Exercise 1: Quantity Quota
A new chemical cleaning solution is introduced to the market. Initially, demand is QD =1000 ± 2p and supply is QS= 100 + p. Determine the equilibrium price and quantity.
The government then decides that no more than 300 units of this product should be sold per period, and imposes a quota at that level. How does this quota affect the equilibrium price and quantity? Show the solution using a graph and calculate the numerical answer.
Exercise 2: First-Time Homebuyers Credit
In 2009 and 2010 the US government instituted a program where all first-time homebuyers received an $8,000 tax credit upon the purchase of a new house. In April 2010, just prior to the credit's expiration, sales rose 7.6% and the median US home price rose 4% to from $167,000 to $174.000. Assume that all buyers received the $8,000 subsidy.
(a) Show the effects of the subsidy on a graph.
(b) Assuming that all buyers received the credit, estimate the own price elasticity of demand and own price elasticity of supply
(c) Who gained more from the subsidy, buyers or sellers?
Exercise 3: Wine production
In wine production, raw materials (grapes) are the single biggest cost. The cost of the grapes may be as much as 60% of total production costs but varies greatly from lower-quality inexpensive wines to the highest quality wines. The second-highest cost for many vintners is the barrels used to ferment the wine. French oak barrels cost as much as $700 apiece and last only a few years. The other major production cost, other than the actual physical plant where the winemaking occurs, is time.
Quality wines spend 2±2 ½ years aging in barrels and then an additional 8 months in bottles before being ready for sale.
(a) How much substitutability do you suppose exists between inputs in winemaking? How might this factor affect efforts to cut costs?
(b) If a firm were to find a new technology that cut the required aging time in half, how would it affect the demand for other inputs?