Problem Set 2
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.
graphical analysis, write a short explanation explaining your analysis. Here’s an example of the graphical analysis:
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.
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.
Problem 2 –
Egypt's Gaza Crackdown Hammers Economy
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.
Problem 3 –
Dutch Economy Faces Stagnation
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
Problem 4 -
Farmers Opt to Dump Supplies as Weather Forecast Dashes Hopes for Price Jump.
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
Problem 5 -
China lures the world’s pilots.
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.
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
Problem 7 – Rising
prices cause airlines to adjust flight schedules. Show the effect on airline prices and
Problem 8 –
Federal Aviation Administration increases minimum pilot qualifications.
airlines are concerned that higher flight hour requirements for new pilots will
increase costs. Show the effect on
passenger ticket prices and quantity demanded.
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.
Problem 10 -
More Doctors Steer Clear of Medicare
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
Problem 11 – Wage-Rise
Report Sees Fewer Jobs, Less Poverty
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.
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.
Problem 13 - Price
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
Problem 14 –
Supply and demand
demand and supply are given by Qd = 50 – P and Qs = 1/2P
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.
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 function for product X is given by Qsx = -50 +
0.5Px – 5Pz.
much of product X is supplied when Px = $500 and Pz =
much of product X is supplied when Px = $250 and Pz = $10?