Spring 2008 Dr. Olmsted
Microeconomics Homework # 3
Due:
Homework instructions: SHOW YOUR WORK and if possible, use graph paper. When turning in your homework as a group, please give me one copy for the group and include the names of all those involved. Groups can be between 2 and 4 individuals. PLEASE STAPLE!
1. Given the following demand and supply schedules for wool sweaters:
|
Supply |
Demand |
||
|
p |
Q |
P |
Q |
|
$10 |
0 |
$0 |
160 |
|
$20 |
20 |
$20 |
140 |
|
$40 |
60 |
$40 |
120 |
|
$60 |
100 |
$60 |
100 |
|
$80 |
140 |
$80 |
80 |
|
$100 |
180 |
$100 |
60 |
|
$120 |
220 |
$120 |
40 |
|
$140 |
260 |
$140 |
20 |
|
$160 |
300 |
$160 |
0 |
a. Draw the market for wool sweaters. What is the equilibrium price and quantity? Identify p and q.
b. Calculate both the supply and demand elasticity at equilibrium (Hint: first you need to calculate the slope - rise/run.)
c. Is the Supply of wool elastic or inelastic? What about the Demand?
d. On a separate graph, show how much will be supplied and demanded if the government sets a price of $40? Label and explain what the difference between the quantity supplied and demanded will be.
e. Is this a price ceiling or a price floor?
f. On a separate graph, show and explain in words what will happen to the sweater market if the price of wool increases. Assume that as a result of this shift, the equilibrium price changes by $10.
g. Will sweater revenues be higher or lower? What does this say about demand elasticity?
h. On a separate graph, show and explain the effect of an unseasonably warm winter.
i. On another graph combine effects f and h and explain.
2. Be sure to show your work and draw any relevant graphs or formulas in answering the multiple choice questions:
I. If you knew the individual demand curves of each consumer, you could find the market demand curve by
a. Taking the average quantity demanded at each price.
b. Adding all of the prices.
c. Adding up, at each price, the quantities purchased by each individual.
d. Taking the average of all prices.
e. None of the above.
II. The quantity demanded is more sensitive to price changes when:
a. Supply is relatively inelastic.
b. Close substitutes are available.
c. Consumers are rational.
d. Consumers are relatively more informed about the quality for some goods.
e. All of the above.
III. Suppose the absolute value of the income elasticity of potatoes is 1/3 and that potatoes are an inferior good. If income rises by 30%, what will be the change in the quantity of potatoes purchased be?
a. An increase of 10 %.
b. A decrease of 10 %.
c. A decrease of 90 %.
d. An increase of 90 %.
e. The income elasticity cannot be calculated.
IV. If the price of wool falls, causing an decrease in the demand for cotton, then:
a. wool and cotton are substitutes.
b. wool and cotton are complements.
c. the cross price elastiticity of wool and cotton is negative.
d. a and c.
e. b and c.
3. Go to the Dept. of Energy web page: http://www.eia.doe.gov/emeu/mer/contents.html
From there, find tables 2.5 and 9.4, which will provide you with p and Q data for petroleum used in transportation.
a. Draw a graph with P (unleaded regular) on the Y axis and
Q (petroleum) on the X axis. Include two points on your graph, for the years
1990 and 2000 (feel free to round each of these numbers.)
b. How must S and/or D have changed to lead to the outcome you observe in the
graph in part a?
c. What economic factors likely explain this change?
d. Read the following article http://www.irmep.org/oilprice.htm
What light does this article shed on the questions raised in 3c?
4. Juan has a budget of $500 to paint and paper the rooms of
his new house. The price of paint for one room is $25; the price of wallpaper
is $50 per room.
a. Draw Juan’s budget constraint.
b . Juan arrives at the hardware store and realizes
that the price of paint is $40 per room. On the same graph, show Juan’s new
budget constraint. c. Because the price of paint has gone up, Juan’s mother
decides to help him out with his project and gives him an additional $300. Draw
a new graph, illustrating how this change will alter his budget line (draw the
line you derived part b, in addition to the new line.)
d. EXTRA CREDIT Suppose Juan can get a bulk discount
on paint. If he buys paint for 10 or more rooms, he only has to pay $25 per
room. Otherwise he has to pay $40 per room. How will this change his budget
constraint assuming he has $500 to spend?
5. Read the following article: http://archives.cnn.com/2000/FOOD/news/08/02/sugar.surplus.ap/
a. Summarize the main points of this article.
b. Illustrate graphically what