Unit 3 Microeconomics: Fall 2020

(3A): Assume that the price in a market is currently below the equilibrium price. Explain the adjustment of the market back to equilibrium by putting the steps in the correct order.

(3A): 1- There is a shortage - quantity demanded is greater than quantity supplied 2- Some buyers are willing to pay more for the good; therefore sellers can raise prices and sell more 3- Prices begin to rise Quantity demanded decreases while quantity supplied increases 4- The shortage becomes smaller 5- This process continues until there is a new equilibrium 6- A new equilibrium is reached with a larger quantity transacted at a higher price --> When price is below equilibrium, quantity demanded exceeds quantity supplied; hence a shortage. A shortage means that some buyers are willing and able to pay more to get the good and that sellers can raise their prices and still sell all they are willing to supply. Therefore prices begin to rise. As prices rise, quantities demanded decrease and the quantities supplied increase. This process continues as long as there is a shortage. The shortage gets smaller and is eventually eliminated. A new equilibrium quantity is reached where the quantity demanded equals the quantity supplied. At that point the price stops rising, because there are no longer any pressures to cause the increase.

(3A): Below are the supply and demand schedules for Japanese cars bought and sold in the U.S. Suppose that a rise in "Buy American" sentiment in the U.S. reduces the quantity demanded at each price by 500,000 (.5 million) cars per year. What is the new equilibrium price? (PICTURE 1)

(3A): 12,000 --> Subtract 500,000 from each quantity demanded at every price. Figure out where quantity demanded is equal to quantity supplied after this change.

(3A): At what level of output is the marginal cost greater than the marginal benefit? (PICTURE 2)

(3A): 125 --> Another way of understanding value to a consumer is to think of it as the amount of benefit that will be gained from consuming the good. The marginal benefit (the value) is also represented by the demand curve, and the marginal cost, the price producers must have if they are going to produce one more unit of a good, is represented by the supply curve. At a level of output of 150 on the graph, the marginal benefit is about a $1.00 and the marginal cost is about $1.15. Thus, it costs more to produce than its value to consumers.

(3A): Below are the supply and demand schedules for Japanese cars bought and sold in the U.S.What is the equilibrium price? (PICTURE 1)

(3A): 14,000 --> The equilibrium price is the price where quantity supplied is equal to quantity demanded. It is the price where firms have a proper incentive to produce a quantity of goods that is exactly equal to the quantity of goods demanded by individual consumers at that price.

(3A): Below are the supply and demand schedules for Japanese cars bought and sold in the U.S. Suppose that a rise in "Buy American" sentiment in the U.S. reduces the quantity demanded at each price by 500,000 (.5 million) cars per year. What is the new equilibrium quantity? (PICTURE 1)

(3A): 1750000 --> Subtract 500,000 from each quantity demanded at every price. Figure out where quantity demanded is equal to quantity supplied after this change.

(3A): Below are the supply and demand schedules for Japanese cars bought and sold in the U.S.What is the equilibrium quantity? (PICTURE 1)

(3A): 2000000 --> The equilibrium quantity is the quantity where quantity demanded is equivalent to the quantity supplied. There are no extra units produced nor are there any individuals that demand the good that cannot receive one.

(3A): "President Reagan proposed a lowering of the minimum wage for teenagers during the summer." Assume that there are normal demand and supply curves and effective minimum wages in the labor market for both teenagers and adults. Assume also that the new, lower minimum wage is an effective one (below the old minimum wage, but still above what the equilibrium wage would be) for teenagers. What would be the effects of Reagan's proposal on the market for teenage labor? During the summer months, what would be the effects on the market for adult labor with skills similar to teenagers? Explain how you arrived at your answers.

(3A): A lowering of the minimum wage for teenagers would result in an increase in the quantity demanded of teenagers and a decrease in the number of teenagers willing to work. The actual wage for teenagers would fall to the new minimum wage and teenage unemployment would fall. The decreased wage for teenagers would cause a decrease in the demand for substitutes, that is, for adults with similar skills. Normally the market would adjust by reducing adult wages. Adult wages, however, cannot fall because of the minimum wage. Therefore adult wage would remain constant and adult unemployment would rise.

(3A): Which of the following statements about the effects of a government setting maximum prices is true?

(3A): A maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price. --> If the price ceiling is set above the equilibrium price, then it is not effective and the equilibrium price will prevail and no shortage occurs.

(3A): If population increases in a city with effective rent controls (and nothing else changes), which of the following describes what will happen in the market for rental housing?

(3A): An increase in demand for rental housing units; no change in supply; no change in rents --> An increase in population will make demand increase, but rent control is a price ceiling, meaning that price is not allowed to rise. Therefore, demand will increase, but supply will not since price is capped at the ceiling. Rents will not change unless the government changes it (assuming it was an effective price ceiling).

(3B): The economic significance of successful ticket scalping (scalpers sell tickets at higher than official prices) at baseball games is that:

(3B): there is an excess demand for tickets and ticket prices should be raised

(3B): Suppose the local slaughterhouse gives off an unpleasant stench. The quantity of meat produced would then be _______ because not all of the _______ are accounted for in the marketplace.

