Exam 4: Demand and Supply Applications

The Deepwater Horizon oil spill in the Gulf of Mexico which began from an explosion on April 20, 2010 resulted in a ban on shrimp fishing that measures about 10% of the Gulf. Using the graph below assume that the original supply curve before the spill is represented by So and the new supply curve is represented by S2 explain the process that takes place to reach a new equilibrium. The supply curve shifts to the left. Before the waters are closed, the shrimp market is in equilibrium at the price of $11.00 and a quantity of 75 million pounds. The decreased supply of shrimp leads to higher prices, and a new equilibrium is reached at $16.00 and 56 million pounds (point B).

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Question 1

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The supply curve shifts to the left. Before the waters are closed, the shrimp market is in equilibrium at the price of $11.00 and a quantity of 75 million pounds. The decreased supply of shrimp leads to higher prices, and a new equilibrium is reached at $16.00 and 56 million pounds (point B).

Rent control is typically imposed ostensibly for the purpose of helping the poor. Why might you be able to argue that few poor people will actually be the beneficiaries of such controls?

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Rent control certainly does have the effect of keeping a ceiling on rent. However, it only works in the prescribed area. As poor people begin to look for housing in the regulated areas they eventually come up empty handed as they discover that there is a shortage of such housing. They must then look for housing in the unregulated area. But by now many of those who couldn't find housing in the regulated area will be bidding up the rents in the unregulated areas of the city.

Often bar owners will require that patrons stand in a line to get a wristband entitling them to pay a preferred price for drinks if they arrive early to the bar. The wristbands are typically tamper- resistant and can be easily identified if patrons have been switching wristbands with other customers. What is the bar owner concerned about and why does he make his patrons wear these bands?

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The bar owner wants to increase business activity at a time when many customers may not be interested in showing up to the bar. This is typically in the early evening hours before sundown. Customers who may be sensitive to drink prices but indifferent as to when they patronize the bar may be willing to wait in the line to get the special hand bracelet. If the bracelets could be easily taken off then those who arrived early could charge a small price to those who arrived later so that they too could enjoy the lower price of bar drinks. The tamper-resistant nature of the wristbands keeps this transfer of producer surplus to the late-arriving customers from taking place.

Explain what will happen when the government imposes a maximum price that is above the market equilibrium price. Why is this true?

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Question 4

Assume that the cost of producing a hardback book is roughly equivalent to producing a paperback book. Explain how and why then do publishing companies charge higher prices for the hardback book and a much lower price for the paperback book.

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Question 5

McDonalds and many supermarkets offer vending machines in their stores that rent new movie releases for as low as $1.00 per day provided that they are returned in 24 hours before incurring a late fee. How can Netflix and Blockbuster compete against this type of service? Or is their something else going on there that doesn't first meet the eye?

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Question 6

Assume that the government of the state of New Jersey has determined that a large number of injuries and deaths have occurred as a result of accidents involving the installation and repairs of electrical equipment at private residences. In reaction to this problem the state assembly decided to pass a law which made a requirement that all certified electricians take and pass a tougher state licensing examination. Analyze the impact that this law is likely to have on the market for electricians and explain why safety may not necessarily improve.

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Question 7

Suppose you came across the following headline in a story of a daily newspaper: "Automobile prices are so high right now that there must be a shortage. As a consequence not everyone who needs an automobile will be able to buy one." Is this statement necessarily correct?

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Question 8

Assume that the original manuscript of Adam Smith's the Wealth of Nations is discovered and the estate auctions it off to the highest bidder a price of $1,000,000 show with the use of a graph what takes place and explain the process.

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Question 9

Why is it that people who have to fly at a moment's notice often pay some of the highest air fares whereas people who wait until the last minute to buy a ticket to a live performance of play may be able to get a better price than someone who bought their ticket months in advance.

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Question 10

Define the process of queuing.

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Question 11

What are ration coupons and what is their purpose? Provide a historical or current example.

