Principles of Economics II Microeconomics Homework #1: Ch 4~6 and Ar icle !

"es ions

Ar icle !"es ions

Please download he associa ed ar icle# $%are Hike###& 1. Based on the article, are taxi fares more elastic or less elastic for drivers? Passengers? How do you know? Give at least 3 reasons. . !f given a chance, do you think that ca" drivers would have raised the amount that high? #hy$not?

Chap er !"es ions

Ch 4 !"es ions: 1. %onsider the market for eggs. &or each of the events listed here, identify which of the determinants of demand or su''ly are affected. (lso indicate whether su''ly or demand increases or decreases. )hen draw a diagram to show the effect on the 'rice and *uantity of eggs. (. )he 'rice of grain that is fed to hens falls. B. )he 'rice of "acon falls. %. ( new study is released that indicates that eating eggs is ha+ardous to one,s health. -. )he num"er of egg.'roducing farms falls. /. )his weekend is the /aster holiday. 1# a# If he price of 'rain "sed o feed hens falls( he s"ppl) of e''s will rise# *emand will no +e affec ed# ,he res"l is a fall in he price and an increase in he -"an i ) sold( as %i'"re 1. shows# %i'"re 1.

+# If he price of +acon falls( he demand for e''s will rise +eca"se e''s and +acon are complemen s# /"ppl) will no +e affec ed# ,he res"l is an increase in +o h he price of e''s and he -"an i ) sold( as %i'"re 10 shows# %i'"re 10

c# A new s "d) ha indica es ha ea in' e''s is ha1ardo"s o one2s heal h will ca"se a decline in he demand for e''s# /"ppl) is no affec ed# ,he res"l is a

decline in he price of e''s and a decrease in he -"an i ) sold( as %i'"re 14 shows# %i'"re 14

d# If he n"m+er of e''3prod"cin' farms falls( he s"ppl) of e''s will decline# *emand is no affec ed# ,he e-"ili+ri"m price of e''s will fall and -"an i ) of e''s sold rises( as %i'"re 14 shows# %i'"re 14

e# *"rin' Eas er weekend( he demand for e''s rises# /"ppl) is no affec ed# As a res"l ( +o h he e-"ili+ri"m price and he e-"ili+ri"m -"an i ) rise( as %i'"re 10 shows# . 0sing su''ly and demand diagrams, show the effect of the following events on the market for 'ersonal com'uters. (. )he 'rice of com'uter chi's falls. B. )here is a rise in consumer incomes %. )he 'rice of com'uter software rises -. 0niversities re*uire incoming freshmen to have their own 'ersonal com'uters. .# a# If he price of comp" er chips falls( he cos of prod"cin' comp" ers declines# As a res"l ( he s"ppl) of comp" ers shif s o he ri'h ( as shown in %i'"re ..# ,he new e-"ili+ri"m price is lower and he new e-"ili+ri"m -"an i ) of comp" ers is hi'her# %i'"re ..

+# A rise in cons"mer income leads more people o +") comp" ers( increasin' he demand# ,he res"l ( shown in %i'"re .0( is a rise in +o h he e-"ili+ri"m price and -"an i ) of comp" ers# %i'"re .0

c# If he price of comp" er sof ware rises( he demand for comp" ers will fall +eca"se comp" ers and sof ware are complemen s# ,his is shown in %i'"re .4# ,he res"l is a decrease in +o h he e-"ili+ri"m price and -"an i ) of comp" ers# %i'"re .4

d# If "ni5ersi ies re-"ire incomin' freshmen o ha5e heir own personal comp" ers( he demand for comp" ers will rise# ,he res"l is a rise in e-"ili+ri"m price and an increase in he e-"ili+ri"m -"an i ) of comp" ers( as shown in %i'"re .0# 3. )he market for ham"urgers Price 41.55 1. 6 1.65 1.76 .55 . 6 has the following su''ly and demand schedule1 2ty -emanded 2ty 3u''lied 55 ham"urgers 115 ham"urgers 175 135 186 186 1 6 166 115 195 155 196

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Gra'h the demand and su''ly curves. #hat is the e*uili"rium 'rice and *uantity in this market? !f the actual 'rice in this market were a"ove the e*uil. 'rice, what would drive the market toward the e*uil.? !f the actual 'rice in this market were "elow the e*uil. 'rice, what would drive the market toward the e*uil?

