Chapter 4 Questions and answers

Name:________________________________ Ecn222Fall2010Chapter4questions,dueThursday,September16th 1. Whatisthedifferencebetwe Whatisthedifferencebetweenachangein“demand”and enachangein“demand”andachangein“quantitydemanded”? achangein“quantitydemanded”?  Achangeindemandisashiftoftheentirecurvecausedbyachangeinanonprice determinant  Achangeinquantitydemandedisamovementalongthecurvecausedbyachangeinprice. 2. Useonediagramtoillustrateachangein“d Useonediagramtoillustrateachangein“demand”andonetoillustrate emand”andonetoillustrateachangein“quantity achangein“quantity demanded” P

Changein

P 

ChangeinQ D D

Demand

P 00 P 0

D D Q0

D

Q

Q0

Q

3. Ifth Ifthepric epriceof eofbagel bagelsinc sincrease reases s a. The Thedeman demandfor dforbagel bagelswil swilldec ldecrease rease b. Thedemandforbagels Thedemandforbagelswillincrease willincrease c.

Thedemandformuffinswillincrease

d. Thedemandformuffi Thedemandformuffinswilldecrease nswilldecrease 4. Analyzethemarketforsurfinglesson AnalyzethemarketforsurfinglessonsatWrightsvillebeach.Foreachofthefollo satWrightsvillebeach.Foreachofthefollowing,which wing,which curveshifts(orboth)andwhichdirection(s)? Event AHurricanecausesriptidesandmakessurfingmoredangerous

Curve

Direction

Demand

Left

Demand

Right

Demand

Left

Supply

Right

Supply

Left

Demand

Right

B o th

Right

Demand

Left

AnoilspillintheGulfcausesmoretouriststovisitWB Asharkattackbringsattentiontothedangersoftheocean Withabadeconomymorestudentsopensurfschoolsafter graduationsincetheycannotfindotherjobs Wrightsvillebeachbeginsrequiringexpensivelicensesto conductbusinessonthebeach Theeconomybeginstorecoverandpersonalincomerises Hurricaneactivitypicksupandit’spossiblethebeachwillbe closedinthefuture Dr.JoneswhoREALLYneedssomesunstrollsontothebeach andscaresallthetouristsaway

5. #14inMankiw,Chapter4 SupposethepriceofbasketballticketsatUNCWisdeterminedbymarketforces.Currentlythe demandandsupplyschedulesareasfollows: Price $4 $8 $12 $16 $20

Quantity Demanded 14,000 11,000 8,000 5,000 2,000

Quantity Supplied 8,000 8,000 8,000 8,000 8,000

a. Usinggraphpaperonthecoursewebsite(oryourown)drawthedemandandsupply curves.Whatisunusualaboutthissupplycurve?Whymightthisbetrue? SupplyCurveisverticalbecauseoffixedamountofseatsavailableandnomarginal costofprovidinganotherticket. b. Whataretheequilibriumpriceandquantityoftickets? P=$12,Q=8000 c.

Asyouareaware,UNCWhasbeengrowing,supposetheenrollmentnextyearis expectedtoincreaseby5000students,andthose5000additionalstudentswillhave thefollowingsupplyschedule: Price $4 8 12 16 20

Quantity Demanded 4,000 tickets 3,000 2,000 1,000 0

Nowaddtheolddemandscheduleandthedemandscheduleforthenewstudentsto calculatethenewdemandscheduleforallofUNCW.Drawthenewdemandcurveon yourgraph.Whatwillbethenewequilibriumpriceandquantity? P=$14(orsomethingclose),Q=8,000 6. Watchthevideonewsreportbelowand,onanothersheetorpaper,diagramthemarketfor coffeeusingtheSupplyandDemandmodel.(Rememberourthreestepprocess,whichcurve shifts,whichway,what’stheneweqm?)Besuretolabeltheinitialpriceandquantityaswellas thenewequilibrium.Whichcurveshiftedandwhy? http://www.youtube.com/watch?v=bc3XWPBxqQg Demandcurveshiftsinwardasincomeandexpectationofincomedecreases.Pfalls,Qfalls

