Econ 211
Problem Set 2
Summer 1999

1. What is the effect of each of the following events on the equilibrium price and quantity of personal computers in the US market?
a) The price of microprocessor chips increases.
b) The price of monitors (a complement in consumption) decreases.
c) The government restricts the entry of foreign-made computers into the U.S.
d) The government increases income taxes for all consumers.
e) The price of printers increases and plastic becomes less expensive.
f) The price of software increases and the government reduces taxes on all computer manufacturers.

2. Consider the market for gasoline in the US. Determine what happens to the equilibrium price and quantity of gasoline under each of the following situations:
a) price of oil falls.
b) automobile prices decrease.
c) the economy enters a recession; consequently, incomes are dropping.
d) several petroleum firms exit the industry due to negative profits.
e) it's the middle of summer and people are on vacation and a huge oil field is discovered off the coast of Cleveland.
f) environmentalists successfully put pressure on oil companies to shut down the Alaskan pipeline and consumers expect the price of gasoline to rise next month.

3. Consider the market for hotdogs in the US. Determine what happens to the equilibrium price and quantity of hotdogs under each of the following situations:
a) the price of hamburgers rises.
b) the price of mustard rises.
c) the supply of hogs falls.
d) producers expect the price of hotdogs to fall in the coming months.
e) the price of hotdog buns falls and several new hotdog producers enter the industry.
f) hotdog manufacturers implement a more efficient production method and the government raises the income tax rate on consumers.

4. The number of compact discs sold in markets has more than quadrupled over the past three years. The average price of a compact disc, however, has fallen. Use supply and demand analysis to explain this phenomenon.

5. The number of doctors in the US has decreased over the last decade. The wage rate of doctors has increased over the same time period. Use supply and demand analysis to explain this phenomenon.

6. Here are some more S&D questions. It would be a good idea to take a piece of paper and sketch the demand or supply curves described or inferred in each case below.
a) If a huge increase in demand for soybeans results in almost no increase in the price of soybeans, what can you conclude about the supply of soybeans?
b) If a large fall in the cost of growing corn results in almost no decrease in the price of corn, what can you conclude about the demand for corn?
c) What effect would you predict on the price of rental housing in an area where several major employers have recently closed down or moved away?
d) What effect do you think the development of synthetic fabrics had on the price of cotton?

7. True or false: Some cities raise revenue by levying a tax on employers equal to a certain number of dollars per employee per year. This is a good thing for workers, because workers are not taxed.

8. Far fewer babies are currently offered for adoption in the United States than couples want to adopt. Would you call this a shortage? Why doesn't the price of an adopted baby rise? By what criteria are the scarce babies rationed to demanders?

9. Which of the following statements uses incorrect terminology? Explain.
a) "The recent fare war among the major airlines has increased the demand for air travel."
b) "The recession of 1990-1992 has caused the demand for air travel to fall."

10. Elasticity Questions:
a) In August, 1990, East German taxicab drivers were on strike demanding lower cab fares. What must the drivers have believed about the price elasticity of demand for taxi rides?
b) In 1977 Brazil was supplying about one-third of the world's coffee exports. When a frost wiped out about 75 percent of Brazil's 1976-77 crop, the price of green (unroasted) coffee rose 400 percent. What was the approximate price elasticity of demand for coffee? Why was it so low?
c) An athletic director at a college recently raised ticket prices from $8 to $10 per game. Sales went down 10 percent. The director said "... with the 25 percent increase in ticket prices, dollar volume has increased about 12 percent." Is this claim consistent with what you know about demand elasticity? Find the elasticity of demand in this case, assuming the demand schedule is stable.
d) According to recent studies at M.I.T. and the University of Michigan, a 10 percent increase in the price of cigarettes leads to a 14 percent drop in sales to teenagers. What is the elasticity of demand for cigarettes among teenagers? Would you expect it to be this high for older smokers? Explain your answers.
e) In the mid-1980s, the state of Texas raised the price of personalized automobile license plates from $35 to $70. The state's revenue from the personalized license plates then fell. From this information, what can you say about the price elasticity of demand for personalized plates?
f) Suppose the price elasticity of demand for rental housing is 0.60 and the average rent increases from $275 per month to $325 per month. At $275 per month, 100,000 rental units are rented. What percentage decrease in quantity demanded would you predict from this information. Approximately how many units would be rented at $325 per month?

11. When William Bennett was director of the Office of National Drug Control Policy, he sent a letter to Ann Landers attacking one of her correspondents who had advocated the legalization of drugs. Here is one paragraph from the letter: "Drugs would become much cheaper--at least one-fifth the cost. Then five times as many people could and would buy them. We would then have five times as many addicts. This means instead of only 100,000 addicted babies being born to addicted mothers each year, we would have half a million." What assumptions is he making about the demand for drugs?

12. The data in the table below refers to the compact disc market.

a) Plot the supply and demand curves based on this data. [Remember, these are going to be step functions.]
b) What is the competitive equilibrium price and quantity?
c) Calculate the value of each of the following at the competitive equilibrium: Consumer surplus, Producer surplus, and Social welfare
d) Suppose the government imposed a price ceiling at $15. What quantity would buyers demand? What quantity would sellers supply? Is there a shortage or surplus? How big is it? What happens to CS, PS, and Social Welfare?
e) Suppose the government imposed a price floor at $30. What quantity would buyers demand? What quantity would sellers supply? Is there a shortage or surplus? How big is it? What happens to CS, PS, and Social Welfare?

13. Suppose that the market price for personal computers has fallen over the course of a year from $1500 to $1300. At the same time, the number of computers bought has risen from 5 million to 6.5 million. Suggest an explanation for this data using supply and demand.

14. Distinguish between a change in demand and a movement along a given demand curve. Explain the chief causes of each. Now distinguish between a change in supply and a movement along a given supply curve. Explain the chief causes of each.

15. "If the DEA intercepts 100 tons of cocaine, the supply of cocaine will fall. This will cause the price to rise, which will increase the supply back to its original position". True, false, or uncertain. Explain.

16. When the price of water in southern California rose, some analysts attributed the change to the drought, others attributed it to more people living in southern California, and those people who live there buying bigger swimming pools. Since both the drought and the influx of people who are getting richer occurred simultaneously, how would you determine which set of analysts had described the dominant cause of the price increase?

17. Assume that the demand for heroin is inelastic, and assume further that users get the funds to pay for heroin by stealing. Suppose the government increases penalties on heroin suppliers and thereby reduces supply. What will happen to the price of heroin? What will happen to the amount of crime committed by heroin users?

18. What three factors determine the size of the elasticity of demand?

19. Problem #1 and 3 in Chapter 4, Parkin.

20. What is consumer surplus? How do we measure consumer surplus? What is producer surplus? How do we measure producer surplus?

21. What is deadweight loss? Does a deadweight loss occur only if production is less than the efficient level?

22. Problem #1, Chapter 6, Parkin

23. Problem #3 and 4, Chapter 7, Parkin.