Macroeconomics Study Set 62

Business

Quiz 4 :

Supply and Demand: an Initial Look

Quiz 4 :

Supply and Demand: an Initial Look

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The following table summarizes information about the market for principles of economics textbooks: img a. What is the market equilibrium price and quantity of textbooks b. To quell outrage over tuition increases, the college places a $55 limit on the price of textbooks. How many textbooks will be sold now c. While the price limit is still in effect, automated publishing increases the efficiency of textbook production. Show graphically the likely effect of this innovation on the market price and quantity.
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The following table summarizes the information about the market for economics textbooks.
Table - 1
img a. Equilibrium level of price and quantity
A market obtains equilibrium level of price and quantity where the quantity demand is equal to the quantity supply. In the above table, equilibrium level of price is $65 where the quantity demand and quantity supply equals to 1,300 units.
b. Impose restriction on textbook price
If the college places a $55 limit on the price of textbooks, then supply will be only 700 units. At the price of $55 per unit, the suppliers are interested to supply only 700 units of books. Hence, 700 units of book will be sold.
c. Effect of increasing the efficiency of textbook production
If the publisher adopts some innovative technique and increases the efficiency of textbook production, then the supply of book will increase. The production efficiency in textbook production will shift the supply curve outward. Hence, the new equilibrium point will be obtained where the new level of output is greater than the previous level.
img Figure₁
In Figure₁, price of book is measured on vertical axis and quantity demand and supply of book is measured on horizontal axis.
The increase in efficiency of production shifts the supply curve downward from
img to
img Further, the demand curve shifts upward from
img to
img to get an equilibrium with an increase in supply curve. Hence, the increase in supply and demand increases the level of output from
img to
img .

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What shapes would you expect for the following demand curves a. A medicine that means life or death for a patient b. French fries in a food court with kiosks offering many types of food
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a. Demand curve for medicine is parallel to vertical axis
The demand curve is parallel to vertical axis because the demand for medicine is inelastic to the change in price.
An increase in price of medicine will not reduce the demand for medicine. A patient will consume medicine to save his/her life. Hence, he/she will be ready to consume it at a higher price also.
On the other hand, reduction in price will also not increase the demand for medicine. A consumer will consume medicine only to get cured from a disease. Hence, the reduction in price of medicine will not increase the consumption of medicine.
Hence, the demand curve for medicine is parallel to vertical axis.
b. Demand curve for French fries would be downward slopping
The demand curve for French fries is downward slopping because it is highly elastic to the change in price.
If the price of French fries goes up, then the consumer will consume less and go for its alternative. Hence, increase in price of French fries will reduce its demand and vice-versa.
Hence, the demand curve of French fries slopes downward from left to right.

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The two accompanying diagrams show supply and demand curves for two substitute commodities: regular cell phones and smartphones. img a. On the right-hand diagram, show what happens when rising raw material prices make it costlier to produce regular cell phones. b. On the left-hand diagram, show what happens to the market for smartphones.
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a. Rise in raw material cost will increase price and decrease output
A rise in cost of raw materials will make the production expensive; hence, the supply curve will shift upward. The new equilibrium price will be higher than the original price.
This can be explained with the help of the following figure.
img Figure (1)
In Figure (1), price is shown on vertical axis and output on the horizontal axis. The supply curve shifts rightward as raw material price increases and reaches the new equilibrium point
img .
b. Rise in price of substitute goods will increase both price and output of the commodity
Since cell phone is the substitute commodity for smart phone, the rise in price of the smart phone will increase the demand for the regular cell phones. As a result, the demand curve of the cell phone will shift outward.
This can be explained with the help of the following figure.
img Figure (2)
In Figure (2), price is shown on vertical axis and output on the horizontal axis.
The rise in price of the smart phone increases the demand for regular cell phones. Hence, the demand curve shifts from
img to
img and reaches a new equilibrium at point
img .

