Week 3 Homework [PDF]

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Running head: WEEK 3 HOMEWORK

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Week 3 Homework Lara A. Pacheco International College of the Cayman Islands BE-201: Principles of Economics I Instructor: Daniel Alcorn

 

WEEK 3 HOMEWORK

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Chapter 6 Problems and Applications #2 The government has decided that the free-market price of cheese is too low. a. Suppose the government imposes a binding price floor in the cheese market. Draw a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese?

  There would be a surplus of cheese. b. Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain.  Increase in price will decrease the willingness of the consumers to buy the product which will also decrease the total revenue of the farmers. c. In response to farmers’ complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?  The farmers/ manufacturers will gain the benefits and the government will lose. The farmers will benefit from this because all the surplus of the cheese will be sold at the price floor. However, the government might lose because since the cheese is already a surplus, there is no certainty that the government will sell all of it. #3 A recent study found that the demand and supply schedules for Frisbees are as follows:

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Price per Frisbee

Quantity Demanded

Quantity Supplied

$11 10

1 million Frisbees 2

15 million Frisbees 12

9

4

9

8

6

6

7

8

3

6

10

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a. What are the equilibrium price and quantity of Frisbees?  Price: $8  Quantity: 6 million Frisbees b. Frisbee manufacturers persuade the government that Frisbee production improves scientists’ understanding of aerodynamics and thus is important for national security. A concerned Congress votes to impose a price floor $2 above the equilibrium price. What is the new market price? How many Frisbees are sold?  The new market price will be $10 per Frisbee.  According to the table, only 2 million Frisbees are sold at that price. (Quantity demanded) c. Irate college students march on Washington and demand a reduction in the price of Frisbees. An even more concerned Congress votes to repeal the price floor and impose a price ceiling $1 below the former price floor. What is the new market price? How many Frisbees are sold?  If the price ceiling will be $9, it will have no effect because the equilibrium price is $8. The market price will be $8 and there would be 6 million Frisbees sold. Chapter 7 Problems and Applications #1 Melissa buys an iPod for $120 and gets consumer surplus of $80. a. What is her willingness to pay?  Consumer surplus = willingness to pay – amount paid by buyers

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 $80 + $120 = $200 is her willingness to pay b. If she had bought the iPod on sale for $90, what would her consumer surplus have been?  $200 - $90 = $110 is her consumer surplus c. If the price of an iPod were $250, what would her consumer surplus have been?  She will not buy one because the price of the iPod is higher than her willingness to pay. Meaning, there is no consumer surplus. #2 An early freeze in California sours the lemon crop. Explain what happens to consumer surplus in the market for lemons. Explain what happens to consumer surplus in the market for lemonade. Illustrate your answers with diagram.  The supply curve in the diagram will shift to the left. This means that the price of lemons will increase and the consumer surplus will decrease (from the green + orange areas to just green)

  When the price for lemons increase, the supply of lemonade decreases. This means that the price of lemonade will also increase and the consumer surplus will decrease. This proves that a change in consumer surplus of one market can affect the other markets.

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