Question.3123 - 3. What effect will each of the following have on the demand for small automobiles such as the Mini-Cooper and Smart car? a. Small automobiles become more fashionable. b. The price of large automobiles rises (with the price of small autos remaining the same). c. Income declines and small autos are an inferior good. d. Consumers anticipate that the price of small autos will greatly come down in the near future. e. The price of gasoline substantially drops. 6. What effect will each of the following have on the supply of auto tires? a. A technological advance in the methods of producing tires. b. A decline in the number of firms in the tire industry. c. An increase in the prices of rubber used in the production of tires. d. The expectation that the equilibrium price of auto tires will be lower in the future than currently. e. A decline in the price of the large tires used for semi trucks and earth-hauling rigs (with no change in the price of auto tires). f. The levying of a per-unit tax on each auto tire sold. g. The granting of a 50-cent-per-unit subsidy for each auto tire produced. 8. In 2001 an outbreak of hoof-and-mouth disease in Europe led to the burning of millions of cattle carcasses. What impact do you think this had on the supply of cattle hides, hide prices, the supply of leather goods, and the price of leather goods? 11. Suppose the total demand for wheat and the total supply of wheat per month in the Kansas City grain market are as shown in the table below. Suppose that the government establishes a price ceiling of $3.70 for wheat. What might prompt the government to establish this price ceiling? Explain carefully the main effects. Demonstrate your answer graphically. Next, suppose that the government establishes a price floor of $4.60 for wheat. What will be the main effects of this price floor? Demonstrate your answer graphically. Chapter 3 Problems 3. Refer to the expanded table below from question 11. What is the equilibrium price? At what price is there neither a shortage nor a surplus? Fill in the surplus-shortage column and use it to confirm your answers. b. Graph the demand for wheat and the supply of wheat. Be sure to label the axes of your graph correctly. Label equilibrium price P and equilibrium quantity Q. c. How big is the surplus or shortage at $3.40? At $4.90? How big a surplus or shortage results if the price is 60 cents higher than the equilibrium price? 30 cents lower than the equilibrium price? Thousands of bushels Price Per Thousands Surplus (+) Demanded Bushel of bushels supplied or Shortage (-) 85 $3.40 72 80 3.70 73 75 4.00 75 70 4.30 77 65 4.60 79 60 4.90 81 5. Use two market diagrams to explain how an increase in state subsidies to public colleges might affect tuition and enrollments in both public and private colleges. Chapter 5 Questions 1. Explain the two causes of market failures. Given their definitions, could a market be affected by both types of market failures simultaneously? 4. What are the two characteristics of public goods? Explain the significance of each for public provision as opposed to private provision. What is the free-rider problem as it relates to public goods? Is U.S. border patrol a public good or a private good? Why? How about satellite TV? Explain. 5. Draw a production possibilities curve with public goods on the vertical axis and private goods on the horizontal axis. Assuming the economy is initially operating on the curve, indicate how the production of public goods might be increased. How might the output of public goods be increased if the economy is initially operating at a point inside the curve? 6. Use the distinction between the characteristics of private and public goods to determine whether the following should be produced through the market system or provided by government: (a) French fries, (b) airport screening, (c) court systems, (d) mail delivery, and (e) medical care. State why you answered as you did in each case.
