Langara Microeconomics PDF

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Langara Microeconomics 1150 2021 Assignment #2 Due May 23 Name ________________________

Student Number ____________

1. In April 2014, the money price of a litre of milk was $2.01 and the money price of a litre of gasoline was $3.63. Calculate the relative price of a litre of gasoline in terms of milk.

The ratio of one price to another is called a relative price. The relative price of a litre of gasoline in terms of milk is equal to the price of a litre of gasoline divided by the price of a litre of milk, which is $3.63 per litre of gasoline ÷ $2.01 per carton of milk = 1.81 litres of milk per litre of gasoline. 2. The money price of a textbook is $90 and the money price of the Wii game Super Mario Galaxy is $45. a. What is the opportunity cost of a textbook in terms of the Wii game? The price of a textbook is $90 and the price of a Wii game is $45. When a consumer purchases a textbook, he gives up buying 2 Wii games. So the opportunity cost of a textbook in terms of Wii games is 2 Wii games per textbook.

b. What is the relative price of the Wii game in terms of textbooks? The relative price of a Wii game in terms of textbooks equals ($45 per Wii)/($90 per textbook), which is 1/2 of a textbook per Wii game.

3. Do the following Supply and Demand Analysis. a) Soft drinks and milk are substitutes for consumers. Draw a graph showing the effect of an increase in the price of milk on the demand for soft drinks. Demand curve for soft drinks would shift right. Price and quantity would increase. b) Soft drinks are a normal good. Draw a graph showing the effect of an increase in income on the demand for soft drinks. Demand curve would shift right. Price and quantity would increase. c) Last year a very severe ice storm hit the north counties of New York state, and the states of Vermont and Maine. Electric poles were down and no one had power for days. It was reported that the price of kerosene heaters skyrocketed and the number purchased increased during this time. Using a supply and demand diagram, show the impact of the ice storm on the market for kerosene heaters. Demand curve would shift right. Price and quantity would increase. d) Consumers can use either natural gas or heating oil to warm their houses. Suppose the price of natural gas increases. Use a demand and supply diagram to show the impact of the higher price of natural gas on the market for home heating oil.

Demand curve would shift right. Price and quantity would increase.

4. The market for wine in Okanagan wine is initially in equilibrium represented by the intersection of the supply and demand curves. Beer is a close substitute for wine; cheese and wine are complements. Use demand and supply graphs to analyze the effect of each of the following (separate) events on the equilibrium price and quantity in the Okanagan wine market. Draw a separate graph for each event (5). a) The income of consumers falls (wine is a normal good). Demand curve would shift to the left; Price decreases; Quantity decreases b) Weather problems destroy part of the grape crop for making wine. Supply curve would shift to the left; Price increases; Quantity decreases c) A new invention reduces the cost of producing cheese. Demand curve would shift to the right; Price increases; Quantity increases d) A new fermentation technique is invented that reduces the cost of producing wine. Supply curve would shift to the right; Price decreases; Quantity increases e) The cost of producing both wine and beer increase dramatically. Supply curve shift left; and the demand curve shift right in the wine market. Answer the following questions. Use the following data to work Problems 5 and 6. The table sets out the demand and supply schedules for college meals. 5. a. What is the market equilibrium? The equilibrium price of a meal is $6 and the equilibrium quantity is 2,500 meals a week.

b. If the college put a price ceiling on meals at $7 a meal, what is the price students pay for a meal? How many meals do they buy?

Price (dollars per meal) 4 5 6 7 8

Quantity Quantity demanded supplied (meals per week) 3,000 1,500 2,750 2,000 2,500 2,500 2,250 3,000 2,000 3,500

The price ceiling is above the equilibrium price, so it is ineffective. The price of a meal remains at $6 a meal and students buy 2,500 meals a week.

6.

If the college put a price ceiling on meals at $4 a meal, what is the quantity bought, the shortage of meals, and the maximum price that someone is willing to pay for the last meal available? The price ceiling is below the equilibrium price, so it is effective. The quantity of meals purchased is the quantity supplied at the price of $4 a meal, which is 1,500 meals a week. At this price, the quantity of meals demanded is 3,000, so the shortage of meals is 3,000 meals demanded minus 1,500 meals supplied, which is 1,500 meals. The demand schedule shows that when the price rises by $1 a meal, the quantity demanded decreases by 250 meals a

week. So when the quantity of meals demanded is 1,500 a week, someone is willing to pay $10 for the last meal....