0# !"an i ) s"pplied e-"als -"an i ) demanded a a price of 61#47 and -"an i ) of 144 ham+"r'ers 8%i'"re .9:# If he price were 'rea er han 61#47( -"an i ) s"pplied wo"ld e;ceed -"an i ) demanded( so s"ppliers wo"ld red"ce he price o 'ain sales# If he price were less han 61#47( -"an i ) demanded wo"ld e;ceed -"an i ) s"pplied( so s"ppliers co"ld raise he price wi ho" losin' sales# In +o h cases( he price wo"ld con in"e o ad<"s "n il i reached 61#47( he onl) price a which here is nei her a s"rpl"s nor a shor a'e# %i'"re .9

Ch 4 !"es ions: 8. &or each of the following 'airs of goods, which good would you ex'ect to have more elastic demand and why? (. :e*uired text"ooks or mystery novels. B. Beethoven recordings or classical music recordings in general. %. 3u"way rides during the next 9 months or su"way rides during the next 6 years. -. :oot "eer or water. 4# a# M)s er) no5els ha5e more elas ic demand han re-"ired e; +ooks( +eca"se m)s er) no5els ha5e close s"+s i " es and are a l";"r) 'ood( while re-"ired e; +ooks are a necessi ) wi h no close s"+s i " es# If he price of m)s er) no5els were o rise( readers co"ld s"+s i " e o her )pes of no5els( or +") fewer no5els al o'e her# =" if he price of re-"ired e; +ooks were o rise( s "den s wo"ld ha5e li le choice +" o pa) he hi'her price# ,h"s( he -"an i ) demanded of re-"ired e; +ooks is less responsi5e o price han he -"an i ) demanded of m)s er) no5els# +# =ee ho5en recordin's ha5e more elas ic demand han classical m"sic recordin's in 'eneral# =ee ho5en recordin's are a narrower marke han classical m"sic recordin's( so i is eas) o find close s"+s i " es for hem# If he price of =ee ho5en recordin's were o rise( people co"ld s"+s i " e o her classical recordin's( like Mo1ar # =" if he price of all classical recordin's were o rise( s"+s i " ion wo"ld +e more diffic"l 8a ransi ion from classical m"sic o rap is "nlikel)>:# ,h"s( he -"an i ) demanded of classical recordin's is less responsi5e o price han he -"an i ) demanded of =ee ho5en recordin's# c# /"+wa) rides d"rin' he ne; fi5e )ears ha5e more elas ic demand han s"+wa) rides d"rin' he ne; si; mon hs# ?oods ha5e a more elas ic demand o5er lon'er ime hori1ons# If he fare for a s"+wa) ride was o rise emporaril)( cons"mers co"ld no swi ch o o her forms of ranspor a ion wi ho" 'rea e;pense or 'rea incon5enience# =" if he fare for a s"+wa) ride was o remain hi'h for a lon' ime( people wo"ld 'rad"all) swi ch o al erna i5e forms of ranspor a ion# As a res"l ( he -"an i ) demanded of s"+wa) rides d"rin' he ne; si; mon hs will +e less responsi5e o chan'es in he price han he -"an i ) demanded of s"+wa) rides d"rin' he ne; fi5e )ears# d# @oo +eer has more elas ic demand han wa er# @oo +eer is a l";"r) wi h close s"+s i " es( while wa er is a necessi ) wi h no close s"+s i " es# If he price of wa er were o rise( cons"mers ha5e li le choice +" o pa) he hi'her price# =" if he price of roo +eer were o rise( cons"mers co"ld easil) swi ch o o her sodas# /o he -"an i ) demanded of roo +eer is more responsi5e o chan'es in price han he -"an i ) demanded of wa er#

