Assignment:
1. Examine Table A and Table B provided below. Then, answer the following questions.
Table A Table B
Market for Peanut butter candy Market for Peanut butter candy
Price (in US dollars) Quantity (in pounds) Price (in US dollars) Quantity (in pounds)
14 40 14 60
13 45 13 55
12 50 12 50
11 55 11 45
10 60 10 40
a) Which table represents consumers? Which table represents producers? Explain your reasoning. What are the equilibrium price and quantity for the market for peanut butter candy? Discuss your answer in detail. Be sure to include a definition of market equilibrium in your answer.
b) What happens in the market for peanut butter candy if the price is below the market equilibrium price? Explain the condition occurring. Provide a specific example using Tables A and B from above.
c) What are this market’s (or any market’s) limitations? In other words, what is this market unable to do on its own? Why might the government interfere/intervene in this market? Discuss your answer in detail.
2. Now, let’s examine the market for shovels. Suppose that the market for shovels is at market equilibrium initially. Then, a snowstorm hits a major northeastern city one weekend and the flakes are falling at record levels.
You own a hardware store. Snow falls throughout the night. You know that the moment you open your store, many customers will want snow shovels you have on hand.
After a blizzard, how much should you charge for a shovel? What happens to equilibrium price and quantity? Why?
Explain your reasoning and use a graph to support your answer. Be sure to label all parts of your graph! And answer the following questions:
A. Describe what might happen if the government imposes a price ceiling requiring prices to remain unchanged when the store opens at 8 a.m.
B. Describe the outcome if the prices of the limited supply were raised when you opened the store.
C. What consequences might you face if you had raised the prices that morning?
D. Why did you take the risk of buying shovels last fall? What was the reward you hoped to receive? Explain how a price ceiling would affect that reward.
E. Would customers be willing to pay more than the clearance price if you had been wrong and had to liquidate the inventory? Explain.
3. Now, let’s examine the market for gasoline and pizza. Suppose that the market for gasoline and market for pizza is shown below. Change in price of gasoline is more inelastic than change in prize of pizza. Why?
1. Which products are the most inelastic? Organize them in the proper order from the most inelastic to the most elastic demand:
salt, airline travel, gasoline, pizza, Chevrolet cars, textbook, doctor visit, T-bone steak
2. What factors would most likely explain why demand for gasoline is more inelastic and demand for pizza is more elastic?