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Question 12

If ration coupons are used to determine who gets the products available, what happens if the government allows individuals to trade them?

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Question 13

Suppose that Bill is a big movie buff and enjoys renting movies from the local video rental outlet. Assume that he is willing to pay $5 for the first movie he rents for the weekend but would only pay $4 for a second and still only $3 for a third movie. If the video rental franchise charges $3.50 per movie what will Bill's consumer surplus be and why? Assume now that the video rental franchise now has a new package deal in which it offers to rent three movies to customers at a price of $9.00 would Bill be interested? How much consumer surplus would he enjoy now? What is the maximum price that the video rental franchise could charge and still make Bill interested in the package deal?

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Question 14

Assume that policy makers in the state of California respond to the fury by residents of recent price hikes for the price of water and respond by capping water prices in 2010 to $.10 per gallon that they were a few years ago rather than what the market price otherwise would be at $.25 per gallon. Explain with the use of a graph what would happen if the state legislature were to impose such a price control.

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Question 15

Why is it true that shortages usually occur mainly when price controls are in effect?

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Question 16

The U.S. government has two different methods to deal with illegal drug use. First, the government has tried a "war on drugs", with the idea of keeping illegal drugs out of the country. Second, the "Just say no" campaign has been used to make individuals more aware of the harmful effects of drugs. Use supply and demand to analyze the effects of these two separate policies.

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Question 17

Consumers are often bewildered by the different array of choices, plans and prices that are offered by cell phone service companies. Explain in terms of consumer surplus why this makes sense from both the company's perspective and that of the consumer.

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Question 18

What reasons do governments often give to justify the decision to not allow price to ration goods?

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Question 19

What is a price ceiling?

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Question 20

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Rent control is typically imposed ostensibly for the purpose of helping the poor. Why might you be able to argue that few poor people will actually be the beneficiaries of such controls?

Explain what will happen when the government imposes a maximum price that is above the market equilibrium price. Why is this true?

Assume that the cost of producing a hardback book is roughly equivalent to producing a paperback book. Explain how and why then do publishing companies charge higher prices for the hardback book and a much lower price for the paperback book.

Suppose you came across the following headline in a story of a daily newspaper: "Automobile prices are so high right now that there must be a shortage. As a consequence not everyone who needs an automobile will be able to buy one." Is this statement necessarily correct?

Assume that the original manuscript of Adam Smith's the Wealth of Nations is discovered and the estate auctions it off to the highest bidder a price of $1,000,000 show with the use of a graph what takes place and explain the process.

Why is it that people who have to fly at a moment's notice often pay some of the highest air fares whereas people who wait until the last minute to buy a ticket to a live performance of play may be able to get a better price than someone who bought their ticket months in advance.

Define the process of queuing.

What are ration coupons and what is their purpose? Provide a historical or current example.

If ration coupons are used to determine who gets the products available, what happens if the government allows individuals to trade them?

Why is it true that shortages usually occur mainly when price controls are in effect?

Consumers are often bewildered by the different array of choices, plans and prices that are offered by cell phone service companies. Explain in terms of consumer surplus why this makes sense from both the company's perspective and that of the consumer.

What reasons do governments often give to justify the decision to not allow price to ration goods?

What is a price ceiling?

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Introduction to Macroeconomics

Measuring National Output and National Income

Unemployment, Inflation, and Long-Run Growth

Aggregate Expenditure and Equilibrium Output

The Government and Fiscal Policy

The Money Supply and the Federal Reserve System

Money Demand and the Equilibrium Interest Rate

The Determination of Aggregate Output, the Price Level, and the Interest Rate

Policy Effects and Costs Shocks in the Asad Model

The Labor Market in the Macroeconomy

Financial Crises, Stabilization, and Deficits

Household and Firm Behavior in the Macroeconomy: a Further Look

Long-Run Growth

Alternative Views in Macroeconomics

International Trade, Comparative Advantage, and Protectionism

Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates

Economic Growth in Developing and Transitional Economies

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