1. when excess demand exists for tickets to a major sporting event or a concert, profit opportunities exists for scalpers. Explain briefly using supply and demand curves to illustrate. Some argue that scalpers work to the advantage of everyone and are "efficient" Do you agree or disagree Explain briefly.
Scalpers do work efficiently because they allow ticket prices, especially those in high demand to reach an equilibrium by supplying those who want a ticket at market price allowing them to get one, and by allowing those with utilities below the market price to sell them. With the help of scalpers no tickets are gone unused by setting the price of these tickets at a price that they can be sold when necessary and still make a decent profit. It becomes efficient because all tickets are sold.
2. The rent for apartments in New York City has been rising sharply. Demand for apartments in New York City has been rising sharply as well. This is hard to explain because the law of demand says that higher prices should lead to lower demand. Do you agree or disagree?
The scenario of rising prices that increases in demand and ignore the laws of demand as in demand for New York City apartments is an example of elasticity or in this case Veblen or Giffen good to be precise. Apartments in N.Y city represent mostly a luxury good where the status and location and exclusiveness adds to its preferability. Along with this trend, with so many people living in New York city and a rising population, people have little choice in how much to pay for an apartment, especially one that is located downtown, in the capital. Its good business sense to raise the price when consumers have little choice or when they prefer an exclusive good. Thus as in the apartments of New York city, prices will rise as well as demand.
3. Suppose that the world price of oil is $70 per barrel and that the US can buy all the oil it wants at this price. Suppose also that the demand and supply schedules for oil in the US are as follows:
Price $ per barrel US Quantity Demanded US Quantity Supplied
68 16 4
70 15 6
72 14 8
74 13 10
76 12 12
a. On graph paper, draw the supply and demand curves for the US. No graph needed, just explain.
b. With free trade in oil, what price will Americans pay for their oil: What quantity will Americans buy? How much of this will be supplied by Americans producers? How much will be imported? Illustrate total imports on your graph of the US oil market.
US buys total 15 barrels.( total US consumption, both domestic and imports)
US domestic suppliers will supply: 6 barrels
Total Imports= Total demand - Supply by American producers
= 15 - 6
= 9 barrels
c. Suppose the US imposes a tax of $4 per barrel on imported oil. What quantity would Americans buy? How much of this would be supplied by American producers? How much would be imported? How much tax would the government collect?
With a tax of $4 price will increase from 70 to $74.
At this new price:
Total consumption= 13 barrels
US domestic suppliers will supply: 10 barrels
Total Imports= Total demand - Supply by American producers
= 13 - 10
= 3 barrels
d. Briefly summarize the impact of an oil import tax by explaining who is helped and who is hurt among the following groups: domestic oil consumers, domestic oil producers, foreign oil producers, and the US government.
By imposing an import tax or tariff, the price level of barrel will increase by $4. Which reduces the total consumption from 15 to 13 barrels.
The domestic oil consumers are highly effected as the price level got increased. And this increased price level or the difference in the tariff price and world price will be passed on to government as tax revenue or tariff revenue.
Tax revenue to government= total imports x $4
=3 x$4
= $12
Foreign oil producers will lose only the sale, as the tariff they are paying was indirectly levied on the consumers or they charge the extra $4 from the US consumers.
The domestic suppliers will benefit as they can increase their sales. Due to increased price level, many domestic producers who have to exit the market due to competition , can do business as their average total cost lies below the $74.
Finally due to import tariff, domestic consumer is the looser.
4. Use the data in the preceding problem to answer the following questions. Now suppose that the United States allows no oil imports.
a. What are the equilibrium price and quantity for oil in the United States?
b. If the United States imposed a price ceiling of $74 per barrel on the oil market and prohibited imports, would there be an excess supply or an excess demand for oil. If so, how much?
c. Under the price ceiling, quantity supplied and quantity demanded differ. Which of the two will determine how much oil is purchased? Briefly explain