Extra practice for chapter 1 - with answers PDF

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Extra practice for chapter 1 - with answers...

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Exercises 1. Explain whether each of the following events represents (i) a shift of the demand curve or (ii) a movement along the demand curve. a. A store owner finds that customers are willing to pay more for umbrellas on rainy days. b. When XYZ Telecom, a long-distance telephone service provider, offered reduced rates on weekends, its volume of weekend calling increased sharply. c. A sharp rise in the price of gasoline leads many commuters to join carpools in order to reduce their gasoline purchases.

Exercises 2. Explain whether each of the following events represents (i) a shift of the supply curve or (ii) a movement along the supply curve. a. More home owners put their houses up for sale during a real estate boom that causes house prices to rise. b. Many strawberry farmers open temporary roadside stands during harvest season, even though prices are usually low at that time. c. Immediately after the school year begins, fast-food chains must raise wages, which represent the price of labor, to attract workers. d. Many construction workers temporarily move to areas that have suffered hurricane damage, lured by higher wages. e. Since new technologies have made it possible to build larger cruise ships (which are cheaper to run per passenger), Caribbean cruise lines offer more cabins, at lower prices, than before.

Exercises 3. When a new, faster computer chip is introduced, demand for computers using the older, slower chips decreases. Simultaneously, computer makers increase their production of computers containing the old chips in order to clear out their stocks of old chips. a. Draw two diagrams of the market for computers containing the old chips: - One in which the equilibrium quantity falls in response to these events - And one in which the equilibrium quantity rises. b. What happens to the equilibrium price in each diagram?

Exercises 4. In Rolling Stone magazine, several fans and rock stars, including Pearl Jam, were bemoaning the high price of concert tickets. One superstar argued, “It just isn’t worth $75 to see me play. No one should have to pay that much to go to a concert.” Assume this star sold out arenas around the country at an average ticket price of $75. a. How would you evaluate the argument that ticket prices are too high? b. Suppose that due to this star’s protests, ticket prices were lowered to $50. In what sense is this price too low? Draw a diagram using supply and demand curves to support your argument. c. Suppose Pearl Jam really wanted to bring down ticket prices. Since the band controls the supply of its services, what do you recommend they do? Explain using a supply and demand diagram.

Exercises 5. After economics class one day, your friend suggests that taxing food would be a good way to raise tax revenue because the demand for food is quite inelastic. a. In what sense is taxing food a “good” way to raise tax revenue? b. In what sense is it not a “good” way to raise tax revenue?

Answers 1. a. Shift: rainy days cause higher demand for umbrellas, nothing to do with price of umbrellas. b. Movement: lower phone call prices, higher quantity demanded of phone calls. c. Movement: higher gasoline price, lower quantity demanded of gasoline.

Answers 2. a. Movement: higher house prices induce people to sell houses. b. Shift: it’s harvest season, there’re more strawberries to sell. c. Movement: higher wage attracts workers. d. Movement: higher wages attract workers. e. Shift: technology increases the supply of cabins.

Answers 3. a. If the demand (for computers with older chips) shifts left more than the supply shifts right, the resulting equilibrium quantity falls; and vice versa. 𝑃

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𝑄 Fall in equilibrium quantity b. Price falls in either case.

𝑄 Rise in equilibrium quantity

Answers 4. a. Saying that $75 is too high doesn’t really have much economic basis. $75 is the market price, the value that the market puts on the rockstar’s concerts. It’s at 75 because there’re concert-goers who value the concerts at and above 75$.

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b. $50 is too low in the sense that it causes a shortage: QD > QS. There’re concert-goers who are willing to pay more than $50 for tickets but can’t get them.

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𝐷 𝑄 c. The market price for concerts can be brought lower by expanding the supply: more seats and/or more concerts. Doing this shifts the supply curve to the right, naturally decreasing the concert ticket prices.

5. a. Because the demand for food is inelastic, a tax on food is a good way to raise revenue because it does not lead to much of a decline in quantity; thus taxing food is less inefficient (relatively small DWL due to small decline in quantity) than taxing other things. It’s also ‘good’ in terms of collecting government revenues from the tax, as the decline in market quantity is relatively small. b. But it is not a good way to raise revenue from an equity point of view, because poorer people spend a higher proportion of their income on food. The tax would hit them harder than it would hit wealthier people. Also, taxing people for food consumption, especially if they have to bear a significant part of the tax burden because of inelastic demand, is not exactly a very moral thing to do, socially. (Be sure to draw a diagram showing the demand for food being highly inelastic to illustrate the points made here.)...