Answer Below:
3. What effect will each of the following have on the demand for small automobiles such as the Mini- Cooper and Smart car? a. Small automobiles become more fashionable. Ans) The demand for small automobiles will rise if the small automobiles become more fashionable. b. The price of large automobiles rises (with the price of small autos remaining the same). Ans) When the price of large automobiles rises its demand will fall thereby increasing the demand for small automobiles. c. Income declines and small autos are an inferior good. Ans) As income declines the demand for the inferior goods increases, hence, the demand for small automobiles will also increase with the decline in the income. d. Consumers anticipate that the price of small autos will greatly come down in the near future. Ans) When consumers anticipate that the price of small autos will greatly come down in the near future then the demand for small automobile will decrease as the consumers will hold their purchase till the price decline. e. The price of gasoline substantially drops. Ans) The demand of small automobiles will increase given the substantial decline in the price of gasoline. 6. What effect will each of the following have on the supply of auto tires? a. A technological advance in the methods of producing tires. Ans) A technological advance in the method of production of auto tires will boost its supply. b. A decline in the number of firms in the tire industry. Ans) A decline in the number of firms in the tire industry will reduce tire production and hence cause decline in the supply of auto tires. c. An increase in the prices of rubber used in the production of tires. Ans) An increase in the prices of rubber used in the production of tires implies an increase in the production cost, hence the supply of auto tires will decrease with such increase in raw material cost. d. The expectation that the equilibrium price of auto tires will be lower in the future than currently. Ans) Supply and price of a commodity are positively correlated; hence if the future equilibrium price is expected to be lower than its current level then the supply of tires will also decline. e. A decline in the price of the large tires used for semi trucks and earth-hauling rigs (with no change in the price of auto tires). Ans) A decline in the price of large tires used for semi trucks/ earth-hailing rigs will not have any effect on the supply of tires as both the products are neither related nor a substitute of each other. f. The levying of a per-unit tax on each auto tire sold. Ans) The additional per-unit tax on the sale of auto tire will reduce its supply. g. The granting of a 50-cent-per-unit subsidy for each auto tire produced. Ans) A 50-cent-per-unit subsidy for each auto tire produced reduces the cost of production, hence this will increase the supply of tires. 8. In 2001 an outbreak of hoof-and-mouth disease in Europe led to the burning of millions of cattle carcasses. What impact do you think this had on the supply of cattle hides, hide prices, the supply of leather goods, and the price of leather goods? Ans) In 2001 an outbreak of hoof-and-mouth disease in Europe led to the burning of millions of cattle carcasses. Thus the number of cattle has decreased which implies that the demand for cattle hides will decrease. This will consequently reduce the hide prices to get demand-price equilibrium (as the price is greater than demand). Also, decrease in the number of cattle will reduce the production of leather goods (due to scarcity of the raw material). This scarcity of cattle will increase the cost of production and hence, reduce the supply of leather goods. The lower supply of leather goods will increase the price of leather goods. 11. Suppose the total demand for wheat and the total supply of wheat per month in the Kansas City grain market are as shown in the table below. Suppose that the government establishes a price ceiling of $3.70 for wheat. What might prompt the government to establish this price ceiling? Ans) The government might have established the price ceiling at $3.70 so that people could afford to purchase this necessity product (wheat). Explain carefully the main effects. Ans) The government has established the price ceiling at price which is lower than the market equilibrium price which is $4.00 in our problem. Such a situation will cause a supply shortage as the producers of wheat won’t be willing to supply this product at this lower price. Consequently, quantity demanded will not meet the quantity supplied. Such a situation might also create a black market for wheat to cover up wheat scarcity. Demonstrate your answer graphically. 3.43.744.34.64.9 50 55 60 65 70 75 80 85 90 DemandSupply Next, suppose that the government establishes a price floor of $4.60 for wheat. What will be the main effects of this price floor? Ans) At the price of $4.60, quantity demanded is 65 thousand barrels while the quantity supplied is 79 thousand barrels. A price floor means the minimum prices set by the government on certain commodities as a price control measure. In our problem the price floor set by the government is higher than the market equilibrium price of $4.00 hence; this situation will create a surplus supply of wheat which might in turn harm the producers as they will produce wheat at the higher prices while there won’t be any purchase of the entire of their stock at that price. Chapter 3 Problems 3. Refer to the expanded table below from question 11. What is the equilibrium price? At what price is there neither a shortage nor a surplus? Ans) The equilibrium price is the price at which the quantity demanded of a commodity equals the quantity supplied of that commodity. In a free market ( a market without any regulations or government interference), the equilibrium price is said to the price at which the producers are willing to sell all of their produce. In our problem, equilibrium price for wheat is $4.00 as at this price the quantity of wheat demanded (75,000 bushels) equals the quantity of wheat supplied (75,000 bushels). Thousands of bushels Price Per Thousands Surplus (+) Demanded Bushel of bushels supplied or Shortage (-) 85 $3.40 72 -13 80 3.70 73 -7 75 4.00 75 0 70 4.30 77 +7 65 4.60 79 +14 60 4.90 81 +21 b. Graph the demand for wheat and the supply of wheat. Be sure to label the axes of your graph correctly. Label equilibrium price P and equilibrium quantity Q. 3.43.744.34.64.9 50 55 60 65 70 75 80 85 90 DemandSupply c. How big is the surplus or shortage at $3.40? At $4.90? How big a surplus or shortage results if the price is 60 cents higher than the equilibrium price? 