(3B): too high; costs

(3A): Subtract 500,000 from each quantity demanded at every price. Figure out where quantity demanded is equal to quantity supplied after this change.

(3A): An increase in the price of the good = A movement along a demand curve¸ no change in demand An increase in income for a normal good = Shift the demand curve to the right and an increase in demand A decrease in the price of a substitute good = Shift the demand curve to the left and a decrease in demand. Expectations of falling income in the near future = Shift the demand curve to the left and a decrease in demand. (If the good is normal.) Expectations of rising prices in the near future = Shift the demand curve to the right and an increase in demand now. --> An increase in the price of a good only changes the quantity demanded of a good (which is represented by a movement along the existing demand curve). An increase in income means that buyers are able to buy more goods, resulting in an increase in demand for normal goods. If two goods are substitutes for one and other, buyers will purchase the cheaper option (all else equal). Therefore, a decrease in the price of a substitute good, leads to a decrease in demand. If buyers expect their income to fall in the future, they tend to save more money in the present, causing a decrease in demand. If buyers expect prices to increase in the near future, demand will increase in the present to take advantage of lower prices now.

(3A): Assume that tastes change so that tennis is no longer as desirable to play as it is now. What would happen to the market for tennis balls?

(3A): Demand for tennis balls decrease, equilibrium quantity falls, equilibrium price falls. --> The change in tastes causes the demand for tennis balls to decrease. The quantity demanded is now less than quantity supplied. There is a surplus. Given the surplus, sellers will lower their prices to get rid of extra product. As prices fall, the quantity demanded will begin to increase and the quantity supplied to decrease and thus the surplus gets smaller. This downward pressure will continue until there is no longer a surplus and a new lower equilibrium price and lower equilibrium quantity are reached.

(3A): If (1) the cost of manufacturing computers decreases and (2) at the same time the quality improves making computers more useful for households, which of the following is most likely to happen?

(3A): Equilibrium price may increase, decrease, or, remain the same; equilibrium quantity will increase --> The cost reduction increases supply and the quality improvement increases demand.

(3A): If the city allows fewer bar licenses (and bars require a license to serve beers), how will the market equilibrium for beer change? Assume all else remains constant (ceteris paribus).

(3A): Equilibrium price will be higher and equilibrium quantity will be lower --> Once producers offer a higher price and consumers accept it, the equilibrium price will be higher. At the higher price, quantity supplied increases and quantity demanded decreases until a new equilibrium is reached. The end result is a smaller equilibrium quantity.

(3A): If income increases and, at the same time, a new technology is discovered that lowers the cost of producing the good, which of the following will happen if the good is an inferior good?

(3A): Equilibrium quantity may rise, fall or remain the same. The equilibrium price will decrease --> The rise in incomes reduces the demand for the inferior good. This reduces equilibrium quantity and price. The invention of a new technology causes the supply to increase. This causes equilibrium quantity to rise and the price to fall. So prices fall due to both reasons while the equilibrium quantity falls because of the demand shift and rises due to the supply shift. So at the end of the process prices will surely fall. However quantities may be higher (if the supply shift is stronger); lower (if the demand shift is stronger); or stay the same (if the supply shift equals the demand shift).

(3A): "Falling oil prices have caused a sharp decrease in the supply of oil." To an Economist, this quotation is

(3A): Incorrect; a decrease in price causes a decrease in the quantity supplied, not a decrease in supply. --> prices only affect quantity supplied or quantity demandeed

(3A): Christmas card sales increase during the last three months of the year, and the sale of fresh strawberries in the North increase during the early summer months. However, the equilibrium price movements of these two commodities are quite different during their peak sales seasons. Christmas cards are more expensive during their peak sales season, whereas strawberries are cheaper during their peak sales season. Explain this difference.

(3A): Prices of Christmas cards rise due to an increase in demand; prices of strawberries fall due to an increase in supply. --> The cause of the increase in the quantity of Christmas cards is an increase in demand. Thus the price will rise and the quantity will increase. The cause of the increase in the quantity of strawberries is an increase in supply. Thus the equilibrium quantity will increase and the price will decrease.

(3A): What would be the initial change in the market for beer if a city suddenly restricted the number of bar licenses they permitted? (Note: A bar requires a licenses to operate.)

(3A): Supply would decrease at current prices, there would be a shortage --> The reduced number of licenses would reduce the number of sellers of beer, leading to a decrease in supply. Since demand has remained constant and supply has decreased, quantity supplied is smaller than quantity demanded and there is a shortage.

(3A): Explain why an effective minimum wage law that is not changed over time may eventually become ineffective as demand for workers increases.

(3A): The minimum wage law is effective when it holds wages above what they would otherwise be. As demand increases, the quantity demanded at the minimum wage will increase. If demand increases enough, the surplus will be eliminated and the equilibrium wage will rise above the minimum level. The market wage will rise to the equilibrium, making the minimum wage law ineffective.

