Managerial Economics Midterm Questions
Q1) Suppose that the daily demand for apples is D(p) = 20,000 × (5 - p) pounds and suppose that daily supply is S(p) = 40,000 × (p - 2) pounds.
a) What is the price of apples? What are consumer and producer surplus?
b) Suppose that a tax on apples is introduced of $X per pound. How much of this tax will be passed on to consumers (your answer should have an "X" in it)? What is the ratio of the reduction in consumer surplus to the reduction in producer surplus (your answer may or may not have an "X" in it)?
Q2) Short-run demand for cars is D(p) = 1,000(40,000 - p) per year and short-run supply is S(p) = 4,000(p - 30,000) per year. Long-run supply is perfectly elastic, at a price of 30,000.
a) What is the current price of cars? Is the market in long-run equilibrium?
b) What will be the price of cars in the long run?
c) Draw a graph with the short-run supply and demand curves, as well as long-run supply. Label intercepts, and identify the quantity of cars transacted in the short-run and long-run.
d) In the long run, the short-run supply curve will shift so that the market is in equilibrium at a price-quantity pair on the long-run supply curve. Suppose that the slope of the short-run supply curve does not change as the curve shifts to get the market in long-run equilibrium. Does producer surplus increase, decrease, or stay the same after short-run supply has shifted, versus the initial conditions in part (a)?
Q3) Suppose that the world supply of oil is completely inelastic at a quantity of 10,000,000 barrels per day. Demand is given by D(p) = 10,000(1,100 - p) barrels per day.
a) What is the price of oil? What is consumer surplus?
b) Suppose demand drops. Specifically, consumers are willing to pay $50 per barrel less for oil, at any given quantity sold, so the demand curve shifts down to D(p) = 10,000(1,050 - p). How much does producer surplus fall?
c) Continuing with the numbers from part (b), suppose a tax is put in place of $20 per barrel of oil. What is the price that consumers would pay after the tax is imposed? What is the price that producers would receive?
Q4) (Hard) Josie is in charge of forecasting prices and demand for platinum. She has calculated that the elasticity of demand for platinum is -3 and the elasticity of supply is 1. Last month, buyers of platinum bought 44,500 ounces, and suppliers produced 41,000 ounces, at a price of $1,000 per ounce.
a) Approximately how much should Josie forecast that prices will rise or fall?
b) Suppose that the price of gold rises, so buyers of jewelry are suddenly willing to pay $100 more per ounce of platinum, at any given quantity sold. How much should Josie expect the price of platinum to rise, beyond the level found in part (a)?