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Suppose the supply and demand schedules for bicycles are as they appear in the following table. img a. Graph these curves and show the equilibrium price and quantity. b. Now suppose that it becomes unfashionable to ride a bicycle, so that the quantity demanded at each price falls by 8 million bikes per year. What is the new equilibrium price and quantity Show this solution graphically. Explain why the quantity falls by less than 8 million bikes per year. c. Suppose instead that several major bicycle producers go out of business, thereby reducing the quantity supplied by 8 million bikes at every price. Find the new equilibrium price and quantity, and show it graphically. Explain again why quantity falls by less than 8 million. d. What are the equilibrium price and quantity if the shifts described in Test Yourself Questions 3(b) and 3(c) happen at the same time
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S. government price supports for milk led to an unceasing surplus of milk. In an effort to reduce the surplus about a decade ago, Congress offered to pay dairy farmers to slaughter cows. Use two diagrams, one for the milk market and one for the meat market, to illustrate how this policy should have affected the price of meat. (Assume that meat is sold in an unregulated market.)
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The same rightward shift of the demand curve may produce a very small or a very large increase in quantity, depending on the slope of the supply curve. Explain this conclusion with diagrams.
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From 2000 to 2010 in the United States, the number of working men fell by 0.6 percent, while the number of working women grew by almost 4 percent. During this time, average wages for men grew by roughly 3 percent, whereas average wages for women grew by slightly more than 6 percent. Which of the following two explanations seems more consistent with the data a. Women decided to work more, raising their relative supply (relative to men). b. Discrimination against women declined, raising the relative (to men) demand for female workers.
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In 1981, when regulations were holding the price of natural gas below its free-market level, then-Congressman Jack Kemp of New York said the following in an interview with The New York Times: "We need to decontrol natural gas, and get production of natural gas up to a higher level so we can bring down the price."15 Evaluate the congressman's statement.
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Consider the market for beef discussed in this chapter (Tables 1 through 3 and Figures 1 and 8). Suppose that the government decides to fight cholesterol by levying a tax of 50 cents per pound on sales of beef. Follow these steps to analyze the effects ofthe tax: a. Construct the new supply schedule (to replace Table 2) that relates quantity supplied to the price that consumers pay. b. Graph the new supply curve constructed in Test Yourself Question 7(a) on the supply-demand diagram depicted in Figure 7. Figure 7 img c. Does the tax succeed in its goal of reducing the consumption of beef d. Is the price rise greater than, equal to, or less than the 50 cent tax e. Who actually pays the tax, consumers or producers (This may be a good question to discuss in class.)
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(More difficult) The demand and supply curves for T-shirts in Tourist town, U.S.A., are given by the following equations: Q = 24,000 500 P Q = 6,000 + 1,000 P where P is measured in dollars and Q is the number of T-shirts sold per year. a. Find the equilibrium price and quantity algebraically. b. If tourists decide they do not really like T-shirts that much, which of the following might be the new demand curve Q = 21,000 500 P Q = 27,000 + 500 P Find the equilibrium price and quantity after the shift of the demand curve. c. If, instead, two new stores that sell T-shirts open up in town, which of the following might be the new supply curve Q = 4,000 + 1,000 P Q = 9,000 + 1,000 P Find the equilibrium price and quantity after the shift of the supply curve.
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How often do you rent videos Would you do so more often if a rental cost half as much Distinguish between your demand curve for home videos and your "quantity demanded" at the current price.
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The following are the assumed supply and demand schedules for hamburgers in Collegetown: img a. Plot the supply and demand curves and indicate the equilibrium price and quantity. b. What effect would a decrease in the price of beef (a hamburger input) have on the equilibrium price and quantity of hamburgers, assuming all other things remained constant Explain your answer with the help of a diagram. c. What effect would an increase in the price of pizza (a substitute commodity) have on the equilibrium price and quantity of hamburgers, assuming again that all other things remain constant Use a diagram in your answer.
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It is claimed in this chapter that either price floors or price ceilings reduce the actual quantity exchanged in a market. Use a diagram or diagrams to test this conclusion, and explain the common sense behind it.
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How are the following demand curves likely to shift in response to the indicated changes a. The effect of a drought on the demand curve for umbrellas b. The effect of higher popcorn prices on the demand curve for movie tickets c. The effect on the demand curve for coffee of a decline in the price of Coca-Cola
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Discuss the likely effects of the following: a. Rent ceilings on the market for apartments b. A price floor in the market for wheat Use supply-demand diagrams to show what may happen in each case.
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