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Economics 101 Spring 2011 Answers to Homework #2 Due 2/15/11 Directions: The homework will be collected in a box before

the lecture. Please place your name, TA name and section number on top of the homework (legibly). Make sure you write your name as it appears on your ! so that you can recei"e the correct grade. Please remember the section number for the section you are registere ! because you will need that number when you submit exams and homework. #ate homework will not be accepted so make plans ahead of time. "#ease s$ow your work% $ood luck% &. 'onsider the following markets. (or each example identify how the demand cur"e and)or supply cur"e will shift* (Answer each +uestion by ,left- or ,right- and make specific reference to which cur"e is shifting.) (or each example identify what will happen to the e+uilibrium price and +uantity. (Answer each +uestion by ,increase-, ,decrease-, or ,ambiguous- and make sure you identify price or +uantity in your answer.) a. 'onsider the pink bow tie market. colorful prom night attire comes back into fashion, raising the demand for pink bow ties. /ey. !emand cur"e shifts right, no shift in supply ,e+uilibrium price increases, and e+uilibrium +uantity increases. b. The legal prescription drug market. the expiration of drug patents increases the number of generic drugs a"ailable to consumers. /ey. 0upply cur"e shifts right, no shift in demand, e+uilibrium price decreases, and e+uilibrium +uantity increases. c. The stock market. forecasters predict a good time for the economy, prompting millions of potential stock sellers to hang on to their stocks. /ey. 0upply cur"e shifts left, no shift in demand, e+uilibrium price increases, and e+uilibrium +uantity decreases. d. The new car market. 1ew technology allows (ord 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. /ey. !emand cur"e shifts left, supply cur"e shifts right, e+uilibrium price decreases, and the change in e+uilibrium +uantity is ambiguous. e. The new pickup truck market. a technological ad"ancement enables pickup truck manufacturers to produce the "ehicles at a lower cost than before. At the same time,


'huck 1orris, a famous actor, says, 2!ri"ing a pickup truck is so cool%2 Many people who admire 'huck 1orris suddenly go out and buy pickup trucks. /ey. !emand cur"e shifts right, supply cur"e shifts right, e+uilibrium +uantity increases, and the change in e+uilibrium price is ambiguous. f. The kitty litter market. a bli33ard is forecast to hit Madison in the next week. (earing the prospect of getting their cars stuck in the snow, Madison residents rush to buy kitty litter to use for traction. /ey. !emand cur"e shifts right, no shift in supply, e+uilibrium price and +uantity increase. g. The !4! market. the technology to produce !4!s becomes much more efficient, slashing production time and cost of !4!s. Meanwhile, 5lu6ray (a competing technology) drops its prices by half in hopes of encouraging consumers to not switch to !4! technology. /ey. 0upply in the !4! market shifts right due to the decreased cost of !4!s, and demand in the !4! market shifts left due to the decrease in the price of a substitute good. 7+uilibrium price decreases and +uantity change is unknown. h. 'orn market. More acres being de"oted to corn than e"er before to respond to the growing demand for corn to use in ethanol fuels. /ey. !emand cur"e shifts right, supply cur"e shifts right, e+uilibrium +uantity increases, change in price is unknown. 8. 'onsider a caf9 that ser"es both pi33a and cookies. 0uppose the demand cur"e and supply cur"e for pi33a in a caf9 is gi"en by !emand. :;<== > 8=P > 8=Pc 0upply. :;&=P > &= where Pc is price of a cookie. a. 0uppose the price of a cookie is Pc ; ?. (ind the e+uilibrium price and +uantity of pi33a. /ey. Plug the price of a cookie into the demand cur"e, then we get !emand. :;8==68=P@ 0upply. :;&=P6&=. Aence, the e+uilibrium price is PB;C, and e+uilibrium +uantity is :B;D=. b. !ue to a change in the price of cookies, the new e+uilibrium price of pi33a changes to PBE ; ?. Fhat must be the price of a cookie now*

