Pre chapter questions 2: chapter 3, part 1 and part 2 and hw 3

If buyers currently purchase 5,000 gallons of milk per day, then the reservation price of the last buyer willing to buy milk (the marginal buyer is)

$3

What is the equilibrium price?

$3 per gallon

If sellers currently produce 7,000 gallons of milk per day, then the marginal cost of the 7,000th gallon of milk is

$4

If the gov't of Pleasantville makes it unlawful to charge more than $500 per month for a one-bedroom apartment, how many apartments would landlords be willing to supply?

15,000 units per month

Given the picture, if the price of milk is $4 per gallon, then the consumers would be willing to purchase 3,000 gallons of milk per day

3,000

If the gov't of Pleasantville make it unlawful to charge more than $500 per month for a one-bedroom apartment, how many apartments would tenants demands?

35,000 units per month

If the price of milk is $3 per gallon, how many gallons per day do sellers wish to sell?

5,000 gallons

If the price of milk is $2 per gallon, then the consumers would be willing to purchase 7,000 gallons of milk per day

7,000

Along a supply curve, if the price of butter increases, the quantity of butter supplies will

Increase (as price increases, quantity supplied increases)

he movement from s - s' represents an

Increase in supply

The most John is willing to pay for a slice of pizza is $2.56. Thus, $2.56 is

John's reservation price for pizza (a buyer's reservation price is the largest dollar amount the buyer would be willing to pay for the good)

A change in demand is represented by a

Shift in the entire demand curve

Suppose that as the price of movie tickets increases, people stop going to the movies as often because they can no longer afford to do so. This reduction in the quantity of movie tickets demanded is known as the income effect of a price change

The income effect captures the change in quantity demanded of a good that results because a change in price of a good changes the buyer's purchasing power

How does total surplus under this proposal with five trades compare to total surplus realized by the four trades that would have taken place under your proposal?

Total surplus is larger under your original proposal, the one that had only four trades and was based on supply and demand.

Which of the following is likely to lead to an increase in the supply of pumpkins

Weather that's beneficial to the pumpkin crop A decrease in the cost of growing pumpkins

Which of the following will a seller's reservation price generally be equal to? The smallest dollar amount for which a seller would be willing to sell an additional unit The marginal cost of producing another unit of good

Which of the following will a seller's reservation price generally be equal to? The smallest dollar amount for which a seller would be willing to sell an additional unit The marginal cost of producing another unit of good

Five of your friends are about to take a course and are interested in buying used textbooks. Another five of your friends have already taken the course and are willing to consider selling their books. They come to you because they have heard about your skills as a market maker. Suppose that each friend tells you his or her (true) buyer value or seller cost (= their reservation prices). They ask you to figure out how to arrange all the trades. You sort the buyers' reservation prices in decreasing order and the sellers' reservation prices in increasing order, as illustrated in the table below. Then you select the single price that theory would imply as equilibrium price for these buyers and sellers, $13, and let everyone trade at this price. The following trades take place: Todd pays Pearl $13 for her book. Stuart pays Mary $13 for her book. Ignacio pays Cheryl $13 for her book. Mark pays Jessica $13 for her book. With your trades, how much buyer's surplus would buyer Todd capture? --> $12 With your trades, how much seller's surplus would seller Pearl capture? --> $4 With your trades, what is the sum of buyer's surplus and seller's surplus (=total surplus) for Todd and Pearl? --> $16 Suppose that Todd had agreed to pay Pearl $14 instead of the $13 specified in these trades. What effect would this have on the sum of buyer's and seller's surplus for Todd and Pearl? --> It would have no impact on the sum of buyer's and seller's surplus. What is total surplus from the trade between Stuart and Mary, in $? --> 20 What is total surplus from the trade between Ignacio and Cheryl, in $? --> 12 What is the combined total surplus generated from all four trades in this market? --> 48 How much surplus (buyer's- or seller's surplus) does each person get under this set of trades? --> 4 What is the combined total surplus generated by all five trades? --> 40

With your trades, how much buyer's surplus would buyer Todd capture? --> $12 With your trades, how much seller's surplus would seller Pearl capture? --> $4 With your trades, what is the sum of buyer's surplus and seller's surplus (=total surplus) for Todd and Pearl? --> $16 Suppose that Todd had agreed to pay Pearl $14 instead of the $13 specified in these trades. What effect would this have on the sum of buyer's and seller's surplus for Todd and Pearl? --> It would have no impact on the sum of buyer's and seller's surplus. What is total surplus from the trade between Stuart and Mary, in $? --> 20 What is total surplus from the trade between Ignacio and Cheryl, in $? --> 12 What is the combined total surplus generated from all four trades in this market? --> 48 How much surplus (buyer's- or seller's surplus) does each person get under this set of trades? --> 4 What is the combined total surplus generated by all five trades? --> 40

Unbeknownst (at first) to the market participants, I used a different demand curve in the two periods of Market 2 compared to the three periods of Market 1; specifically demand was lower in Market 2, but supply stayed the same. To which of the eight scenarios on our supply-demand sheet we covered in class a few weeks ago does this situation correspond? That sheet is listed as "Changes in demand and/or supply" under Readings for Week 4 on the Canvas page. List a number between 1 and 8.

4

A change in the quantity demanded is represented by

A movement along the demand curve

A change in the quantity supplied is represented by

A movement along the supply curve

Which of the following factors will lead to an increase in supply?

A technological advance that lowers production costs A decrease in the cost of inputs to the production prices

When the market price is $4, there is

An incentive for sellers to lower their prices When a market price is above the equilibrium price, excess supply gives sellers an incentive to lower their price Excess supply

Now assume you and the person who made the other proposal both do not know buyers' and sellers' reservation prices. Instead the ten friends (who also do not know the other reservation prices) set up an anonymous market similar to the one we had in the market experiment. Which market outcome would have been more likely in that market?

