Problem 1. Consider the following markets. For each example identify how the demand curve and/or supply curve will shift? (Answer each question by “left” or “right” and make specific reference to which curve is shifting.) For each example identify what will happen to the equilibrium price and quantity. (Answer each question by “increase”, “decrease”, or “ambiguous” and make sure you identify price or quantity in your answer.)
a. Consider the pink bow tie market: colorful prom night attire comes back into fashion, raising the demand for pink bow ties.
b. The legal prescription drug market: the expiration of drug patents increases the number of generic drugs available to consumers.
c. The stock market: forecasters predict a good time for the economy, prompting millions of potential stock sellers to hang on to their stocks.
d. The new car market: New technology allows Ford to produce cars with fewer resources, so their cars are sold cheaper. At the same time, soaring gasoline prices cause consumers to want fewer cars.
e. The new pickup truck market: a technological advancement enables pickup truck manufacturers to produce the vehicles at a lower cost than before. At the same time, Chuck Norris, a famous actor, says, "Driving a pickup truck is so cool!" Many people who admire Chuck Norris suddenly go out and buy pickup trucks.
f. The kitty litter market: a blizzard is forecast to hit Madison in the next week. Fearing the prospect of getting their cars stuck in the snow, Madison residents rush to buy kitty litter to use for traction.
g. The DVD market: the technology to produce DVDs becomes much more efficient, slashing production time and cost of DVDs. Meanwhile, Blu-ray (a competing technology) drops its prices by half in hopes of encouraging consumers to not switch to DVD technology.
h. Corn market: More acres being devoted to corn than ever before to respond to the growing demand for corn to use in ethanol fuels.
Problem 2. Consider a café that serves both pizza and cookies. Suppose the demand curve and supply curve for pizza in a café is given by
Demand: Q = 300 – 20P – 20Pc
Supply: Q = 10P – 10
where Pc is price of a cookie.
a. Suppose the price of a cookie is Pc = 5. Find the equilibrium price and quantity of pizza.
b. Due to a change in the price of cookies, the new equilibrium price of pizza changes to P*’ = 5. What must be the price of a cookie now?
c. Are pizza and cookies substitutes or complements in this example?
Problem 3. Suppose that in the market for pineapples there are three consumers: person A whose demand curve is QA = - P + 5, person B whose demand curve is QB = -2 P + 6, and person C whose demand curve is QC = -(3/4) P + 3.
a. Solve each person’s demand function for P. (Rewrite the equations for the demand curves, and put P on the left hand side.)
b. Determine who demands pineapples at what price ranges.
c. Take the horizontal summation of each person’s demand at each price range, and graph the market demand curve for pineapples. In addition to the graph, provide the equation(s) for the market demand curve and the relevant price ranges.
Problem 4. Consider the health club market in Madison. The demand for health club services is given by Q = 20 – 3P, and supply is given by Q = P-4, where Q represents health club memberships and P represents the price of a membership.
a. Find the equilibrium price and quantity in this market.
b. Now, the citizens in Madison pay more attention to their health. Everyone's reservation price for a unit of health club service increases by $1. (That is, everyone is willing to pay one more dollar for each unit of the service.) Find the new equilibrium price and quantity.
c. Suppose the citizens in Madison don't realize the importance of exercise. In an attempt to increase the amount of exercise done by its citizens, the Madison City Council is considering imposing an effective price ceiling on the price of health club memberships of $5 on Health Clubs that do business within the city limits. What will happen to the equilibrium price and quantity in this market if this price ceiling is implemented? Will this policy have the desired effect on the amount of exercise being done?
Problem 5. You are trying to find out some information about the supply and demand of photos in Voltaica, a small country on the Pacific Rim. You are given the following information: Voltaica has a linear, upward-sloping supply curve for photos and a linear, downward-sloping demand curve for photos. The citizens, Voltaicans, will not purchase photos for any price equal to or larger than $35, but they will purchase photos if the price is less than $35. At a price of $15, photo producers make 12.5 photos for sale and Voltaicans are willing to buy 20 photos.
a. Is the above information enough to draw a graph of the photo market in Voltaica? If not, what information do you need?
b. The chief economist in Voltaica e-mails you because he accidentally mixed up some of the remaining data on the photo market. He tells you that he knows that the missing piece of information from part (a) of this question is one of the following: the point (Q=20, P=30), or the point (Q=20, P=10). Which point is the missing piece of information? How do you know this?
c. Use the information above, including your answer to (b), to draw a demand and supply curve for the photo market in Voltaica.
d. Find the equation for the supply curve if it is written in X-intercept form (solved for Q).
e. Find the equation for the demand curve if it is written in X-intercept form (solved for Q).
f. Find the equilibrium price and quantity for the photo market in Voltaica.
Problem 6. Consider the aggregate supply for a market consisting of two producers, Jaden and Beatrice. At a price of $10 per widget, the market supply is 31 units. At a price of $6 per widget, the market supply is 23 widgets. Jaden’s supply function is QJ = 5 + P.
a. What is the slope of Beatrice’s supply curve?
b. What is the equation for Beatrice’s supply curve?
c. What is the aggregate supply in this market?
d. At what price will the aggregate supply be equal to 42 units? When the aggregate supply is equal to 42 units, how many units will Beatrice supply and how many units will Jaden supply?
Problem 7. Consider the market for footballs. The football market is characterized by the following demand and supply curves: P = 10 + 1/20QD and P = 1/30QS + 5.
a. Given the equations above, do you think that these curves could represent the football market? Why or why not?
b. From this point on, assume that the demand is given by: P = 10 – 1/20QD. What are the equilibrium price and quantity in this market?
c. Suppose now that suppliers are producing two times as many footballs at each price. What is the new equation for the market supply?
d. What is the equilibrium price and quantity given the demand curve from part (b) and the supply curve you found in part (c)?
e. Returning to the original supply curve (the one given at the beginning of this problem), suppose now that suppliers produce 50 less footballs at each price level. What is the new equation for the market supply?
f. What is the equilibrium price and quantity in the football market given the demand curve from part (b) and the supply curve you found in part (e)?