30 cents lower than the equilibrium price? Ans) At $3.40 there is shortage of 13,000 bushels of wheat. At $4.90 there is surplus of 21,000 bushels of wheat. The current equilibrium price is $4.00 and if the price becomes 60 cents higher i.e. $4.60, there will be surplus of 14,000 bushels of wheat and if the price becomes 30 cents lower than the equilibrium price i.e. $3.70, then there will be shortage of 7,000 bushels. 5. Use two market diagrams to explain how an increase in state subsidies to public colleges might affect tuition and enrolments in both public and private colleges. Ans) State subsidies are given to public colleges to help the colleges keep low tuition fees and thereby increase the number of enrolments. Hence, and increase in the state subsidies to public colleges will increase the enrolment to public colleges. This increased enrolment in public colleges will in turn adversely affect enrolment in private colleges. 012345678 0 0.5 1 1.5 2 2.5 Enrolment in Public College Enrolment in public college 0123456 0 0.5 1 1.5 2 2.5 Enrolment in Private College Enrolment in Private College Chapter 5 Questions 1. Explain the two causes of market failures. Given their definitions, could a market be affected by both types of market failures simultaneously? Market failure refers to a situation where there does not exist fair and efficient allocation of resources in free market. The two main causes of market failure are: Monopolised market: It is a situation where there are few numbers of producers who have market control and which many times results in price and commodity discrimination and thereby not allowing the optimal utilisation of resources. In such markets as the producers have more power hence, there is an interfered market movement. Negative Externalities: Externality is a scenario where the effect of the action of one party is borne by the third party who had been uninvolved in the transaction. E.g.- water pollution caused by the chemical factories pollutes the nearby lakes and ponds. The involved markets in this transaction are the producer of the chemical products and the consumers of the market products. But the habitants of the nearby lakes and ponds have to suffer from the pollutants released in the lakes while they had never been an involved party. Given the explanation of the causes of market failure, it can be said that the two causes can occur simultaneously. 4. What are the two characteristics of public goods? Explain the significance of each for public provision as opposed to private provision. What is the free- rider problem as it relates to public goods? Is U.S. border patrol a public good or a private good? Why? How about satellite TV? Explain. The two main characteristics of public goods are: a) It is non-rivalrous- The consumption of the public good by an individual does not affect the market for that good. b) It is non-excludable- The additional cost of an additional consumer of that good will be nil, that is individuals cannot be excluded from the market. A public good is one which cannot be excluded from use by all and also the consumption of which is not affected by action of an individual. A private good is one whose consumption is excludable and its market might get impacted by the action of individuals. In relation to the public goods, if the contribution of the consumers of the good is very less, it increases the cost of the supplier which could exceed the benefit of supplier. In such a situation the supplier will incur loss and will exit the supply market resulting in market failure. This is known as free-rider problem. U.S. border patrol is a public good as patrolling of the border is a non excludable act on part of the US Government and also the price paid for this is non recognisable for any individual aence, they cannot affect the patrolling. Satellite TV is also a private good as there is a fixed quantity of satellite TVs manufactured also the use of the same can be excluded as per the requirement and desire of the consumers. 5. Draw a production possibilities curve with public goods on the vertical axis and private goods on the horizontal axis. Assuming the economy is initially operating on the curve, indicate how the production of public goods might be increased. How might the output of public goods be increased if the economy is initially operating at a point inside the curve? Ans) The production possibility curve is as shown below: If the economy is operating on the curve, it implies that the economy has achieved optimum level of operation and to produce more of public goods it will have to sacrifice that much amount of private goods i.e. if it is operating at point C it will have to move to point B. If the economy is operating at a point inside the curve i.e. point A in our diagram, it implies that there are unutilised resources which if properly used will generate more public goods without sacrificing on the private goods. Use the distinction between the characteristics of private and public goods to determine whether the following should be produced through the market system or provided by government: (a) French fries, (b) airport screening, (c) court systems, (d) mail delivery, and (e) medical care. State why you answered as you did in each case. a) French fries is a private good as its use can be excluded and should be produced through the market system. b) Airport screening is a public good as its use is non excludable and also the action of an individual will not affect the screening procedure. Hence, it should be provided by the government. c) Court systems are public goods as they serve the country on a whole and benefits all the individuals even if they are not involved directly in any transaction. They are non excludable as they help maintain law, order and justice; hence, the government should provide court systems. d) Mail delivery in case of postal services is a public good as it benefits all the individuals and is non excludable. Also, exclusion of an individual will not impact the mail delivery services. e) Medical Care is a private good as it is excludable and more importantly the use of medical by an individual can deprive another individual from the satisfaction derived from the use of medical care received.More Articles From Economics
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