HW4: Homework - Ch. 4: Equilibrium: How Supply and Demand Determine Prices

Stone and brick are substitutes in home construction. Consider the market for bricks depicted in the graph. Suppose the price of stone increases due to new regulations for the stone quarrying industry. Illustrate the impact this will have on the market for bricks. a. Equilibrium price b. Equilibrium quantity

a. increases. b. increases.

Consider the accompanying supply and demand graph. a. What is the value of consumer surplus? b. What is the value of producer surplus? c. What is the value of total (also called social or economic) surplus?

a. $11.25 (Consumer surplus (CS) = Area between demand curve & price = (1/2) x (9 - 4.5) x 5 = 2.5 x 4.5 = 11.25) b. $8.75 (Producer surplus (PS) = Area between supply curve & price = (1/2) x (4.5 - 1) x 5 = 2.5 x 3.5 = 8.75) c. $20 (Total surplus = CS + PS = 11.25 + 8.75 = 20)

Use the table to answer questions about the demand for and supply of Blu-ray movies. Price per movie Quantity of movies demanded Quantity of movies supplied $15 40 80 $12 50 70 $10 60 60 $7 70 50 $5 80 40 1. What is the equilibrium price per movie? $ 2. At a price of $12 per movie,

1. 10 2. a surplus of 20 movies occurs.

The table shows information on the conditions of demand and supply for designer purses, where the quantity of designer purses is measured in thousands. For each price, select the correct category. Price Quantity demanded (thousands) Quantity supplied (thousands) $700 480 410 $900 440 440 $1100 390 510 $1300 310 640 1. $700 2. $900 3. $1100 4. $1300

1. excess demand or shortage 2. equilibrium 3. excess supply or surplus 4. excess supply or surplus

Suppose the accompanying graph depicts a market for one pound bags of candy. Place the line labeled Excess Demand at a price that would generate an excess demand (shortage). Then, determine the size of the excess demand. Excess Demand = ______________ million bags

4 Reason: The excess demand line is placed at Price 3 per bag. At this price, the demand is 7 million bags and supply is 3 million bags. Hence there is an excess demand for 4 million bags. (7-3 = 4)

The figure shows the supply and demand for online music. Suppose that an economic downturn decreases household wealth and erodes consumer confidence. Move the supply and/or demand curves to reflect the primary effect this would have on the market for online music. You can assume that online music is a normal good. Also select the end result of equilibrium price and quantity. a. Equilibrium price b. Equilibrium quantity

a. decreases. b. decreases.

The U.S. government has subsidized ethanol production since 1978. With the advent of affordable electric cars, policymakers are considering whether to allow the subsidy to expire. The accompanying graph represents the market for ethanol. Move the supply and/or demand curves to show how reducing the subsidy will affect the ethanol market. a. Equilibrium price b. Equilibrium quantity

a. increases. b. decreases. Reason: If policymakers allow the expiration of the ethanol subsidy, ethanol producers will face higher costs. At any given price, the supply of ethanol will be lower. In other words, the supply of ethanol shifts to the left. This will lead to a new equilibrium where demand will meet the new supply at a higher price and a lower quantity of ethanol sold.

Suppose that there has been a sudden influx of refugees in the small town of Dallon, leading to a doubling of the local population. The accompanying graph depicts Dallon's market for food. Adjust the graph to show the immediate impact that this rise in population has on the food market. Then determine what happens to equilibrium price and quantity. a. Equilibrium price b. Equilibrium quantity

a. increases. b. increases.