(3B): Last summer real estate prices in your town soared. You started noticing more For Sale signs in your neighbors' yards. You conclude that

(3B): when housing prices rose, they started to exceed some of your neighbors' reservation prices

(3B): A regulated maximum price that is above the equilibrium price

(3B): will have no effect on the market

(3A): It is claimed that price floors and price ceilings both reduce the actual quantity exchanged in a market. Explain.

(3A): Without a price ceiling or a price floor the market would be in equilibrium. An effective price ceiling is set above the equilibrium price such that quantity supplied exceeds quantity demanded at that price. This implies that sellers wish to sell more than what buyers wish to buy. In reality, however, sellers cannot sell any more than buyers will buy. Hence the market is "demand constrained" and the actual quantity transacted equals the quantity demanded which is less than the free market equilibrium quantity. Similarly, an effective price floor is set below the equilibrium price such that quantity demanded exceeds quantity supplied at that price. This implies that buyers wish to buy more than what sellers wish to sell. In reality, however, buyers cannot buy any more than what sellers will sell. Hence the market is "supply constrained" and the actual quantity transacted equals the quantity supplied which is less than the free market equilibrium quantity.

(3A): Since 1950, women with young children have joined the labor force in large numbers. Because of this trend one would predict that there has been

(3A): an increase in the demand for child care services, an increase in the quantity demanded of child care services --> This is an example of the number of buyers in the market increasing over time.

(3A): New technology that lowers the costs of production will cause the equilibrium price to ______________and the equilibrium quantity to ______________.

(3A): decrease; increase

(3A): An increase in the prices of inputs will cause the equilibrium price of the good to ______________ and the equilibrium quantity to ______________.

(3A): increase; decrease

(3A): An increase in the price of a substitute good will cause the equilibrium price of its substitute to ______________and the equilibrium quantity to ______________.

(3A): increase; increase --> An increase in the price of a substitute good will cause demand for the other good to increase.

(3A): A decrease in the price of a complementary good will cause its complement's equilibrium price to ______________ and the equilibrium quantity to ______________.

(3A): increase; increase --> This leads to an increase in demand for its complement.

(3B): Relative to column C, it appears that column D represents ________. (PICTURE 1)

(3B): a change in supply

(3B): What might cause a supply function to shift to the left today?

(3B): an expectation that the product's price will rise in the future

(3B): Relative to column A, it appears that column B represents ______________. (PICTURE 1)

(3B): an increase in demand

(3B): Whether or not a good can be classified as a complement depends on whether

(3B): an increase in demand for one good follows a decrease in the price of the others

(3B): Refer to the figure above. Assume the market is originally at point W. Movement to point X is a combination of (PICTURE 2)

(3B): an increase in quantity supplied and an increase in demand

(3B): An increase in the demand for GM automobiles results in

(3B): an increase in the quantity supplied of GM automobiles

(3B): Suppose that the equilibrium price of pickles falls while the equilibrium quantity rises. The most consistent explanation for these observations is

(3B): an increase in the supply of pickles with no change in demand

(3B): Suppose you notice that more and more people are driving gas-guzzling cars. Since you drive an economy car, their increased demand for gas:

(3B): causes the price you pay for gas to increase

(3B): Demand for coffee last Monday is shown in bold ​[labeled D(Monday)]. On Tuesday the news featured a story that a storm wiped out the entire coffee crop in Brazil. On Wednesday, (PICTURE 3)

(3B): demand shifted to D(B) in anticipation of future price increases.

(3B): "As the price of personal computers continues to fall, demand increases." This headline is inaccurate because

(3B): falling prices for personal computers increases quantity demanded, not demand

(3B): Shelly purchases a leather purse for $400. One can infer that

(3B): her reservation price was at least $400

(3B): Refer to the figure above. Assume that these are demand curves for a normal good. Moving from demand curve D2 to demand curve D1 could be caused by a(n) (PICTURE 4)

(3B): increase in the price of a complement.

(3B): "smart for one, dumb for all"

(3B): individuals, when acting rationally, fail to take advantage of all opportunities for social benefit.

(3B): Which of following is not true of an equilibrium price?

(3B): it is always a fair and just price

(3B): In a free market, if the price of a good is above the equilibrium price, then

(3B): suppliers, dissatisfied with growing inventories, will lower the price

(3B): Suppose one could rent a car or take the train to go to Chicago from Washington, D.C. If the price of traintickets increases

(3B): the demand for rental cars will increase

(3B): Assume both the demand and the supply of beef decrease. Which of the following outcomes is certain to occur?

(3B): the equilibrium quantity of beef will fall

(3B): The buyer's reservation price of a particular good or service is the

(3B): the max amount one would be willing to pay for it

(3B): The US Govt. banned cigarette ads on TV and radio after January 1971. After the ban took effect you would expect that

(3B): the price of magazine ads for all goods would increase

(3B): efficiency occurs when

(3B): the socially optimal quantity of goofs and services is being produced the economic surplus is maximized society's marginal benefits are equated to society's marginal costs

(3B): As coffee becomes more expensive, Joe starts drinking tea. Therefore, the quantity demanded for coffee decreases. This is:

(3B): the substitution effect