6. 3u''ose that "usiness travelers and vacationers have the following demand for airline tickets from ;ew <ork to Boston1 Price 2ty -emanded 2ty -emanded ="usiness> =?acationers> 4165 ,155 tickets 1,555 tickets 55 ,555 @55 65 1,A55 955 355 1,@55 855 (. (s the 'rice of tickets rises from 4 55 to 4 65, what is the 'rice elasticity of demand for =i> "usiness travelers and =ii> vacationers? B. #hy might vacationers have a different elasticity from "usiness travelers? 4# a# %or +"siness ra5elers( he price elas ici ) of demand when he price of icke s rises from 6.77 o 6.47 is A8.(777 1(B77:C1(B47DCA8.47 .77:C..4D E 7#74C7#.. E 7#.0# %or 5aca ioners( he price elas ici ) of demand when he price of icke s rises from 6.77 o 6.47 is A8F77 677:C977D C A8.47 .77:C..4D E 7#.BC7#.. E 1#0.# +# ,he price elas ici ) of demand for 5aca ioners is hi'her han he elas ici ) for +"siness ra5elers +eca"se 5aca ioners can choose more easil) a differen mode of ranspor a ion 8like dri5in' or akin' he rain:# ="siness ra5elers are less likel) o do so +eca"se ime is more impor an o hem and heir sched"les are less adap a+le# 9. )he ;ew <ork )imes re'orted that su"way ridershi' declined after a fare increase1B)here were nearly 8 million fewer riders in -ec. 1AA6, the first full month after the 'rice of a ticket increased 6 cents C from 41. 6 to 41.65 C than in the 'revious -ec., a 8.3 'ercent decline.B (. 0se these data to estimate the 'rice elasticity of demand for su"way riders. B. (ccording to your estimate, what ha''ens to the )ransit (uthority,s revenue when the fare rises? %. #hy might your estimate "e unrelia"le? 6# a# If -"an i ) demanded falls +) 4#0G when price rises +) .7G ( he price elas ici ) of demand is 4#0C.7 E 7#.14( which is fairl) inelas ic# +# =eca"se he demand is inelas ic( he ,ransi A" hori )2s re5en"e rises when he fare rises# c# ,he elas ici ) es ima e mi'h +e "nrelia+le +eca"se i is onl) he firs mon h af er he fare increase# As ime 'oes +)( people ma) swi ch o o her means of ranspor a ion in response o he price increase# /o he elas ici ) ma) +e lar'er in he lon' r"n han i is in he shor r"n# Ch 6 !"es ions: 7. )he government has decided that the free market 'rice of cheese is too low. (. 3u''ose the government im'oses a "inding 'rice floor in the cheese market. -raw a su''ly and demand diagram to show the effect of this 'olicy on the 'rice of cheese and the *uantity of cheese sold. !s there a shortage or sur'lus of cheese? B. &armers com'lain that the 'rice floor has reduced their total revenue. !s this 'ossi"le? /x'lain. %. !n res'onse to farmers, com'laints, the govt. agrees to 'urchase all of the sur'lus cheese at the 'rice floor. %om'ared to the "asic 'rice floor, who "enefits from this new 'olicy? #ho loses? 9# a# ,he imposi ion of a +indin' price floor in he cheese marke is shown in %i'"re 0# In he a+sence of he price floor( he price wo"ld +e P1 and he -"an i ) wo"ld +e !1# Hi h he floor se a P f( which is 'rea er han P1( he -"an i ) demanded is !.( while -"an i ) s"pplied is !0( so here is a s"rpl"s of cheese in he amo"n !0 !.# +# ,he farmers2 complain ha heir o al re5en"e has declined is correc if demand is elas ic# Hi h elas ic demand( he percen a'e decline in -"an i ) wo"ld e;ceed he percen a'e rise in price( so o al re5en"e wo"ld decline# c# If he 'o5ernmen p"rchases all he s"rpl"s cheese a he price floor( prod"cers +enefi and a;pa)ers lose# Prod"cers wo"ld prod"ce -"an i ) !0 of cheese( and heir o al re5en"e wo"ld increase s"+s an iall)# Howe5er( cons"mers wo"ld +") onl) -"an i ) !. of cheese( so he) are in he same posi ion as +efore# ,a;pa)ers lose +eca"se he) wo"ld +e financin' he p"rchase of he s"rpl"s cheese hro"'h

hi'her a;es# %i'"re 0

@. %ongress and the 'resident decide that the 03 should reduce air 'ollution "y reducing its use of gasoline. )hey im'ose a 45.65 tax for each gallon of gas sold. (. 3hould they im'ose this tax on 'roducers or consumers? /x'lain with words and a diagram. B. !f the demand for gas were more elastic, would this tax "e more effective or less effective in reducing the *uantity of gasoline consumed? /x'lain with "oth words and a diagram. %. (re consumers of gas hel'ed or hurt "y this tax? #hy? -. (re workers in the oil industry hel'ed or hurt "y the tax? #hy? F# a# I does no ma er whe her he a; is imposed on prod"cers or cons"mers he effec will +e he same# Hi h no a;( as shown in %i'"re 6( he demand c"r5e is *1 and he s"ppl) c"r5e is /1# If he a; is imposed on prod"cers( he s"ppl) c"r5e shif s "p +) he amo"n of he a; 847 cen s: o /.# ,hen he e-"ili+ri"m -"an i ) is !.( he price paid +) cons"mers is P.( and he price recei5ed 8af er a;es are paid: +) prod"cers is P. 47 cen s# If he a; is ins ead imposed on cons"mers( he demand c"r5e shif s down +) he amo"n of he a; 847 cen s: o *.# ,he downward shif in he demand c"r5e 8when he a; is imposed on cons"mers: is e;ac l) he same ma'ni "de as he "pward shif in he s"ppl) c"r5e when he a; is imposed on prod"cers# /o a'ain( he e-"ili+ri"m -"an i ) is !.( he price paid +) cons"mers is P. 8incl"din' he a; paid o he 'o5ernmen :( and he price recei5ed +) prod"cers is P. 47 cen s# %i'"re 6

+# ,he more elas ic he demand c"r5e is( he more effec i5e his a; will +e in red"cin' he -"an i ) of 'asoline cons"med# ?rea er elas ici ) of demand means

ha -"an i ) falls more in response o he rise in he price of 'asoline# %i'"re 9 ill"s ra es his res"l # *emand c"r5e *1 represen s an elas ic demand c"r5e( while demand c"r5e *. is more inelas ic# ,he a; will ca"se a 'rea er decline in he -"an i ) sold when demand is elas ic# %i'"re 9

c# ,he cons"mers of 'asoline are h"r +) he a; +eca"se he) 'e less 'asoline a a hi'her price# d# Horkers in he oil ind"s r) are h"r +) he a; as well# Hi h a lower -"an i ) of 'asoline +ein' prod"ced( some workers ma) lose heir <o+s# Hi h a lower price recei5ed +) prod"cers( wa'es of workers mi'h decline#