Problem Set 2 Answers

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					Economics 102 Introductory Macroeconomics
Spring 2004, Professor J. Wissink
Problem Set 2
Due: Wednesday 2/18 at the start of class.

Boxes will be removed ten minutes after the start of class.

Remember: We will NOT accept problem sets late. Period.
Thanks for minding this policy and not asking if you can hand it in late.

1. Graphically represent the market for apples in New York under each of the following conditions (taken
one at a time, not all together). State what happens to the equilibrium price and quantity. If more than one
possibility exists, show them all. (a) The New York State government cuts income taxes, which increases
spendable income. (b) The price of apple fertilizer decreases. (c) The U.S. Agriculture Department
imposes a minimum price on apples (called a price support). (d) The U.S. Agriculture Department imposes
an effective minimum price, which is higher than the equilibrium price, on oranges. Analyze all the possible
price and quantity outcomes for the apple market assuming apples are a normal good.

2. Let's model the market for cigarettes. Suppose that the market demand curve for cigarettes (in billions
of packs) is XD = 100-40P and that the market supply curve is XS= -20+40P. (a) Graph the supply and
demand curves. (b) What are the equilibrium quantity and price in this market? (c) Suppose that the
government wants to curb smoking and decides to impose a $2/pack minimum price on cigarettes, how
many packs of cigarettes are traded in the market? Calculate any surplus or shortage.

3. Critically evaluate the following statements and explain why they are true, false or uncertain. Suppose
that cassette tapes and music CDs are substitutes. (a) As the price of tapes increases, consumers
demand more CDs. In equilibrium, the price of CDs will increase. (b) At the new equilibrium price, sellers
will produce more CDs which leads to an increase in supply and hence the equilibrium price will move
back to its original level. Use graphs to illustrate your arguments.

4. When oranges are "in-season," they are relatively cheaper than when they are out of
season. Furthermore, in-season, relatively greater quantities of oranges are sold. When vacation trips to
Hawaii are "in-season," greater quantities are also sold, but in-season vacation rates are relatively higher
than out-of-season rates. Explain this seemingly paradoxical observation using supply and demand

                                                                                                      PS2, Q1-Q4
he possible

              PS2, Q1-Q4
5. Consider the market for roses in Ithaca. The table below shows the quantities demanded and
supplied (in number of roses) at various prices on Valentine's Day and also for a "regular day."
(a) What are the equilibrium price and quantity on a regular day (solve graphically or numerically)? (b)
What happens to the equilibrium price and quantity on Valentine's Day? (c) Suppose that on Valentine's
day, people also consume more wine. Do you expect the price of wine will be much higher on
Valentine's Day than on a regular day? Why or why not?

             Valentine's Day     Regular day
     Price   Quantity Quantity  Quantity Quantity
    $/rose Demanded Supplied Demanded Supplied
      0.02     8000        4000   7000       4000
      1.00     5000        4000   4700       4000
      1.25     4800        4000   4000       4000
      1.50     4500        4000   3400       4000
      1.75     4200        4000   2900       4000
      2.00     4000        4000   2500       4000
      2.25     3500        4000   2200       4000
      2.50     3000        4000   2000       4000

6. Multiple Choice.

1) Which of the following will increase the supply of apples?

a. A rise in the market price of apples.
b. A fall in the market price of oranges.
c. A fall in the market price of wages to apple pickers.
d. A fall in apple buyers' incomes.
e. A fall in number of apple orchards.

2) A demand curve will shift with changes in:

a. technology.
b. factor prices.
c. tastes.
d. number of sellers.
e. the good's own market price.

3) Which of the following would result in a change in the quantity supplied but not a change in supply?

a. An increase in factor prices.
b. A change in technology.
c. An increase or decrease in the price of an alternative in production.
d. A shift in the market demand curve.
e. All of the above.

4) If there is both a decrease in demand and an increase in supply for a good:

a. the quantity traded will necessarily fall.
b. both quantity traded and market price will necessarily fall.
c. the market price will necessarily rise.
d. the quantity sold will necessarily rise.
e. market price will necessarily fall.

5) During a recent Bruce Springsteen concert tour, long waiting lines developed at ticket booths and
scalpers frequently sold tickets for prices ranging in the $100s. Such behavior reflects:

a. box office prices that have been established below equilibrium prices.
b. a demand curve that slopes upward and to the right.
c. an increase in the supply of Springsteen concerts.
d. box office prices that are "too high," thus squeezing out the average concert go-er.
e. the existence of price floors in the ticket market.


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