An outcome similar to the one in your original proposal in which the four buyers with the highest buyer's reservation prices buy from the four sellers with the lowest seller's reservation prices.

If the demand for ketchup decreases when the price of hot dogs increases, then this suggests that ketchup and hot dogs are

Complements

If the price of blueberries increases, then this should lead to the supply of blueberry muffins to:

Decrease (an increase in the price of an input will lead to a decrease in supply)

If the price of butter increases, the quantity of butter demanded will

Decrease (as price increases, quantity demanded decreases)

As the quantity milk bought increases from 5,000 to 7,000 gallons per day, then the reservation price of the marginal buyer (the last buyer who is willing to buy milk)

Decreases The fact that the demand curve for a good is downward sloping reflects the fact that the reservation price of the marginal buyer declines as the quantity of the good bought increases

If the gov't of Pleasantville makes it unlawful to charge more than $500 per month for a one-bedroom apartment, then this would result in an excess

Demand of 20,000 apartments per month When the price is $500, quantity demanded is $35,000 units per month and quantity supplied is 15,000 per month, implying an excess demand of 20,000 units per month

The introduction of rent controls could lead to which of the following

Lower rent for those for those who live in rent controlled apartments A decrease in quantity of apartments available for rent

A change in supply is represented by

Shift in the entire supply curve

If Red Bull and Coke are substitutes, then a decrease in the price of Red Bull should lead to:

a decrease in the price of coke (As the price of red bull falls, the demand for coke will fall, leading to a decrease in the equilibrium price and quantity of coke) a decrease in the amount of Coke bought and sold in the market.

Economic efficiency occurs when:

all goods and services are produced and consumed at their socially optimal levels.

Two goods are complements if

an increase in the price of one good, causes a decrease (Leftward shift) in the demand for another good

In the supply-demand graphs for each group, (predicted) total surplus is the area

between the blue and yellow lines to the left of where these lines intersect.

If torrential rain wipes out this year's corn crop, this should lead to decrease in supply of corn.

decrease

An increase in the supply of corn (a rightward shift in the supply curve) could be the result of a decrease in the price of an input to the production of corn.

decrease A decrease in the price of an input to production leads to an increase in supply

A decrease in demand while keeping supply constant is predicted to (and did)

decrease total surplus in market 2 compared to market 1.

A medical breakthrough that decreases the cost of treating cancer should lead to an increase in the supply of cancer treatments.

increase

A maximum allowable price specified by law is a

price ceiling

The supply-demand model predicts certain changes in price and quantity in response to the change in demand. Looking at the data for Market 2, Period 2, and comparing them with Market 1, Period 3, the equilibrium predictions are faring

relatively well--market price and quantity are both generally lower in Market 2 compared to Market 1.

If an increase in the price of one good, causes an increase (rightward shift) in the demand for another good, then the two goods are substitutes

substitutes

A schedule or graph showing the quantity of a good that sellers wish to sell at each price is known as a

supply curve

An increase in the price of cotton is likely to shift the supply curve for clothing (that uses cotton as in input) to

the left (An increase in the price of an input will lead to a decrease in supply (leftward shift))

The socially optimal quantity is

the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good

If the gov't imposes a price ceiling of $2 per gallon on milk, the this will lead to an excess:

Demand of 4,000 gallons per day Quantity supplied is 3,000 and the quantity demanded is 7,000, implying an excess demand of 4,000 gallons per day

"Market Efficiency" refers here to the ratio between the actual total surplus in a given market and the total surplus in a market that is in equilibrium. Could Market Efficiency ever be larger than 1?

No, because in class we have seen that if the market is in equilibrium total surplus is maximized (under certain assumptions, which are all fulfilled here).

Sellers surplus is the difference between the price the seller receives and the seller's reservation price

Sellers surplus is the difference between the price the seller receives and the seller's reservation price

Take a look at the numbers and the graphs for Group 6 (to see the graphs you need to scroll down to the sixth combination of supply-demand and transactions graphs). Note that the average price for this group was relatively high ($1.35) because of one single trade with a very high price early on (about $3.40). Which of the following statements about this trade is correct?

That one trade at a price of $3.40 did not have a negative impact on total surplus since that relatively large loss to the buyer in this trade must have been compensated by a relatively large gain to the seller in this trade.

Suppose Martin just bought a guitar from Jackson off Craigslist for $110. Martin's reservation price was $140, and Jackson's reservation price was $100.

The buyer's surplus from this transaction was $30 dollars. The total surplus from this transaction was $40 dollars Total surplus is the difference between the buyer's reservation price and the sellers reservation price ⇒ 140- 100 = $40 The sellers surplus from this transaction was $10 dollars Sellers surplus is the difference between the amount the seller receives and the seller's reservation price ⇒ 110-110 = 10

Open (on Canvas) the summary files for Markets 1 and 2 of the market experiments we conducted on Thursday September 13 (the files are posted under Lectures in Week 4; these are the files for the 11 am session, but the ones for the smaller 8 pm session look similar.).In particular, take a look at the file for Market 1, Period 3. In most "Groups" there were ten buyers trying to buy up to three units and ten sellers trying to sell up to three units. What is the equilibrium price in such a market? --> 1.2 What is the maximum total surplus, called here "Optimal Surplus," in such a market? --> 13

What is the equilibrium price in such a market? --> 1.2 What is the maximum total surplus, called here "Optimal Surplus," in such a market? --> 13

If the demand for tea increases when the price of coffee goes up, then this suggest that coffee and tea are substitutes.

substitutes