# eonomics problem set 1

Pages: 5 (1038 words) Published: March 15, 2014
﻿INSTRUCTIONS: You must show all of your work where calculations are required and you must include a brief explanation of approximately 50 words for each answer to receive full credit: 1. Markets, Demand and Supply, part 1 (10pts):

a. What effect will each of the following have on the DEMAND for coffee (i.e. Increase Demand, Decrease Demand, or NO CHANGE)? You must include a brief explanation of approximately 50 words for each answer to receive full credit: i. There is an increase in the price of coffee.

(a) Increase in Demand for coffee. In general, an increase in price of coffee will engender a concomitant decrease in demand. Also of importance is the amount of this change in demand and the affect on total revenue. These changes (demand and total revenue) will be determined by the price elasticity of demand. ii. There is an increase in the price of tea, which consumers view as a substitute for coffee. (a) Increase in the Demand for Coffee. In general, an increase in the price of tea will engender a concomitant increase in the demand for coffee. As a close substitute iii. There is an increase in consumer incomes, assuming coffee is a normal good. iv. There is a decrease in the number of consumers who buy coffee. b. What effect will each of the following have on the SUPPLY of soybeans? (i.e. Increase Supply, Decrease Supply, or NO CHANGE)? You must include a brief explanation of approximately 50 words for each answer to receive full credit: i. There is an increase in the amount of subsidies given to soybean producers. Increase in Supply of Soybeans: Subsidies are supply-side microeconomic policies. Suppliers are paid to encourage supply as the cost to supply is less. ii. There is a decrease in the price of fertilizer, an input needed to produce soybeans. iii. There is an increase in the price of corn, an alternative good that soybean producers could produce instead of soybeans (i.e. assume corn is a substitute in production for soybeans). iv. Soybean producers expect the price of soybeans to substantially fall in the future.

2. Markets, demand and supply, part 2 (10pts):

Given the following information about the market for gasoline (quantities in millions):

Price per gallon
Quantity Demanded
Quantity Supplied
\$9
50
200
\$8
75
175
\$7
100
150
\$6
125
125
\$5
150
100
\$4
175
75
\$3
200
50
\$2
225
25
Graph the demand and supply curves for gasoline (You do NOT submit the graph for grading) and answer the following. You must include a brief explanation of approximately 50 words for each answer to receive full credit: a. What is the equilibrium price (P*) of gasoline and what is the equilibrium quantity (Q*) of gasoline? b. If the price of gasoline were \$8 per gallon, using the table above, determine whether a surplus or a shortage would exist, and determine the amount (# of gallons) of this shortage or surplus. c. Now, suppose the federal government imposes a price ceiling of \$4 per gallon. What is the effect of this action on this market for gasoline? d. Suppose that the supply of gasoline suddenly increases, while the demand for gasoline is held constant. How would this affect the equilibrium price and equilibrium quantity in the market? In other words, answer whether equilibrium price (P*) and equilibrium quantity (Q*) would rise, fall, or remain unchanged.

3. Elasticity (10pts):
You must show all of your work where calculations are required and you must include a brief explanation of approximately 50 words for written answers to receive full credit: a. Price elasticity of demand (6pts): Suppose you own a hot dog stand and find that if you raise the price of hot dogs from \$3.00 to \$3.20, the quantity demanded falls from 28,500 to 24,500. i) Please calculate the price elasticity of demand (Ed) for hot dogs in this specific price range (\$3.00 to \$3.20). You must use the ‘midpoint formula’ we used in the text Please round your answer to the nearest hundreth (i.e....