# Recitation #3 Week from 01/26/09 to 02/01/09

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1 EconS 101, Section 1 Professor Munoz Recitation #3 Week from 01/6/09 to 0/01/09 1. For each of the following situations in the table below, fill in the missing information: first, determine whether this situation causes a shift or a movement along the supply curve; then, if it causes a shift, determine whether the supply curve shifts to the right or to the left. Situation Specified market Movement or shift Market for exotic vacations Labor costs for air travel and cruise ships increase Prices of office equipment and phone service rise by 40% Price of bicycles increases Price of leather boots increases New technology for music playing device revealed Price of brand name designer clothing increases Stock market prices expected to fall next quarter Increase in number of coffee shop owners in the metro area Market for call center services Market for bicycles Market for beef products Market for musicplaying devices Market for brandname designer clothing Stock market today Market for coffee shops in the metro area Rightward or leftward shift in supply 1

2 EconS 101, Section 1 Professor Munoz. The competitive market for bicycles in Pedal City is described by the demand curve P=, 000 Q and the supply curve P= 6Q. There are twenty bicycle manufacturers in Pedal City and each of these manufacturers produces the same number of bicycles as every other manufacturer. a. Using the two equations for the demand and supply curves, fill in the following table describing the demand and supply schedules for bicycles in Pedal City. Price Quantity demanded Quantity supplied \$ ,00 1,440 1,680 1,90 b. Examine the table you created in (a) and provide a range of prices that you expect the equilibrium price to fall between. Why do you expect the equilibrium price to fall within this range? c. Sketch a graph of the demand and supply curves for bicycles in Pedal City. Price Market for Bicycles in Pedal City Quantity

3 EconS 101, Section 1 Professor Munoz d. If the current price for bicycles is \$40, how many bicycles will be supplied in Pedal City and how many bicycles will a single manufacturer produce? At a price of \$40, how many bicycles will be demanded? At a price of \$40, is the market in equilibrium? Explain you answer. e. If the current price for bicycles is \$480, how many bicycles will be supplied in Pedal City and how many bicycles will a single manufacturer produce? At a price of \$480, how many bicycles will be demanded? At a price of \$480, is the market in equilibrium? Explain your answer. f. If the current price for bicycles is \$1,680, how many bicycles will be supplied in Pedal City and how many bicycles will a single manufacturer produce? At a price of \$1,680, how many bicycles will be demanded? At a price of \$1,680, is the market in equilibrium? Explain your answer. g. Calculate the equilibrium price and the equilibrium quantity in the market for bicycles in Pedal City. 3

4 EconS 101 Principles of Microeconomics Recitation #3 January 6 th to February 1 st, 009. emand given by Q = 100 P Supply given by Q = 10P 0 1) Find the equilibrium and calculate CS and PS. We know that: (1) emand: Q = 100 P () Supply: Q = 10P 0 In order to obtain the equilibrium we have to equalize (1) and () 100 P = 10P 0-1P = -10 /x-1 1P = 10 P = 10 (3) Substituting (3) into (1) or (): Q = 100 x10 Q = 80 Moreover we know that: when Qd=0 Pd=50, and when Qs=0 Ps= 1

5 Graphically: 50 P A S CS 10 PS B C 80 Q The Consumer Surplus 1 is the area of the triangle ABC: (50 10) CS = = = 1600dls The Producer Surplus is the area of the triangle BC: (10 ) PS = = = 30dls 1 The marginal benefit from a good or service minus the price paid for it, summed over the quantity consumed The price of a good minus the marginal cost of producing it, summed over the quantity producer.