7. Watchthefollowingvideobelowonminimumwage.Let’ssupposethecurrentminimumwage, $7.25anhour,istheinitialequilibriumwageforcheckoutclerksatTarget.(norealreasonto assumethisisthemarketwagebutourpurposeslet’sassumeitissowehaveastartingpoint.) AssumethatbecauseofyoureconomicseducationatUNCWyoupursueacareerasan economistandareanadvisortothePresidentoftheUnitedStates.Thepresidenttellsyouthat livingonminimumwageisreallytoughandhe/sheisconsideringaproposaltoraisethe minimumwageandwantsyouropinion.Yousaythatraisingtheminimumwagewilldefinitely helpminimumwageworkerswhoseetheirpayincreasebutthereisadownside,whatisit? (hint,thinkaboutthenumberofcheckersTargetwouldhireemployed)UseaS&Dmodelona separatepieceofpapertoillustratehowtothinkabouttheproblem.(labelthesurplusor shortage) http://www.youtube.com/watch?v=E3Hd3hf7Hw Iftheminimumwageisincreasedthenpurchasersofcashiers,Target,willreducetheir quantitydemandedbutmorepeoplewouldbewillingtoworkascashierssoquantitysupplied increases.Thismeanstherewillbeasurplusofcashiersoninthelabormarket.Alsonotice thatthequantitydemandedbytargetislessthatit’soldquantitydemandedsosomeworkers actuallylosetheirjobs.

8. UsetheSupplyandDemanddiagramtoanalyzetheeffectsofthefollowingtwoeventsonthe marketforseafood.SupposeanoilspillclosesmuchoftheGulfofMexicotofishingandanew studycomesoutthatsaysadditionalfishoilinadietisgoodforpreventingmacular degeneration.Besuretolabelaxes,initialandnewpricesandquantitiesandclearlyshow whichcurveshifted. a. Analyzetheeffectonthemarketofonlytheoilspill.Whathappenstoprice?Quantity? Supplyshiftsin,Pincreases,Qdecreases b. Analyzetheeffectonthemarketofonlythestudythatsayseatingfishoilisgoodfor yourvision.Whathappenstoprice?Quantity? Demandshiftsout,Pincreases,QIncreases c.

Nowanalyzewhathappensifbotheventsoccursimultaneously.Whathappensto price?Quantity?(Pleaseusetwographsforthistoshowthetwodifferentoutcomesin themarket.) Whensupplydecreasesanddemandincreasesweknowpriceincreasesbutquantityis ambiguous.

5.

6. 

P S 

P 0 P 1

D Q1

D Q

Q0

7.

P SurplusofLabor

S

(cashiers)

$8.00

7.25

D QD

Q0

QS

Q

8.a.

P

S 1 S 0

P 1 P 0

D Q1

D Q

Q0

8.b.

P S 

P 1 P 0

D1

D Q0

Q1

Q

8.c.

P

S 1 S 0

P 1 P 0

D1

D0 Q

Q0 Q1

S 1

P

S 0 P 1

P 0

D1

D0 Q1

Q0

Q

MiscellaneousComments Note,inproblem3,achangeinthepriceofbagelswillleadtoachangeinquantitydemandedofbagels, notachangeindemand.(seedefinitionsinquestions1and2)BagelsandMuffinsaresubstitutessoan increaseinthepriceofbagelswillcauseanincreaseinthedemandformuffins. #4.Apossibleclosingofthebeachinthefuturewouldmeanifyouwanttotakeasurfinglesson,takeit now,demandshiftsout.Also,sellersknowthattheymightnotbeabletoworkinthefuture,worknow, makehaywhilethesunshines. #7Notethatthenumberofcashiersemployedfellfromtheinitialnumber,Q E,tothenewlower quantitytargetdemands,Q D.Theactualquantityhired(orpurchased)isequaltothelesserofthetwo, quantitysupplied,orquantitydemanded.Youcan’tsellmorethanbuyersarewillingtopurchaseand youcan’tbuymorethansellersarewillingtosupply.Atequilibrium,quantitydemandedequals quantitysuppliedbutwhenthereissomethinglikeaminimumwagekeepingapricefromadjustingto equilibriumweseethequantityequalsthelesserofthequantitysuppliedordemanded.