The Generator is a popular youth hostel in London located near Kings Cross. The hostel provides a bed, showers, and breakfast in their nightly fee. Suppose the quantity demanded is 0 when the price is $90 per night and 90 when the price is $10 per night. Quantity supplied is 0 when the price is $10 and 100 when the price is $80. a. In the accompanying diagram, use this information to place the supply and demand curves. b. In equilibrium, how many beds are rented? c. What is the total surplus?

b. 50 beds c. $2,000 (Total surplus = consumer surplus + producer surplus) (Consumer surplus = (1/2) x (90-45 = 45) x 50 = 1,125) (Producer surplus = (1/2) x (45-10 = 35) x 50 = 875) (Total surplus = 1,125 + 875 = 2,000)

Match each statement with the change it describes. 1. Change in quantity supplied 2. Change in supply 3. Change in quantity demanded 4. Change in demand

1. The price of lamps increases, so lamp producers increase the number of lamps they produce. 2. Lamps become much more profitable to make, so furniture makers make fewer tables and more lamps. 3. The price of lamps increases, and lamp sales in Urtown drop. 4. Many people are buying bigger houses, and lamps sales increase. Reason: Demand and supply curves represent the relationship between price and quantity demanded and price and quantity supplied. Therefore, a change in price is the only thing that can cause a change in quantity demanded. If there is a change in a factor that affects supply or demand, other than price the supply or demand curves shifts. If the price of lamps increases, lamp producers increase the quantity of lamps supplied, which is a movement along the supply curve. One of the factors that shifts the supply curve is a change in the opportunity cost of the produced good. Furniture makers switch from making tables to lamps, since the opportunity cost of making tables has increased, due to lamps becoming more profitable. As a result, the supply curve for lamps shifts to the right, and the supply curve for tables shifts to the left. The residents of Urtown buy fewer lamps as the price of lamps increases. Hence, the change in price results in a movement along the demand curve. One of the factors that changes demand, i.e., shifts the demand curve, is the size of the market. People are buying bigger houses, and, in order to furnish these homes, they are also buying more lamps, shifting the demand curve to the right. The number of lamps sold at all prices increases, which is the same as saying the demand for lamps increases.

All of the goods below are either sold in perfectly competitive markets or in secondary markets that are also competitive. Suppose that the market (or the secondary market) starts in equilibrium. For each of the following scenarios, determine whether there would be upward or downward pressure on the price immediately after the event.

Upward pressure on price: -An impeding nuclear war causes people to stock up on twonkies, a popular snack cake provided by many companies. Downward pressure on price: -Sub-zero weather in New York, where the Super Bowl is being played, causes people to become disinterested in watching the Super Bowl live. What happens to ticket price in the scalping market? -The Nile River floods this year add an exceptional amount of silt to the soil, resulting in increased crops of cotton. -An outbreak of mad cow disease causes Americans to abstain from eating beef.

Suppose the cost of lithium-ion batteries, an input into the production of electric vehicles, has dropped more steeply than expected. The accompanying graph depicts a market for electric vehicles. Demonstrate the effect of a reduction in the price of lithium-ion batteries by adjusting the accompanying diagram. a. Equilibrium price b. Equilibrium quantity

a. decreases. b. increases. Reason: Lithium-ion batteries are inputs in the production of electric cars. If producers have less costly inputs available, they are able to produce more electric cars at any given price. If producers are willing and able to sell more goods at every price, supply increases. Graphically, the supply curve shifts to the right. An increase in supply, holding all else constant, causes the equilibrium price to decrease and the equilibrium quantity to increase.

The accompanying diagram represents the market for violins. Suppose that a new technology allows beginner-level violin producers to make violins at a substantially lower (marginal) cost while retaining the same quality. a. Use the graph to illustrate the effect that this will have on the supply and demand of beginner-level violins and then answer the following three questions. b. How much does this new technology increase consumer surplus? Increase in consumer surplus: c. How much does this new technology increase producer surplus? Increase in producer surplus: d. How much does this new technology increase total (or social) surplus? Increase in total surplus:

b. $1,050,000 Initial: (1/2) x (240-150=90) x 30 = 1,350) New: (1/2) x (240-120=120) x 40 = 2,400) (2,400 - 1,350 = 1,050) c. $1,050,000 Initial: (1/2) x (150-60=90) x 30 = 1,350) New: (1/2) x (120-0=120) x 40 = 2,400) (2,400 - 1,350 = 1,050) d. $2,100,000 (1,050 + 1,050 = 2,100) Make sure to convert your units to thousands so answer is 2,100,000.