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Principle of Microeconomics

Assignment 1 (Section 005 &006)


1. Housing policy analysts debate the best way to increase the number of housing units available to lowincome households. One strategy-the demand-side strategy-is to provide people with housing
vouchers, paid for by the government that can be used to rent housing supplied by the private market.
Another-a supply-side strategy-is to have the government subsidize housing suppliers or to build
public housing.
a. Illustrate supply-and demand-side strategies using supply and demand curves. Which
results in higher rents?
ANS:

b. Critics of housing vouchers (the demand-side strategy) argue that because the supply of
housing to low-income households is limited and does not respond to higher rents, demand
vouchers will serve only to drive up rents and make landlords better off. Illustrate their point with
supply and demand curves.
ANS:

2. Suppose the market demand for pizza is given by


pizza is given by

Qd = 300 - 20P and the market supply for

Qs = 20P - 100, where P = price (per pizza).

a. Graph the supply and demand schedules for pizza using $5 through $15 as the value of P.
ANS:
P=5
P=10
P=15
ANS:

Qd
200
100
0

Qs
0
100
200

b. In equilibrium, how many pizzas would be sold and at what price?


As the answer of question A, we can find that in equilibrium, the price will be $10 for 100 pizzas.

c.

What would happen if suppliers set the price of pizzas at $15? Explain the market
adjustment process.
ANS: The quantity of supply will increase but the quantity of demand will decrease into 0, so excess
supply will happen.
d. Suppose the price of hamburgers, a substitute for pizza, doubles. This leads to a doubling of
the demand for pizza. (At each price, consumers demand twice as much pizza as before.)
Write the equation for the new market demand for pizza.
ANS: Qd=2*(300-20P)
e. Find the new equilibrium price and quantity of pizza.
ANS: The new equilibrium price and quantity:
2*(300-20p) = 20p-100
600-40p = 20p-100
700 = 60p
P = 11.66667 = 11.7
2*(300-20*11.7) = 132
So, the new equilibrium price is $11.7, and the new equilibrium quantity is 132.
3. Illustrate the impact of the following event on equilibrium price and quantity with supply and /or
demand curves:
a. The federal government "s upports" the price of wheat by paying farmers not to plant
wheat on some of their land.
ANS: The Quantity of supply will be decrease and the equilibrium price will be increase.

ANS:

b. An increase in the price of chicken h a s an impact on its substitute--hamburger.


The quantity of demand and the equilibrium price will both increase.

c. Incomes rise, shifting the demand for gasoline. Crude oil prices rise, shifting the s u p p l y
of gasoline.

ANS:

4. Suppose that the world price of oil i s $70 per barrel and that the United States can buy all the oil
it wants at this price. Suppose also that the demand and supply schedules for oil in the United States
are as follows:
PRICE
U.S. QUANTITY
($ PER BARREL) DEMANDED
68
70
72
74
76

16
15
14
13
12

U.S. QUANTITY
SUPPLIED
4
6
8
10
12

a. On graph paper, draw the suppl y and demand curves for the United States.
ANS:

b. With free trade in oil, what price will Americans pay for their oil? What quantity will
American buy? How much of this will be supplied by America n producers? How much will
be imported? Illustrate total imports on your graph of the U.S. oil market.
ANS: With free trade in oil, the Americans will pay $70 for their oil, and the quantity will be 15
barrel and the quantity of supplied will be 6 and the quantity of import will be 9.
c. Suppose the United States imposes a tax of $4 per barrel on imported oil. What quantity
would Americans buy? How much of this would be supplied by American producers?
How much would be imported? How much tax would the government collect?
ANS: If the United States imposes a tax of $4, the Americans need to spend $74 per barrel, and
the quantity of demanded will be 13 barrel, the quantity of supplied will be10, and the quantity of
import will be 3 barrel.

d. Briefly summarize the impact of an oil import tax by explaining who is helped and who
is hurt among the followin g groups: domestic oil consumers, domestic oil producers,

foreign oil producers, and the U.S. government.


ANS: After the oil import tax imposed, the price will become expensive, its bad for the nation
consumer, but it can help the nation producer, because the consumer want to use a lower price to
buy oil. And it hurt the importer, because they need to spend more money to import the same among
of oil.
5. Use the data in the preceding problem to answer the following questions. Now suppose that the
United States allows no oil imports.
a. What are the equilibrium price and quantity for oil in the United States?
ANS: $76
b. If the United States imposed a price ceiling of $74 per barrel on the oil market and
prohibited i mpo rt s , would there be an excess supply or an excess demand for oil? If so,
how much?
ANS: If the price ceiling become $74 and prohibited imports, excess demand will appear (13
10 = 3 barrel.)
d. Under the price ceiling, quantity supplied and quantity demanded differ. Which of the
two will determine how much oil is purchased? Briefly explain why.
ANS: When the quantity of supply and quantity of demand are different, we use the lower amount
one to determine the purchased amount. Under this situation, the quantity of demand is 13 but the
quantity of supply is 10, so the real purchase amount is 10.
6. Use the following diagram to calculate total consumer surplus at a price of $8 and production of 6
million meals per day. For the same equilibrium, calculate total producer surplus. Assuming price
remained at $8 but production was cut to 3 million meals per day, calculate producer surplus and
consumer surplus. Calculate the deadweight loss from underproduction.

ANS:

When the price is $8 and production of 6million meals per day, the total consumer surplus:
1/2(14-8)6 = $18million.
For the same equilibrium
18 + 18 = $36 million (consumer and producer surplus are both equal to $18 million)
When the price is $8 but production was cut to 3 million meals per day, the producer surplus and
consumer surplus is:
Producer surplus and consumer surplus are the same:
(3*3)+ (1/2)(3*3) = $13.5million.
And the deadweight loss will be:
1/2(6*3) = $9million

Deadline of submission: Oct. 5, 2012