Exercise A:
A. Steel Supply and Demand for USA are given by ; Demand: P = 1,200 – 100 (QD) and supply: P = 100 (QS) where QD = quantity demanded and QS = quantity supplied
1. Draw the market supply and demand curves. What are the equilibrium price and equilibrium quantity?
2. Compute the price elasticity of demand when price is $800. What can you say about the demand?
3. Compute the price elasticity of demand between $200 and $900. Is the demand elastic or inelastic?
4. Assume the selling price is $700 and the firm decreases the price of the product. Will the total revenue falls or increases. Why?
Illustrate graphically the relationship between elasticity, price and total revenue by identifying the revenue maximization price and revenue maximization output.
5. Assume the cross price elasticity of the steel with respect to cars is -5. By how much and in what direction the price of the related good has changed if the demand for steel increased by 20%.
What will be the demand curve of steel if the price of autos decreases by 15%?
Illustrate graphically your answer.
6. Assume that on average consumers’ income in this market is $50,000 and the selling price is still $700, if income increases to 55,000 and the new quantity demanded for steel is 4 , what is the elasticity of income?
Based on the elasticity of income what type of good is steel?
If the income of customers decreases by 10% what is the new demand curve? Illustrate it graphically.
7. Assume that the government levied a 25% tax on the suppliers of steel. Illustrate graphically the different economics effects of the tax ( and compute the dwl and tax burden)
Who is paying more of the tax and why?
Exercise B:
Homes’ demand curve for wheat is P=40 -1/2(QD) and supply is p= 10 + 1/2 (QS)
I) Determine the price of wheat in the absence of trade and economic surplus (consumer surplus and producer surplus).
II) Illustrate graphically the different economic effects if citizens of home are allowed to buy the wheat in foreign markets and the world price is $20.
III) Compute the economic surplus and the consumer surplus.
IV) Home imposes a specific tariff of $4 on wheat imports.
V) Determine and graph the effects of the tariff on the following groups:
a) Home import competing producers
b) Home consumers
c) Home government
VI) Show graphically and calculate the terms of trade gain, the efficiency loss, and the total effect on welfare of the tariff.
VII) The government decides to grant a $4 subsidy to import competing sector, illustrate graphically the different economic effects of this subsidy on the domestic market and calculate the loss of economic efficiency.
VIII) In your opinion, which measure is more efficient and why?
IX) What are the different economic arguments for protecting domestic industries?
Exercise C:
Chen has an income of $325 to purchase jeans and shirts. The price of a pair of jeans is $25 and price of a shirt is $50. The table below contains the extra satisfaction she derived from buying these two goods.
Quantities MU of jean MU of shirt
1 110 210
2 90 195
3 85 180
4 80 150
5 75 120
6 50 108
a) Determine the equation of the budget line and graph it.
b) Determine the optimum choice (number of jeans and shirts) for this consumer
c) Suppose the price of the shirt decreases to $40, what is the new optimum choice? Graph the derived demand curve and determine the equation of the demand for the shirts.
d) On what concepts are based the determination of the demand curve?