14.01 Fall 2010 Problem Set 1. (25 points) For each of the following scenarios,

Question

14.01 Fall 2010 Problem Set 1. (25 points) For each of the following scenarios, use a supply and demand diagram to illustrate the efect of the given shock on the equilibrim price and quantity in the specified competitive marot. Explain whether there is a shilt in the demand eurve, the supply eurve, or neither (a) & poinms) An unespected temporary heat wave lits the East Coast. Show the effect in the ice (b) (S points) The gowmament intrebans a tax on ?re mam whihi. pad ly proInn what s the (c) (& points) China and Mexico are major producers of tests. Worls in Mexico decile to go on (d) (& poists) Show the effect of the situstion described la (e) on the market foe Chinese textiles cream market in New England etoct in the ice eean marlrt? strike. Show the macket for Mexican tesides (e)(points) Suppose the goverct imposes a peice eap on bottled water. Show the eSect in the bottled water market Proben 1courtesy of Willican Whraton.Ued with peruion. 2. (20 pints) Fo o the following pais of goods, iey whih one you would expeet to hve more own, price clastic demand. F%ase explain your rwoning. (a) ponts) Compaters (axserally) Apple MacBook Pro lapsops b) & polsts) Stereo beadphooes (generall) vs. bearing ads For each of the Sollowing goods, idestify whether you would expect desmsand to be more (ows-price elstie in the short u or the long run As above, please brielly explanyourreasceing (e) (3 points)Reailgline in the subnate of Chica )(3points) Air coditioningin Miani Brach, Florid Problem 2 courtesy o Lake Stein. Used with permision 3. (30 points) Consider the market for agple juke. In this market, the supply curve is given by IOP,-5P, and the drinandcurve is given by QD-100-15p, + 10/,, wherr?dnutes apple juice, A denotes apples, and T denotes te (a) (? points) Assume thit Pa is fixed at S1 and /'r-s. Calnalate the equilibrium price and quantity in the apple juice markrt (b) (7 points) Suppo that a poor harvest son rains the price o aps to Pa 2. Find the equilibtim price and qaantiny of pile juiee. Draw a graph to illustrate your w (e) (8 points) Suppose Pa- bt the price of tea drogps to Pr 3. Find the new equilrim price and gaantity of mpple juice (d) (Speints) Suggne Pa-1.Py-S. and there is a price miling on apple juice of F7-s. what is theexmw.kmand fir apple juice as a rvsult ? Draw ? graph to illotrate your ansver Probie3 coustesy of Willian Wheaton. Used with perision (25 polnts) You have been asked to analyae the market for steel. From pablic sourees, you are able to End that last year's price for steel was 520 per ton. At this prioe, 100 million toss were sold on the worll marlct Frees trade association data you are alle to obtns estimates for the own price elasticities of demand and sepply on the woeld markts a-025 for deasand and 0 for suppy Assume that steel has linear demand and supply eurves throughout. (n) (10 points) Solve for the equations of demand and supply in this malst and skotch the dema and supply curves (b) ?15 Pint') Suppor that you di river 'hnt thr curmat prie of sed i. $15 per ton and the curmt of workdwsde sales of steel is 150mllion toms The most recent elnsticity estinmates fom the trade asociation this year are-012 demd and 0.25 for supply. Dscribe the change in the supply and demand eurves over the past yeur ing your diagram from part (a). What sot ef event(s) might explain the change Prublra 4 courteay ca Lu? Sirin. Used with prmiwion.

Explanation / Answer

1. a. When there is hot weather , demand for ice cream increases.Demand curve shifts to right resulting in increase in Equilibrium price and quantity

b. When tax is imposed on producers , they cut down on quantity supplied. Supply curve shifts to left. Equilibrium price rises and quantity falls with introduction of tax. Since price of good rises , quantity demanded falls.

C. When Mexicon workers go on strike supply of Mexican textiles reduces. Supply curve of Mexican textiles shift to left. Equilibrium price rises and quantity falls.

d. Demand for Chinese textiles increase. Equilibrium price for Chinese textile rises and quantity demanded also rises

e. When there price cap is set below Equilibrium price then it leads to shortage of goods leading to a situation of excess demand and shortage in supply

2. a Apple Mac Book will have more elastic demand

b. Stereo headphones will have more elastic demand

Reason being luxury items tend to have more elastic demand whereas necessity have less elastic demand

We consider hearing aid to be a neccessity and Mac book as luxury

C. In long run goods tend to have more elastic demand.

3. Qs = Qd at Equilibrium

10 Pj - 5 Pa = 100 -15 Pj + 10 Pt

10 Pj - 5(1) = 100 -15Pj +10 (5)

25Pj = 155

Pj= 31/5 is Equilibrium Price

Qd = 100 - 3(31/5) + 10(5)

= 100 - 7 + 50

= 57 is Equilibrium quantity

b. Pa = 2 nd Pt = 5

10 Pj - 5 Pa = 100 - 15 Pj +10 Pt

10 Pj - 10 = 100 - 15 Pj +50

25 Pj = 160

Pj = 32/5

Qd = 100 - 15(32/5) +50

= 100 -96 +50

= 54

Equilibrium price rises and quantity falls when price of apple rises to 2.

c. Pa = 1 Pt = 3

10 Pj -5Pa = 100 -15 Pj + 10 Pt

10Pj - 5 = 100 - 15 Pj + 30

25 Pj = 135

Pj = 27/5

Qd = 100 -15 (27/5) + 30

= 100 - 81 +30

= 49

Equilibrium price falls and quantity falls when tea price drop

d. Pa = 1 Pt = 5 and Pj = 5

Qs = 10(5) -5 (1)

45

Qd = 100 - 15(5)+ 10(5)

= 25+50

75

Excess demand = 75 -45= 30

When price cap is below Equilibrium price then it leads to shortage of goods and excess demand

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.