Problem Set 2
The popular 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 âInsertâ on the upper menu bar. Next, click the drop down menu under
âShapes.â Select the shape youâd wish to
insert, then use the mouse to insert the line or arrow into the graph.
Below the graphical
analysis, write a short explanation explaining your analysis. Hereâs an example of the graphical analysis:
This example 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.
A military 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 â Egypt’s Gaza
Crackdown Hammers Economy
An aggressive 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
Problem 3 â Dutch
Economy Faces Stagnation
The Albert 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.
U.S. soybean 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 worldâs pilots.
The rising middle class
in China means millions more people are taking to the skies. Thereâs 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.âs 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 company.
Problem 7 â Rising oil
Rising oil prices cause
airlines to adjust flight schedules.
Show the effect on airline prices and quantity demanded.
Problem 8 â Federal
Aviation Administration increases minimum pilot qualifications.
Regional 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
Problem 10 – More
Doctors Steer Clear of Medicare
Fewer 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 â 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 â 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 producersâ 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
Rent controls 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 deadweight
Problem 14 â Supply and
Suppose demand and
supply are given by Qd = 50 â P and Qs = 1/2P â 10.
the equilibrium quantity and price in this market?
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 â Supply
Suppose the supply
function for product X is given by Qsx = -50 + 0.5Px
much of product X is supplied when Px = $500 and Pz =
much of product X is supplied when Px = $250 and Pz = $10?
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