answers to homework 3 fall 2014

7/25/2019 Answers to Homework 3 Fall 2014

1/12

Economics 101

Fall 2014

Answers to Homework #3

Due 10/30/14

Directions: The homework will be collected in a box before the lecture. Please place your name, TA name an

section num!er on top of the homework. Write legibly throughout the whole homework. Make sure you write yourname as it appears on your ID so that you can receive the correct grade. Please remember the section number for thesection "or wic you are re$istere,because you will need that number when you submit exams and homework.ate homework will not be accepted so make plans ahead of time to insure that your homework is submitted. !oodluck"

#our homework reflects you$ please make sure that you submit a neat% organi&ed% and legible set of answers"

'emember to show all your work. (lso remember that calculators are not permitted on the exam% so you should trythese manually.

%art &: E'cise Ta'

). *onsider the ice cream market in Madison. In +uly% the ice cream market demand and supply curves are given bythe following e,uations where - is the ,uantity to ice cream units and P is the price in dollars per unit of ice cream$

Demand$ - )/000 1 )0P2upply$ - 3000 4 30P

a5 6ind the e,uilibrium price and ,uantity of ice cream in +uly.

In e,uilibrium% we know that the ,uantity demanded ,uantity supplied. Thus% by solving the two e,uations% wehave the e,uilibrium price 7/00 per unit of ice cream and the e,uilibrium ,uantity )0%000 units of ice cream.

b5 *alculate the price elasticity of demand and supply at the e,uilibrium price in +uly. 8se the point elasticity

formula to compute these two values of these elasticities.(nswer$The point elasticity of demand formula is9lasticity of Demand :;)


2/12

c5 6ind the e,uilibrium price and e,uilibrium ,uantity in Actober% and calculate the price elasticity of demand andsupply at this new e,uilibrium price. 8se the point elasticity formula in calculating these values.

(nswer$Ey solving the two e,uations% we obtain the e,uilibrium price of 7)00 per unit of ice cream and ,uantity of /%000units.

To find the price elasticity of demand using the point elasticity formula$Price elasticity of demand >:;)5


3/12

- in +uly LL00 units

C. In Actober the relevant demand e,uation is - B000 1 C0P and the relevant supply e,uation is - )B00 430P :see explanation in the answer to K) of part :d55. 2olving for e,uilibrium with these two e,uations weget$B000 1 C0P )B00 4 30P

F0P FC00P in Actober 7)0 per unit of ice cream- B000 1 C0:)05- in Actober C@30 units

e5 *alculate the consumers tax burden ratio in +uly and in Actober given your answers in :d5 and then analy&e theanswers you get for these two calculations by filling out the table provided and then writing a verbal explanation ofthe difference you find with regard to the two consumers tax burden ratios. #our explanation should include theimpact of demand and supply elasticities on these calculations. The tax burden ratio can be found by using thefollowing e,uation$

*onsumers tax burden ratio :consumers tax incidence5


4/12

%art &&: &nternational Trae

3. 2uppose the domestic demand in the 8nited 2tates for glow;in;the;dark golf balls can be represented by thefollowing domestic demand curve and domestic supply curve e,uations where P is the price per glow;in;the;dark

golf balls and - is the ,uantity of glow;in;the;dark golf ballsJ

Domestic Demand *urve$ - /0 1 FP for 0 O P O @ - 0 for @ O PDomestic 2upply *urve$ - )0P 1 30 for 3 O P - 0 for P O 3

a5 *alculate the e,uilibrium price% ,uantity% consumer surplus and producer surplus for the domestic market forglow;in;the;dark golf balls when the 8nited 2tates is in autarky :i.e. the market is closed to trade5. Illustrate youranswer graphically.

