Economics 230 J. F. O’Connor Exercises for Chapter III



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Economics 230 J. F. O’Connor

Exercises for Chapter III

1. These are the demand and supply schedules for plones:

a. Find the equilibrium price and quantity? At this equilibrium, what is the seller’s revenue?

b. If the government sets a price floor of $9 for plones, what will be the price, quantity, and expenditure by buyers? Will there be a shortage or surplus of plones? What mechanisms can the government use to ensure that the price floor is effective?

c. If the government sets a price ceiling of $3, answer the same questions as in b. How can the government ensure that the price ceiling is effective?

d. Suppose the demand for plones decreases, so that at each price, consumers want to buy three fewer units of the good. Find the new price, quantity, and revenue. Why has the equilibrium quantity not decreased by three units?



2. The following are the demand and supply schedules for plums:


a. What is the equilibrium price and quantity? At the equilibrium, how much do buyers spend on plums?

b. If the government sets a price of $6 for plums, what will be the price, quantity and revenue? Will there be a shortage or surplus of plums?

c. If the government set a price of $2, answer the same questions as in b.

d. Suppose that as a result of plums being found to be beneficial to health, their demand increases so that at each price, consumers want to buy 3 more units of the good. What happens to price, quantity and revenue? Why has the quantity sold not increased by 3 units?

3. Use supply and demand diagrams, one for each part, to show the change in the equilibrium price and quantity of wine, when the following events occur:


a. The population grows.

b. People's incomes fall and unemployment increases, in a recession.

c. The price of beer increases.

d. The price of cheese rises.

e. A drought occurs in the grape growing regions.

f. Information provided to consumers indicates that that red wine consumed in moderation has beneficial health effects.



g. In order to eliminate a revenue shortfall, the government raises the excise tax on wine.
4. The following are the demand and supply schedules for widgets:



a. Find is the equilibrium price and quantity? At the equilibrium of the market, how much do buyers spend on widgets?

b. Suppose that as a result of widgets being found to be beneficial to health, the demand increases so that at each price, consumers want to buy 3 more units of the good. What happens to the equilibrium price, quantity, and revenue? Why has the equilibrium quantity not increased by 3 units?

c. An improvement in the technique for producing widgets reduces the opportunity cost at each level of output by $1.50 per unit. As a result, sellers are willing to supply three more units at each price. What happens to the equilibrium price, quantity, and revenue? Why has the quantity sold not increased by 3 units?

d. In response to complaints from consumers that the price of widgets is too high, the government sets a price ceiling of $4 for widgets. Find the equilibrium price, quantity, and revenue? Will there be a shortage or surplus of widgets? How much? How can the government ensure that the price does not go above $4 per unit?

e. If the government sets a price floor of $8 by intervening in the market to buy or sell in order to maintain the target price , answer the same questions as in d.

f. Because the production of widgets causes water pollution, the government decides to impose a excise tax of $3 per unit. This raises the opportunity cost of producing an additional widget by $3 and therefore raises the supply curve by $3 at each quantity. Find the price paid by consumers, the price received by sellers, and the equilibrium quantity.

g. Because the consumption of widgets generate beneficial effects on third parties, the government decides to subsidize the production of widgets by paying a subsidy of $3 per unit. This reduces the opportunity cost of producing an additional widget by $3 and, therefore, lowers the supply curve by $3 at each quantity. At each price quantity supplied increases by six units. Find the price paid by consumers, the price received by sellers, and the equilibrium quantity? How much revenue does the government receive in taxes?

h. Compute the economic surplus that arises in part a).

i. Compute the lost economic surplus from the government intervention in part d).

j. Compute the lost economic surplus from the government intervention in part e).

k. Compute the gain in economic surplus from the government intervention in f).

l.. Compute the gain in economic surplus from the government intervention in g).


The equation for demand is Qd = 14 - P and the equation for supply is Qs = - 4 + 2P.

5. Use supply and demand diagrams to show the change in the equilibrium price and quantity of SUVs, for each of the following events:


a. The population increases.

b. People's incomes fall and unemployment increases, in a recession.

c. The price of minivans increases.

d. The price of gasoline increases.

e. A new e-commerce market reduces the cost of parts for manufacturing SUVs .

f. In order to fund research on the stability and safety of SUVs, the government places a per unit tax on SUVs.

6. Use supply and demand diagrams to show the change in the equilibrium price and quantity of beer, for each of the following events:

a. The population increases.

b. People's incomes increase and unemployment falls.

c. The price of wine decreases.

d. The price of popcorn decreases.

e. A new brewing process reduces the opportunity cost of producing beer.

f. In order to protect the incomes of farmers growing malting barley, the government sets an effective price floor for beer.

g. In order to protect consumers’ health, the government increases the per unit tax on beer.

