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The government has decided that the free-market price of cheese is too low. Suppose the government imposes a binding price floor in the cheese market. Draw a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese?

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Yusra AneesLv10
3 Apr 2021
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Related questions

1. Using supply-and-demand diagrams, show the effect of the following events on the market for sweatshirts.

(a) A hurricane in South Carolina damages the cotton crop.

(b) The price of leather jackets falls.

(c) All colleges require morning exercise inappropriate attire

(d) New knitting machines are invented.

 

2. (a) What is the definition of quantity demanded?

(b) What is the definition of quantity supplied?

(c) List the 5 factors that cause the demand curve to shift to the left or the right.

(d) Choose one of the factors from part (b) and consider the market for bananas. On a well-labeled diagram, demonstrate what will occur in this market if there is a change in this factor.

(e) List the 4 factors that cause the supply curve to shift to the left or the right.

(f) Choose one of the factors from part (e) and consider the market for scooters. On a well-labeled diagram, demonstrate what will occur in this market if there is a change in this factor.

(g) Choose one factor from part (b) and another from part (e) and consider the market for minivans. On a well-labeled diagram, demonstrate what will occur in this market given the change in both factors. (Hint: Draw separate diagrams for parts (d), (f), & (g))

3. Suppose that the price of basketball tickets at your college is determined by market forces. Currently, the demand and supply schedules are as follows:

page1image3877024

(a) Draw the demand and the supply curves. What is unusual about this supply curve? Why might this be true?

(b) What are the equilibrium price and quantity of tickets?

(c) Your college plans to increase total enrollment next year by 5,000 students. The additional students will have the following demand schedule:

page1image3870304

Now add the old demand schedule and the demand schedule for the new students to calculate the new demand schedule for the entire college. What will be the new equilibrium price and quantity?

 

 

4. Market research has revealed the following information about the market for chocolate bars: The demand schedule can be represented by the equation QD = 1600 − 300P, where QD is the quantity demanded and P is the price. The supply schedule can be represented by the equation QS = 1400 + 700P, where QS is the quantity supplied.

(a) Sketch a graph representing the market for chocolate bars. Identify the equilibrium point on your graph.

(b) Calculate the equilibrium price and quantity in the market for chocolate bars.

 

5. For each of the following pairs of goods, which good would you expect to have more elastic demand and why?

(a) Required textbooks or mystery novels

(b) Beethoven recordings or classical music recordings in general

(c) Subway rides during the next six months or subway rides during the next five years

(d) Root beer or water

(e) Insulin or Tylenol

(f) Food or bananas

 

6.Consider the following information from the market for lemonade:

Price Quantity Demanded Quantity Supplied
$1 500 cups 150 cups
$2 200 cups 310 cups

(a)  As the price changes from $1 to $2, what is the value of price elasticity of demand?

(b)  As the price changes from $1 to $2, what is the value of price elasticity of supply?

(c)  Sketch a diagram demonstrating the market for lemonade. Are the supply and demand curves relatively inelastic or elastic? Explain.

(d)  Suppose that when the price of lemonade increases from $1 to $2, the quantity demanded of orange juice increases from 150 cups to 190 cups. Calculate cross-price elasticity of demand for orange juice.

(e)  Are orange juice and lemonade substitute or complementary goods? Explain.

 

7. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:

page2image1834528

(a)  As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i) business travelers and (ii) vacationers? (Use the midpoint method in your calculations)

(b)  Why might vacationers have a different elasticity from business travelers?

 

8. Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run.

(a)  If the price of heating oil rises from $1.80 to $2.20 per gallon, what happens to the quantity of heating oil demand in the short run? In the long run? (Use the midpoint method in your calculations)

(b)  Why might this elasticity depend on the time horizon?


9. The Government has decided that the free-market price of cheese is too low.

(a) Suppose the government imposes a binding price floor in the cheese market. Draw a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese?

(b) Farmers complain that the price foor has reduced their total revenue. Is this possible? Explain

(c) In response to farmer's complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?

A town has a bakery that sells bread and a cheese shop. It costs$1 to make a loaf of bread and $2 to make a pound of cheese. If thebakery’s price for a loaf of bread is p1 and the cheese shop’sprice for a pound of cheese is p2, then the number of loaves ofbread sold q1 and the number of pounds of cheese sold q2 are givenby the following demand functions:



q1 = 14 – p1 - .5p2



q2 = 19 - .5p1 – p2



(a) Are bread and cheese complements or substitutes in thisproblem? Defend your answer.



(b) Suppose the firms choose prices simultaneously. Derive eachstore’s best reply function. Graph the best reply functions andfind the Nash equilibrium.



(c) Now suppose the two stores collude and set prices so as tomaximize their joint profits. Find the prices that maximize jointprofits.



(d) Are the prices in part (b) higher, lower, or equal to theprices in part (c)? What is the intuition behind this result?

A town has a bakery that sells bread and a cheese shop. It costs $1 to make a loaf of bread and $2 to make a pound of cheese. If the bakery's price for a loaf of bread is p1 and the cheese shop's price for a pound of cheese is p2, then the number of loaves of bread sold q1 and the number of pounds of cheese sold q2 are given by the following demand functions:

q1 = 14 - p1 - 0.5p2

q2 = 19 - .5p1 + p2

(a) Are bread and cheese complements or substitutes in this problem? Defend your answer.

(b) Suppose the firms choose prices simultaneously. Derive each store's best reply. Graph the best replies and find the Nash equilibrium.

(c) Now suppose the two stores merge and set prices so as to maximize their joint profits. Find the prices that maximize joint profits.

(d) Are the prices in part (b) higher, lower, or equal to the prices in part (c)? What is the intuition behind this result?

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