/ey. Plug the new e+uilibrium price into supply cur"e, we know that the e+uilibrium +uantity should be :BG;H=. Ising the e+uation of the demand cur"e, we can get the new price of a cookie is PcG;(<==68=J?6H=))8=;K c. Are pi33a and cookies substitutes or complements in this example* /ey. Fhen the price of a cookie increases from ? to K, the +uantity of pi33a decreases from D= to H=. Aence, the two goods are substitutes in this example. <. 0uppose that in the market for pineapples there are three consumers. person A whose demand cur"e is :A ; 6 P L ?, person 5 whose demand cur"e is : 5 ; 68 P L D, and person ' whose demand cur"e is :' ; 6(<)H) P L <. a. 0ol"e each personEs demand function for P. (Mewrite the e+uations for the demand cur"es, and put P on the left hand side.) /ey. Person A. P ; 6:A L ?@ Person 5. P ; 6(&)8):5 L <@ Person '. P ; 6(H)<):' L H. b. !etermine who demands pineapples at what price ranges. /ey. (rom the abo"e function forms, we find that no one demands for pineapples if P N ?@ only person A demands some if H O P P ?@ persons A and ' demand some if < O P P H@ and all three persons demand some if = P P P <. c. Take the hori3ontal summation of each personEs demand at each price range, and graph the market demand cur"e for pineapples. n addition to the graph, pro"ide the e+uation(s) for the market demand cur"e and the rele"ant price ranges. /ey. f H O P P ?, the market demand is :M ; :A ; 6 P L ?. f < O P P H, the market demand is :M ; :A L :' ; Q6 P L ?R L Q6(<)H) P L <R ; 6(C)H)P LK. f = P P P <, the market demand is :M ; :A L:5 L :' ; Q6 P L ?R L Q68 P L DR L Q6(<)H) P L <R ; 6(&?)H)P L&H.


H. 'onsider the health club market in Madison. The demand for health club ser"ices is gi"en by : ; 8= > <P, and supply is gi"en by :; P6H, where : represents health club memberships and P represents the price of a membership. a. (ind the e+uilibrium price and +uantity in this market. /ey. 7+uilibrium price PB; D, 7+uilibrium +uantity :B; 8 b. 1ow, the citi3ens in Madison pay more attention to their health. 7"eryoneGs reser"ation price for a unit of health club ser"ice increases by S&. (That is, e"eryone is willing to pay one more dollar for each unit of the ser"ice.) (ind the new e+uilibrium price and +uantity. /ey. The initial demand cur"e is P;6(&)<):L8=)<. 0o, the new demand cur"e becomes P;6(&)<):L8=)<L&. Ising the initial supply cur"e and the new demand cur"e, we can figure out that the new e+uilibrium price PBG; 8C)H, new e+uilibrium +uantity :BG; &&)H. c. 0uppose the citi3ens in Madison donGt reali3e the importance of exercise. n an attempt to increase the amount of exercise done by its citi3ens, the Madison 'ity 'ouncil is considering imposing an effecti"e price ceiling on the price of health club memberships of S? on Aealth 'lubs that do business within the city limits. Fhat will happen to the e+uilibrium price and +uantity in this market if this price ceiling is implemented* Fill this policy ha"e the desired effect on the amount of exercise being done* /ey. The price in the market will e+ual the price ceiling price of S?. The +uantity supplied is & and the +uantity demanded is ?. There will be an excess demand of H health club memberships. Fith the effecti"e price ceiling price of S? the market is only willing to supply & unit e"en though citi3ens would like ? units at that price. Melati"e to the original e+uilibrium, the price ceiling actually results in less exercise.

?. Tou are trying to find out some information about the supply and demand of photos in 4oltaica, a small country on the Pacific Mim. Tou are gi"en the following information. 4oltaica has a linear, upward6sloping supply cur"e for photos and a linear, downward6 sloping demand cur"e for photos. The citi3ens, 4oltaicans, will not purchase photos for any price e+ual to or larger than S<?, but they will purchase photos if the price is less than S<?. At a price of S&?, photo producers make &8.? photos for sale and 4oltaicans are willing to buy 8= photos. a. s the abo"e information enough to draw a graph of the photo market in 4oltaica* f not, what information do you need* /ey. There is enough information to graph the demand cur"e for photos > you are gi"en a point, (:;8=, P;&?) and the y6intercept, (:;=, P;<?). There is not enough information to graph the supply cur"e > you are gi"en only the point, (:;&8.?, P;&?). b. The chief economist in 4oltaica e6mails you because he accidentally mixed up some of the remaining data on the photo market. Ae tells you that he knows that the missing piece of information from part (a) of this +uestion is one of the following. the point (:;8=, P;<=), or the point (:;8=, P;&=). Fhich point is the missing piece of information* Aow do you know this* /ey. The +uestion clearly states that the supply cur"e for photos in 4oltaica is upward6sloping. The point (:;8=, P;<=) is the missing piece of information, because it completes the upward6sloping supply cur"e. The point (:;8=, P;&=) could not be the correct point because it gi"es you a downward6sloping supply cur"e. c. Ise the information abo"e, including your answer to (b), to draw a demand and supply cur"e for the photo market in 4oltaica. /ey.