7. Use supply and demand diagrams, one for each part, to show the change in the equilibrium price and quantity of cheese when the following events occur. Explain your reasoning, briefly.
a. The population grows.

b. People's incomes fall and unemployment increases, in a recession.

c. The price of macaroni increases.

d. The price of wine decreases.

e. A drought occurs in the dairy faming regions of Minnesota and Wisconsin.

f. Information provided to consumers indicates that that the consumption of cheese increases the risk of heart disease.

g. In order to eliminate a revenue shortfall, the government places an excise tax on cheese.

8. Use supply and demand diagrams, one for each part, to show the change in the equilibrium price and quantity of airline travel when the following events occur. Explain your reasoning, briefly.


a. The population decreases.

b. People's incomes increase and unemployment decreases.

c. The rental rate on automobiles falls.

d. The price of crude oil decreases.

e. The price of hotel and motel lodgings increases.

f. Super jumbo jet planes are purchased by the airlines.

g. In order to eliminate a revenue shortfall, the government places an excise tax on airline tickets.

9. Use a supply and demand diagram, properly labeled, and a written explanation to analyze the change in the equilibrium price and quantity of butter, for each of the following events:

a. The population decreases.

b. People's incomes increase and unemployment falls.

c. The price of margarine increases.

d. The price of bread decreases.

e. Consumption of butter is found to increase the risk of heart disease.

f. In order to protect the incomes of dairy farmers, the government sets an effective price floor for milk.

g. In order to protect consumers’ health, the government requires that more expensive materials be used for packaging butter.

10. Use a supply and demand diagram, properly labeled, and a written explanation to analyze the change in the equilibrium price and quantity of broccoli, for each of the following events:


a. The population decreases.

b. People's incomes increase and unemployment falls.

c. The price of cauliflower increases.

d. The price of ranch dip decreases.

e. Consumption of broccoli is found to improve longevity.

f. In order to protect the incomes of broccoli growers, the government sets an effective price floor for broccoli.

g. In order to encourage consumption of broccoli, the government pays a per unit subsidy to broccoli growers.

11. Use supply and demand diagrams, properly labeled, to show the change in the equilibrium price and quantity of potatoes, for each of the following events:

a. The population increases.

b. People's incomes increase and unemployment falls.

c. The price of butter decreases.

d. The price of spaghetti noodles decreases.

e. Consumption of potatoes is found to improve life expectancy.

f. In order to protect the incomes of potato growers, the government sets an effective price floor for potatoes.

g. In order to improve consumers’ health, the government introduces a per unit subsidy on potatoes.

12. The U.S. government is considering two possible uses for the budget surplus. One is to assist Columbia financially in its effort to discourage its farmers from growing the plant from which cocaine is extracted. The second is to increase spending on drug prevention (education) and treatment. Assume that both programs will have some degree of success.

a) Use a supply and demand diagram or model to show the effect on the price and quantity consumed of cocaine in the U.S.

b) What will be the effect on the rate of robbery and burglary in the U.S?

c) Expenditure on prisons
13. In the past week, it was announced by the Kentucky State Police that their program of marijuana eradication had been very effective this year in term of the number of plants destroyed. Use a supply and demand diagram to show the effect of the program on the equilibrium price and quantity of marijuana. Compare the effects of such a program on price and quantity with one which attempted to reduce the demand for marijuana through a drug education program.
(Be sure to label your diagrams fully and carefully in both cases.)
14. Use supply and demand curves to show the change in the price of bread and the quantity sold, when these events occur:

a. The population grows.

b. People's incomes fall and unemployment increases, in a recession.

c. The price of potatoes rises.

d. The price of butter rises.

e. A drought occurs in the wheat growing regions.

f. To protect farmers' incomes, the government sets an effective price floor for wheat.

g. To protect consumers from inflation, the government sets and effective price ceiling for bread.


15. In the United States and western Europe, farmers are strong enough politically to persuade their governments to set price floors for many crops. In many poor Third World countries, governments that are worried about the standard of living of their urban populations impose price ceilings on food staples like rice and wheat. Use supply and demand curves to show how these policies can help to explain the food surpluses in rich countries and the shortages in the poor.

16. The Clinton Administration or at least the U.S. Department of Labor is considering the possibility of raising the minimum wage from $4.25 per hour to $5.00 per hour. Suppose that your Member of Congress is interested in deciding how to vote on the issue if it comes before Congress. Please write an essay for the Congressperson on the consequences of raising the minimum wage. He would like to have a graph that illustrates your discussion.






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