MBAA523 Problem Set 2

MBAA 523
Problem Set 2

The popular and financial press regularly report on economic events, but the description is usually quite different from the theoretical model provided in a microeconomics textbook. This problem set provides an opportunity to practice supply and demand analysis using excerpts from articles published in the Wall Street Journal.

For each of the following 12 economic circumstances, show the shift of supply and/or demand curves; use an arrow to show the shift in the curves, the change in price and the quantity demanded. To insert lines and arrows in MS Word, click on “Insert” on the upper menu bar. Next, click the drop down menu under “Shapes.” Select the shape you’d wish to insert, then use the mouse to insert the line or arrow into the graph.

Below the graphical analysis, write a short explanation explaining your analysis. Here’s an example of the graphical analysis:

This example shows an increase in the demand curve, perhaps as a result of an increase in income. The shift in the demand curve leads to a higher price and quantity demanded. For each problem, explain why the curve(s) shifted.

Problem 1 - Conflict fears drive up crude prices.

A military conflict forces the shut-down of major crude oil pipeline. World oil prices soared to an 18 month high. Show the effects in the crude oil market.

Explanation:

Problem 2 – Egypt's Gaza Crackdown Hammers Economy

An aggressive crackdown by Egypt's interim government on smuggling tunnels between Egypt and the Gaza Strip is crushing the Palestinian enclave's economy, sparking concerns it could fuel a militant backlash. To get around the blockade, Gazans smuggle goods, and the tunnels' closure has sent prices soaring in the past three weeks. Many Gazans now buy the Israel-shipped fuel for seven shekels ($2) a liter -- more than twice as much as that smuggled from Egypt. The cost of cement, another major smuggled item, has reached $1,500 a ton from $1,000, said Ahmad Abdul-Rahman, a merchant. Show the effects in the Gaza market for goods and services.

Explanation:

Problem 3 – Dutch Economy Faces Stagnation

The Albert Cuyp market here, famous for its offerings of cheap clothing and exotic foods, is one of the busiest in the Netherlands. But while it still attracts plenty of shoppers, customers are increasingly wary of spending their money there, said Nicolas Steur, a 50-year-old fishmonger. Revenue at his stall, where he sells fresh haddock, raw herring and other seafood, has fallen by 20% compared with four years ago. "We still have about the same amount of customers," Mr. Steur said. "But they spend less money. People are cutting down on their expenses." Show the effects in the Albert Cuyp market.

Explanation:

Problem 4 - Farmers Opt to Dump Supplies as Weather Forecast Dashes Hopes for Price Jump.

U.S. soybean supplies have been tight since last year's severe drought cut production. Many farmers held some of last year's soybeans in storage, waiting to see if they could sell them at a higher price this summer, when supplies are tightest before the next harvest. This week, many of those farmers decided it was time to sell. Weather conditions for this year's U.S. crop are mostly favorable, which means a large harvest this fall could push prices lower. Historically high cash prices for soybeans early this week also lured farmers to start selling. The result has been a collapse in cash markets over the past two days. Show the effects of the changes in the last two days.

Explanation:

Problem 5 - China lures the world’s pilots.

The rising middle class in China means millions more people are taking to the skies. There’s a tsunami of retirement which is now under way in the airline industry. Chinese airlines have raised their pay offers to foreign pilots by up to 30% in the past 18 months. Show the effects in the global pilot labor market.

Explanation:

Problem 6 - Companies unplug from grid, delivering a jolt to utilities.

On a hill overlooking the Susquehanna River, two big wind turbines crank out electricity for Kroger Co.’s Turkey Hill Dairy in rural Lancaster County, Pa., allowing it to save 25% on its power bill for the past two years. Show the effect on the public electric utility company.

Explanation:

Problem 7 – Rising oil prices.

Rising oil prices cause airlines to adjust flight schedules. Show the effect on airline prices and quantity demanded.

Explanation:

Problem 8 – Federal Aviation Administration increases minimum pilot qualifications.

Regional airlines are concerned that higher flight hour requirements for new pilots will increase costs. Show the effect on passenger ticket prices and quantity demanded.

Explanation:

Problem 9: Europe levies new tax on airline tickets.

A new tax on airline tickets has raised concerns the European airline traffic will fall. Show the effect on airline ticket prices and quantity demanded.

Explanation:

Problem 10 - More Doctors Steer Clear of Medicare

Fewer American doctors are treating patients enrolled in the Medicare health program for seniors, reflecting frustration with its payment rates and pushback against mounting rules, according to health experts -- just as millions of Americans are poised to gain access to such coverage under the new health law next year. Some Americans may have difficulty finding doctors who will take their new benefits or face long waits for appointments with those who do. Some experts attribute the rise in defections to Medicare payment rates that haven't kept pace with inflation and the threat of more cuts to come. Under a budgetary formula enacted by Congress in 1997, physicians could see Medicare reimbursements slashed by 25% in 2014 unless Congress intervenes to delay the cuts, which it has done several times. Show the effects on Medicare patients. Hint: Note that some patients may have trouble finding doctors.

Explanation:

Problem 11 – Wage-Rise Report Sees Fewer Jobs, Less Poverty

President Barack Obama's quest to raise the federal minimum wage to $10.10 an hour would eliminate about 500,000 jobs by 2016 but increase pay for millions of Americans and lift nearly a million out of poverty, a Congressional Budget Office report found. Analyze the labor market with a minimum wage of $10.10 per hour.

Explanation:

Problem 12 – Rent Control

Many of the proponents of price ceilings argue that government-mandated maximum prices, such as rent controls in New York City, simply reduce producers’ profits and do not affect the quantity supplied of a good on the market. If the relevant supply and demand curves are as pictured below, show whether this belief is correct.

Explanation:

Problem 13 - Price Controls

Rent controls limit the rent to Pc. Show the Lost Social Welfare (known as Deadweight loss). You can do so by inserting the curve shape which can be drawn around the deadweight loss.

S

D

Q

P

Pc

Explanation:

Problem 14 – Supply and demand

Suppose demand and supply are given by Q^d = 50 – P and Q^s = 1/2P – 10.

A. What the equilibrium quantity and price in this market?

B. Determine the quantity demanded, the quantity supplied, and the magnitude of the surplus if the price floor is $42 is imposed on this market.

C. Determine the quantity demanded, the quantity supplied, and the magnitude of the shortage if a price ceiling of $30 is imposed on this market.

Problem 15 – Supply

Suppose the supply function for product X is given by Q^s_x = -50 + 0.5P_x – 5P_z.

A. How much of product X is supplied when P_x = $500 and P_z = $30?

B. How much of product X is supplied when P_x = $250 and P_z = $10?