Week 3 Chapter 2: Market Forces: Demand and Supply

For this week read Chapter 2, pages 48-68

Answer the following questions:

Question 2. On page 69

Good X is produced in a competitive market using input A. Explain what would happen to the supply of good X in each of the following situations.

a.   The price of input A decreases.

Hint:      

1.    Draw the demand and supply curves. Label each curve and identify the initial points (D⁰, S^o , E⁰ ,  P⁰ and Q⁰ ).

2.    Now, show which curve (demand or supply) will be affected if the input cost of A decreases and why? Is it the demand or the supply and label accordingly (D¹, or S¹ ).

3.    What is the new equilibrium? Label as P¹, Q¹ and  E^1  

4.    Give an interpretation as to the new price (higher or lower) and the new equilibrium quantity (higher or lower). Review the topic on Comparative statistics.

 

b.    An excise tax of $3 is imposed on good X.

Hint: Here, again begin your analysis from the initial values of equilibrium as given under comparative statics.

 

c.    An ad valorem tax of 7 percent is imposed on good X.

Hint: Use comparative statics and show how the supply curve will be affected under this situation.

 

d.    A technological change reduces the cost of producing additional units of good X.

Hint: Use the approach given under part (a)of this question.

Question 7. On page 70

Suppose demand and supply are given by Qd = 14 –1/2P and Qs = 1/4P – 1.

a.    What are the equilibrium quantity and price in this market? Show your work?

Hint: 

1.    Draw the demand and supply graph and label all initial points ( D⁰, S⁰, P⁰, E⁰), following the use of comparative statics given your text on pages 62-65)

2.    Set demand equal to Supply and solve the values. See page 62 for a practice problem

3.    Next, insert the values in the graph.

Question 8. On page 70

Use the accompanying graph on page 71 to answer these questions.

a.    Suppose demand is D and Supply is S⁰. If a price ceiling of $6 is imposed, what are the resulting shortage and full economic price?

b.    Suppose demand is D and supply is S⁰. If a price floor of $12 is imposed, what is the resulting surplus? What is the cost to the government of purchasing any and unsold units?

c) Suppose demand is D and supply is S⁰so that the equilibrium price is $10. If an excise tax of $6 is imposed on this product, what happens to the equilibrium price paid by consumers? The price received by producers? The number of units sold.

Home Assignment/Drop Box Instructions:

 

Homework is due in the weekly Drop Box.

Send homework as a Word attachment or copy and paste in the Drop Box

 

Week 3 Chapter 2: Market Forces: Demand and Supply

For this week read Chapter 2, pages 48-68

Answer the following questions:

Question 2. On page 69

Good X is produced in a competitive market using input A. Explain what would happen to the supply of good X in each of the following situations.

a.   The price of input A decreases.

Hint:      

1.    Draw the demand and supply curves. Label each curve and identify the initial points (D⁰, S^o , E⁰ ,  P⁰ and Q⁰ ).

2.    Now, show which curve (demand or supply) will be affected if the input cost of A decreases and why? Is it the demand or the supply and label accordingly (D¹, or S¹ ).

3.    What is the new equilibrium? Label as P¹, Q¹ and  E^1  

4.    Give an interpretation as to the new price (higher or lower) and the new equilibrium quantity (higher or lower). Review the topic on Comparative statistics.

 

b.    An excise tax of $3 is imposed on good X.

Hint: Here, again begin your analysis from the initial values of equilibrium as given under comparative statics.

 

c.    An ad valorem tax of 7 percent is imposed on good X.

Hint: Use comparative statics and show how the supply curve will be affected under this situation.

 

d.    A technological change reduces the cost of producing additional units of good X.

Hint: Use the approach given under part (a)of this question.

Question 7. On page 70

Suppose demand and supply are given by Qd = 14 –1/2P and Qs = 1/4P – 1.

a.    What are the equilibrium quantity and price in this market? Show your work?

Hint: 

1.    Draw the demand and supply graph and label all initial points ( D⁰, S⁰, P⁰, E⁰), following the use of comparative statics given your text on pages 62-65)

2.    Set demand equal to Supply and solve the values. See page 62 for a practice problem

3.    Next, insert the values in the graph.

Question 8. On page 70

Use the accompanying graph on page 71 to answer these questions.

a.    Suppose demand is D and Supply is S⁰. If a price ceiling of $6 is imposed, what are the resulting shortage and full economic price?

b.    Suppose demand is D and supply is S⁰. If a price floor of $12 is imposed, what is the resulting surplus? What is the cost to the government of purchasing any and unsold units?

c) Suppose demand is D and supply is S⁰so that the equilibrium price is $10. If an excise tax of $6 is imposed on this product, what happens to the equilibrium price paid by consumers? The price received by producers? The number of units sold.

Home Assignment/Drop Box Instructions:

 

Homework is due in the weekly Drop Box.

Send homework as a Word attachment or copy and paste in the Drop Box