Problem 1. Analyze each of the following scenarios and provide a graph to illustrate your answer. Use (Qo, Po) to designate the initial equilibrium price and quantity, and (Q', P') to designate the new equilibrium price and quantity. Illustrate in your graph any shifts that occur in the demand and/or supply curves.
a. Consider the market for automobiles which is initially in equilibrium. Suppose that the discovery of fracking, a new technology, allows petroleum producers to produce more petroleum at every price while at the same time consumers' tastes and preferences for car ownership diminishes due to the creation of new car-sharing possibilities (think Zipcar, etc.). Given these changes what do you predict will happen to the equilibrium price and equilibrium quantity in the market for automobiles?
b. Consider the market for corn which is initially in equilibrium. Suppose that the weather during the corn growing season is unusually good for the growing of corn. At the same time suppose that people's incomes have risen and corn is an inferior good in consumption. Given these changes what do you predict will happen to the equilibrium price and equilibrium quantity in the market for corn?
c. Consider the market for motorcoach tours which is initially in equilibrium. Suppose that the cost of providing a motorcoach tour falls while at the same time there is an increase in the size of the over 70 year old population (the age group that most often enjoys taking a motorcoach tour!). Given these changes what do you predict will happen to the equilibrium price and equilibrium quantity in the market for motorcoach tours?
d. Consider the market for cruise vacations which is initially in equilibrium. Suppose that there is an increase in people's incomes. Assume that cruise vacations are a normal good. Given these changes what do you predict will happen to the equilibrium price and equilibrium quantity in the market for cruise vacations.
e. Consider the market for cruise vacations which is initially in equilibrium. Suppose that ski vacations become more expensive and at the same time the number of cruise ships increases.
Problem 2. (Do not use a calculator on this problem: you are working to grow stronger computational skills and to do that I need you to stop turning to your calculator so quickly! Also, work this with the fractions (no decimals) but think about how you can "get rid of" the fractions. Another aspect that I am working on with respect to growing your numerical literacy.) Suppose there are two consumers in a market, Arthur and Susan. You are told the following information about this market. Arthur demands 200 units of the product sold in this market when the price is $2 per unit. When the price increases by $2, the quantity of the product he demands decreases by 50 units. Arthur's demand curve is linear. Susan demands 50 units of the product sold in this market when the price is $1 per unit. When the price increases to $5, the quantity of the product she demands decreases to 10 units. Susan's demand curve is linear.
a. From the above information write the equation for Arthur's demand curve.
b. From the above information write the equation for Susan's demand curve.
c. Assuming that Arthur and Susan are the only consumers of the product, draw a graph that illustrates the market demand curve for this product. Then, provide an algebraic expression for the market demand curve. If you need more than one equation please be sure to note what the relevant range of prices is for each equation.
Now, suppose that Susan's income increases so that at every price Susan consumes three times as much of the good as she did originally. [Hint: you might find it helpful to draw a graph of Susan's initial demand curve and then from this graph draw her new demand curve.]
d. Given this new information write the equation for Susan's new demand curve.
e. Given this new information, provide an algebraic expression for the market demand curve. If you need more than one equation please be sure to note what the relevant range of prices is for each equation.
Problem 3. Suppose that a small, closed economy manufactures photo albums. There are four domestic manufacturers of these albums and they have identical supply curves. Suppose the supply curve for a single manufacturer of these albums is given by the equation P = 2Q + 20. Additionally you know that the domestic demand for photo albums in this small, closed economy is given by the equation P = 110 - Q.
a. What is the domestic supply curve for photo albums in this economy?
b. Given the domestic supply curve and the domestic demand curve, what is the equilibrium price and quantity of photo albums in this economy if the economy is closed?
c. Calculate the value of consumer surplus, producer surplus, and total surplus if the domestic economy is a closed economy with regard to the photo album market.
d. Suppose that this economy decides to open this market to trade. Analyze what happens in this market if the world price of photo albums is $30 per album. In your answer identify the level of imports or exports, the new level of consumer surplus, the new level of producer surplus, the new level of total surplus, and identify the distributional consequences of opening this market to trade.
e. Suppose that this economy decides to open this market to trade. Analyze what happens in this market if the world price of photo albums is $80 per album. In your answer identify the level of imports or exports, the new level of consumer surplus, the new level of producer surplus, the new level of total surplus, and identify the distributional consequences of opening this market to trade.
f. Suppose that this market for photo albums is opened to world trade and the world price is $30. Furthermore, suppose that the government of this economy decides to implement a tariff so that the price of photo albums in the small open economy is equal to $40 per one imported album. Analyze the effect of this tariff on imports or exports, consumer surplus, producer surplus, total surplus, government tariff revenue and deadweight loss relative to the results you got when the market was open to trade and there was no tariff.