6 ) Find the price and quantity traded when the government imposes a price ceiling of 8. P 50 A S 10 8 B C Q When P=8 we have that the quantity demanded is: (Using the demand equation) emand: Q = 100 x8 = 84 Supply: Q = 10x8 0 = 60 Therefore the quantity trade is 60 and the price is 8 3) Find the shortage at this price. Therefore Shortage at this price is= (84 60)=4 3

7 4) Calculate CS and PS. id CS increase compared to case 1)? P 50 A CS WL S B C PS Q From the demand equation we can determine the price that the consumer would pay if the quantity produced is 60: emand: 60 = 100 P P = 0 (50 0) CS = + (0 8) 60 = = = 160dls (8 ) PS = = = 180dls CS increases in 0dls ( ) 5) We know this situation is not efficient, calculate how big the inefficiency 3 is. (0 8) (80 60) 1 0 WL = = = 10dls 3 When the professor is asking about inefficiency in this kind of exercises you must think in WL 4

8 PROBLEMS: Suppose the market for demand for the market of milk is given by Q=100-P and the supply is given by Q=P/ (quantity is given in thousand gallons of milk). a. Find the equilibrium price of a gallon of milk and the equilibrium quantity. Equalizing demand and supply we have: emand: Q=100-P Supply: Q=P/ 100-P = P/ /x 00-4P=P P=40 Substituting price into the demand (or Supply) we have: Q=100-x40 Q=0 When Qd=0 Pd=100/=50 and Qs=0 P=0 b. (6 points) Find the CS and PS. 5

9 P 50 CS S Q PS CS = (50 40) = = 100 PS = (40 0) 0 = 40 0 = 400 c. How will the equilibrium change if the government imposes a price ceiling of 0, this is what is the new price and quantity of milk? P 50 S Q 6

10 If P=0 then: Qd=100-x0=60 and Qs=0/=10 Moreover if the quantity that the firm is willing to produce is 10 then the price that it must charge 4 is: 10=100-P, P=45. d. Find the loss in efficiency due to this price ceiling. WL = (45 0) (0 10) = 5 10 = 15 e. (4 points) Find the CS after the price ceiling. CS = (50 45) 10 + (45 0) 10 = = 75 4 Remember: the price that firm must charge is obtained from the EMAN for the market of milk 7

11 MULTIPLE CHOICE QUESTIONS 1. The negative slope of the production possibilities frontier represents the idea a. that free lunches are possible. b. of tradeoffs, that in order to produce more of one good, you must produce less of another. c. of unemployment. d. of inefficient production.. To find the opportunity cost of producing one more unit of any product while on the production possibilities frontier requires a. setting the amounts of the two products equal to each other. b. setting the change in one product equal to the change in the other product. c. dividing the amount of the product forgone by the amount of the product gained. d. None of these describe how to find opportunity cost.. 3. A competitive market has no price ceiling nor floor, no external cost nor external benefit, and no taxes. If production of the good is less than the efficient quantity, then a. someone is willing to buy the good for more than the cost of producing it. b. market forces will increase the quantity to its efficient level. c. the marginal cost of another unit of the good exceeds its marginal benefit. d. Both answers (a) and (b) are correct. 8

12 4. Which of the following is necessary for allocative efficiency to be achieved? a. Marginal benefit must be maximized. b. Marginal cost must be minimized. c. Marginal benefit must equal marginal cost. d. The difference between marginal benefit and marginal cost must be maximized. 5. If John can produce 10 chairs or 0 lamps during a week while Mary can produce 1 chairs or lamps in the same time, who has the comparative advantage in producing each good? a. Mary in producing both goods b. John in producing both goods c. Mary in producing chairs, John in producing lamps d. John in producing chairs, Mary in producing lamps. 6. Which of the following will increase the quantity supplied of compact discs but NOT increase the supply of compact discs? a. a decrease in the price of a compact disc b. an increase in the price of a compact disc c. a decrease in the number of suppliers of compact discs d. an increase in the price of the resources used to produce compact discs 9

13 7. Assume that an association of young workers has lobbied Congress to require that all workers retire once they reach the age of fifty. What impact would this law have on the nation s production possibilities frontier? a. no impact at all b. The level of unemployment would decrease so the production possibilities frontier would shift outward. c. The nation would move to a new position on its production possibilities frontier but the frontier itself would not shift. d. The production possibilities frontier would shift inward. Price (dollars) Quantity demanded (units)

14 ANSWERS TO THE MULTIPLE CHOICE EXERCISES 1. B. C C 5. C 6. B 7. 11

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