Homework: Supply and Demand and Equilibrium Price

Topics: Supply and demand, Economic surplus, Microeconomics Pages: 9 (1655 words) Published: September 30, 2013
Fall 2013
ECO 2306 – Principles of Microeconomics
Homework 4 Answer Key
Part I: True/False and Multiple Choice
1. In equilibrium in the strawberry market, strawberries sell for $1.50 a quart. If the government institutes a price floor of $1 per quart of strawberries, the result will be a surplus of strawberries. a. The preceding statement is TRUE.

b. The preceding statement is FALSE.
2. A price ceiling will lead to deadweight loss as a result of overproduction of the good at the higher ceiling price.
a. The preceding statement is TRUE.
b. The preceding statement is FALSE.
Use the figure below to answer questions 3-4.

3. If the price is P3, then producer surplus is given by area _____. a. E+F+G
b. B+C+E+F+G
c. B+E
d. B+E+G
4. If the price is P3, then the deadweight loss is given by the area _____. a. B+C+E+F
b. C
c. F
d. C+F
5. An increase in the minimum wage leads to
a. decreased unemployment levels if the new wage is the same as the equilibrium wage that would occur without government intervention.
b. no change in unemployment levels if the new wage is less than the equilibrium wage that would occur without government intervention.
c. increased unemployment levels if the new wage is greater than the equilibrium wage that would occur without government intervention.
d. Both (b) and (c) are correct.

Fall 2013
ECO 2306 – Principles of Microeconomics
Homework 4 Answer Key
Use the demand and supply schedules in the table below to answer questions 6 and 7. Demand Schedule
Supply Schedule
Price Quantity
Price
Quantity
Demanded
Supplied
3
55
3
10
4
50
4
20
5
45
5
30
6
40
6
40
7
35
7
50
8
30
8
60
6. A price ceiling of $4 would result in
a. 50 units being traded.
b. a shortage of 30 units.
c. a surplus of 30 units.
d. Both (a) and (b).
7. A price floor of $5 will result in
a. a total of 40 units being traded.
b. a surplus of 15 units of the good.
c. a shortage of 15 units of the good.
d. a deadweight loss from overproduction.
8. Which of the following is correct?
a. Producer surplus is the difference between the most a person is willing to pay and the market price
b. Producer surplus describes a situation in which there is excess quantity demanded c. A firm that sells a motorcycle for $15,000 also gets producer surplus of $15,000 d. If someone is willing to pay $800 to go to the World Cup but can buy a ticket for $500, they will get $300 in consumer surplus.

e. The total surplus (consumer surplus plus producer surplus) is at a minimum at the market equilibrium.
Part II: Problems/Essays
9. Case and Fair’s, Principles of Microeconomics, page 94, #3. (This question is for extra credit – i.e., no points are deducted if you got it wrong)
The diagram shows that some people are willing to pay a very high price (even higher than P*) for the tickets. Some non-price rationing system was used to allocate the tickets to people willing to pay as little as Px. What a scalper does is pay those near Px more than they paid for the tickets and then sells the tickets to someone nearer or even above P*. Since both the buyers and sellers engage in the trade voluntarily, both are better off in that sense. Since the same quantity is traded with a

Fall 2013
ECO 2306 – Principles of Microeconomics
Homework 4 Answer Key
scalper involved or not involved, overall surplus is neither increased nor decreased (and since TS is the same either way, overall efficiency in the economy is unchanged). Some of the consumer surplus ends up in the hands of the scalper, however.

10. Case and Fair’s, Principles of Microeconomics, page 94, #5. Disagree; this can be readily explained using the law of demand. The law of demand does say that higher prices should lead to a lower quantity demanded, a movement along a demand curve. An increase in demand (a rightward shift of the demand curve) would result in a higher equilibrium price. Therefore, a sharp increase in the demand for apartments in...
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