent more at each price than they
      did before). What will be the effect on total apple output, purchases by consumers,
      purchases by the government, and the price of apples? (2 points)

10) Is it possible for all goods a consumer buys to be normal? Is it possible for all goods a
    consumer buys to be inferior? (2 points)

11) Determine which of the following four sentences use the terminology of the supply and
    demand model correctly.
    a) “The price of bicycles rose, and therefore the demand for bicycles went down.” (2 points)
    b) “The demand for bicycles increased, and therefore the price went up.” (2 points)
    c) “The price of bicycles fell, decreasing the supply of bicycles.” (2 points)
    d) “The supply of bicycles increased, and therefore the price of bicycles fell.” (2 points)

12) Begin with the respective market in equilibrium. Read each of the following situations,
    taking note of the market and the events that take place. Evaluate the impact on the market.
    a) Market: Peanut Butter (3 points)
        Event: The price of jelly increases and a drought reduces the peanut crop.
    b) Market: Automobiles
        Event: Consumers expect higher prices of automobiles in the future and new technology
        lowers automobile production costs. (3 points)
    c) Market: Automobiles
        Event: Consumers expect higher auto loan interest rates in the future (5 points)
    d) Market: Urban Housing
        Event: More people move into the urban area from the rural areas (3 points)
    e) Market: Delivery services
        Event: Wages of delivery workers increase (3 points)
Econ 222 – Macroeconomics                                                            Homework 2
Fall 2010                                                                      Dr. Jennifer Smith

Extra Credit: Suppose the demand and supply curves for eggs in the United States are given by
the following equations: Qd=100-20P          QS=10+40P where Qd=millions of dozens of eggs
Americans would like to buy each year; QS=millions of dozens of eggs U.S. farms would like to
sell each year; P=price per dozen eggs.
    a) Fill in the following table: (2.5 points)
                                  Price (per  Quantity   Quantity
                                   dozen)    Demanded    Supplied
   b) Use the information in the table to find the equilibrium price and equilibrium quantity. (1
   c) Graph the demand and supply curves, and identify the equilibrium price and quantity. (1