'rice % 0




2 #uantity

d. (ind the e+uation for the supply cur"e if it is written in U6intercept form (sol"ed for :). /ey. To find the supply e+uation, use the two points. (&8.?, &?) and (8=, <=). The e+uation for the in"erse supply cur"e is :0 ; ? L V P e. (ind the e+uation for the demand cur"e if it is written in U6intercept form (sol"ed for :). /ey. To find the demand e+uation, use the points (8=, &?) and (=, <?). The e+uation for the in"erse demand cur"e is :! ; <? > P f. (ind the e+uilibrium price and +uantity for the photo market in 4oltaica. /ey. 0etting the two cur"es e+ual to each other, we find. :0 ; :! ? L V P ; <? > P PB ; 8=, :B ; &? 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 1 units. At a price of $6 per widget, the market supply is ! widgets. Jaden"s supply function is #J $ % & '. a. (hat is the slope of Beatrice"s supply cur)e* At a price of $10, Jaden supplies 1% widgets. +hus, Beatrice"s supply at $10 is 16 widgets. At a price of $6, Jaden supplies 11 units, which means Beatrice supplies 1! units. +he slope of Beatrice"s supply is ,10-6./,16-1!. $ 1 0. (hat is the e1uation for Beatrice"s supply cur)e*

Beatrice"s supply cur)e can 0e found 0y su0stituting4 '$m#&0, found in ,a. that slope $ 1 10$16&0 0$ - 6 '$ # 5 6 or #B $ ' & 6 c. (hat is the aggregate supply in this market* #Aggregate $ #B & #J $ ,' & 6. & ,% & '. $ 11 & !'. d. At what price will the aggregate supply 0e e1ual to 6! units* (hen the aggregate supply is e1ual to 6! units, how many units will Beatrice supply and how many units will Jaden supply* #Aggregate $ 11 & !' 6! $ 11 & !' 1%.% $ ' Beatrice supplies # $ 1%.% &6 $ !1.% units, Jaden supplies # $ 1%.% & % $ !0.% units 7. Consider the market for foot0alls. +he foot0all market is characteri8ed 0y the following demand and supply cur)es4 ' $ 10 & 1/!0#2 and ' $ 1/ 0#3 & %. a. 9i)en the e1uations a0o)e, do you think that these cur)es could represent the foot0all market* (hy or why not* +he demand cur)e does not seem reasona0le to characteri8e the demand for foot0alls, 0ecause the slope is positi)e, which means that there is an upward-sloping demand cur)e. +his would 0e really unusual4 a good with an upward sloping demand cur)e is called a 9iffen good ,we will not co)er this in class.. 0. :rom this point on, assume that the demand is gi)en 0y4 ' $ 10 5 1/!0#2. (hat are the e1uili0rium price and 1uantity in this market* 10 5 1/!0#2 $ 1/ 0#3 & % 6000 5 0# $ !0# & 000 000 $ %0# #; $ 60, '; $ 7 c. 3uppose now that suppliers are producing two times as many foot0alls at each price. (hat is the new e1uation for the market supply* 3upply twice as many4 first, you ha)e to sol)e the supply cur)e for 1uantity as a function of price. #3 $ 0' 5 1%0 #<ew $ !;#3 $ !, 0' 5 1%0. #<ew $ 60' 5 00

d. (hat is the e1uili0rium price and 1uantity gi)en the demand cur)e from part ,0. and the supply cur)e you found in part ,c.* :irst, sol)e the demand e1uation for #4 #2 $ !00 5 !0' !00 5 !0' $ 60' 5 00 %00 $ =0' ';$!%/6, #;$!00-!0;,!%/6.$7% e. >eturning to the original supply cur)e ,the one gi)en at the 0eginning of this pro0lem., suppose now that suppliers produce %0 less foot0alls at each price le)el. (hat is the new e1uation for the market supply* #3 $ 0' 5 1%0 #<ew $ #3 5 %0 $ , 0' 5 1%0. 5 %0 #<ew $ 0' 5 !00 f. (hat is the e1uili0rium price and 1uantity in the foot0all market gi)en the demand cur)e from part ,0. and the supply cur)e you found in part ,e.* !00 5 !0' $ 0' 5 !00 600 $ %0' '; $ =, #; $ 60