To find the e,uilibrium price and ,uantity set the domestic supply e,uation e,ual to the domestic demand e,uationand then solve. PQ 7/ per flow;in;the;dark golf ball% -Q 30 glow;in;the;dark golf balls. *onsumer surplus is thearea of the triangle above P 7/and below the demand curve. Thus *onsumer 2urplus :)


5/12

The new price in the domestic market :the 82 market5 will be the world price. Domestically supplied golf balls willbe - )0Q3 1 30 0 golf balls. Domestically consumed golf balls will be - /0 1 FQ3 C0 golf balls. Imports =umber of golf balls domestically demanded 1 number of golf balls domestically supplied C0 golf balls 1 0 golfballs or C0 golf balls will be imported. *onsumer surplus is the area above the price consumers pay for golf balls :73per golf ball5 and below the demand curve$ thus *2 :)


6/12

; 73 per golf ball5:)0 golf balls 1 0 golf balls5 4 :)


7/12

e5 2uppose the 82 government decides to sell a single license to an importer granting the right to import and sell allthe imported glow;in;dark golf balls up to the import ,uota of )F golf balls. (t most how much would a seller bewilling to pay in order to purchase the license to sell glow;in;dark golf ballsH 9xplain your answer.

(n importer would be willing to pay no more than the revenue gained from selling the imported golf balls% that is%7)F.

C. #ou are not re,uired to illustrate your answers to this ,uestion% but it is never a bad idea. 2uppose% circa /thcentury E*9% the domestic demand in Macedon% for spears :specifically%sarisas)can be expressed by

Domestic Demand$ - )0000 1 30P for 0 O P O F00 0 for F00 O PDomestic 2upply$ - 3FP 1 )3F0 for F0 O P 0 for P O F0

where - is the number of spears% and P is the price of a spears in dollars :imagine for the moment that /th centuryE*9 Macedon used dollars as a currency5.

a5 *alculate the e,uilibrium price% ,uantity% consumer surplus and producer surplus for the domestic market for

spears when Macedon is a closed economy :an autarky5.

To find the e,uilibrium in the closed economy set domestic supply e,ual to domestic demand and solve. PQ 73F0per spear% -Q F000 spears. *onsumer surplus is the area under the demand curve and above the e,uilibrium price%or P 73F0. Thus *2 :)


8/12

3F5:=ew Ralue 1 Initial Ralue5:3F 1305


9/12

Price 9lasticity of Demand for *heese >:)C0 1 )005


10/12

#ear *ost of Market Easket

(nswer$*ost of Market Easket in #ear n :Price of 2hirt in #ear n5:F shirts5 4 :Price of loaf of bread in #ear n5:FF loaves ofbread5 4 :Price of Diamond in #ear n5:) diamond5

#ear *ost of Market Easket300L 7F0030)0 7F03.F030)) 7FC/.F030)3 7FB030)C [email protected]

b5 8sing 300L as the base year% calculate the *PI for each year using a )00 point scale.

*PI for year n :Price of basket in year n < Price of basket in base year5Q)00

ear %& wit !ase year 200

300L )00

30)0 )00.F

30)) )0.L

30)3 ))/

30)C ))B.F

c5 8sing the *PI calculated in part :b5% calculate the annual rate of inflation starting with the annual rate from 300Lto 30)0.

N Inflation :*PI this year 1 *PI last year5


11/12

an Inflation Index. Thus%'eal Price :=ominal Price


12/12

d5 Write a paragraph about what you learned by doing this reading and this research.

e5 Was this a helpful exercise for you;that is% did you find it interesting% revealing% and helpfulH 9xplain your answerbeyond a simple #esJ% =oJ% or WhateverJ.

=ote$ it would be really surprising if everyone in the class research an occupation starting with the letter (J itwould be really strange if the same occupation kept coming up on every students paperZso% you can work with afriend% but you better pick a separate% and different% occupation to research"

=ote$ if you found this interesting and fun% let Prof. Yelly know$ she would like to use all @00 of you as a kind offocus groupJ in what she hopes is a good experience for people who are thinking about their career paths"

(nswer$

There is no one answer to this ,uestion. This ,uestion is meant to introduce you to some existent data that has beencollected and that is potentially helpful to people who are in the midst of planning their career paths.

)3

answers to homework 3 fall 2014

Documents