Problem 4. Here are a variety of situations to analyze.
a. Bicycles Galore produces 200 bicycles that are being sold for $200 per bicycle in 2013, 300 bicycles that are beomg sold for $150 per bicycle in 2014, and 400 bicycles that are being sold for $200 per bicycle in 2015. What is GDP in this economy in 2013 if Bicycles Galore is the only producer of final goods and services in this economy?
b. Bicycles Galore produces 200 bicycles that can be sold for $200 per bicycle in 2013, 300 bicycles that can be sold for $150 per bicycle in 2014, and 400 bicycles that can be sold for $240 per bicycle in 2015. Bicycles Galore actually sells 100 bicycles for $200 per bicycle in 2013, 250 bicycles for $150 per bicycle in 2014, and 75 bicycles for $200 per bicycle in 2015. All other bicycles end up in the inventories of Bicycles Galore. What is GDP in this economy in 2013 if Bicycles Galore is the only producer of finals goods and services in this economy? What is the level of consumer expenditure in this economy (assume there is only one firm, Bicycles Galore, in this economy). What is the level of investment expenditure in this economy? What is the composition of investment expenditure in this economy?
c. In 2014, Bicycles Galore produces and sells 300 bicycles at a price of $150 per bicycle. In addition they sell all the bicycles they produced in 2013 but did not sell in 2013 (refer back to part (b) to see how many bicycles they did not sell). The bicycles that were produced in 2013 and that were sold in 2014 were sold at their 2013 prices. What is the value of consumer expenditure in 2014? What is the value of GDP in 2014? What is the value of inventory investment in 2014?
Problem 5. Suppose you are given the following information about an economy for the year 2015.
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Consumption Expenditures
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$3000
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Business Expenditure on Plant and Equipment
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$1000
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Tax Revenues
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$800
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Imports
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$700
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Government Expenditures
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$600
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Inventory Change for the Year
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-$100
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Exports
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$500
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Government transfer payments
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$100
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New Home Construction
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$400
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a. Given the above information, is this economy a net exporter or a net importer?
b. Given the above information, what is the level of investment in this economy for 2015?
c. Suppose we define the government budget balance as being equal to government expenditures minus net taxes. Furthermore, suppose that net taxes are equal to tax revenues minus transfer payments from the government. What is the government budget balance for this economy? Is the government operating with a surplus, a deficit, or a balanced budget? Explain your answer.
d. What is the value of GDP in 2015 for this economy?
Problem 6. Use the following information to answer this question. Suppose there are three firms in the economy: firm A produces the inputs that are used by firm B. Firm B produces the inputs that are used by Firm C. Assume that all of firm A's product is purchased by firm B and that all of firm B's product is purchased by firm C. Firm C is the only firm that produces a final good or service in this economy. You are provided the following information about these three firms.
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Firm A
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Firm B
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Firm C
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Total Factor Income
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Value of Sales
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$6,000
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$21,000
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$31,000
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---
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Intermediate Goods
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$0
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$6,000
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---
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Wages
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$1500
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$5000
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$12,000
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Interest Payments
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$2000
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$1500
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Rent
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$2000
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$9000
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Profit
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$1000
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$3000
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$5000
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Total Expenditure by Firm
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$21,000
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---
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Value Added by Firm=Value of Sales - Cost of Intermediate Goods
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a. Fill in the missing entries in the above table.
b. What is the value of aggregate spending on domestically produced final goods and services in this economy?
c. What is the value of total payments to factors of production in this economy?
d. What is the value of total production in this economy using the value added approach?
e. Are your answers to parts (b), (c), and (d) the same? Explain your results.