Order Principles Of Microeconomics Discussion

Order Principles Of Microeconomics Discussion
Problem Set 3
Principles of Microeconomics
Matt Weinberg
Due: April 29, 2014
1. Figure 1 represents the market for blueberries in the city of Philadelphia, where P is the price per pound, and Q is the quantity of blueberries in thousands of pounds.
f
Price (\$/lb)
Quantity (’000s of lbs)0
3.00
1.50
4.20
6.00
2.40
140 17085
QD
QS
Figure 1: Market for Blueberries in Philadelphia
(a) In an effort to encourage its residents to consume blueberries (a “superfood” that is especially good for health), the city of Philadelphia imposes a price ceiling of \$2.40 per pound on blueberries. What is the size of the shortage/surplus caused by the price ceiling? Calculate the change in consumer surplus caused by the price ceiling. Overall, are consumers better or worse off after the ceiling? Calculate the change in producer surplus caused by the price ceiling. Overall, are producers better or worse off after the price ceiling?
(b) As a result of the price ceiling, how much surplus is transferred from producers to consumers? Shade or mark the transferred surplus on Figure 1.
Price (\$/lb)
Quantity (’000s of lbs)0
3.00
1.50
4.20
6.00
2.40
140 17085
QD
QS
Q′ D
Q′′ D
1.80
25 190
Figure 2: Market for Blueberries in Philadelphia
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(c) Scientists discover that blueberries tend to absorb a large proportion of carcinogenic pesticides, widely used in blueberry cultivation, through their thin skins. Would you expect the demand for blueberries to shift left to Q′
D or right to Q′′
D in Figure 2 after this discovery? Find the new price
of blueberries after this news. What is the size of deadweight loss caused by the price ceiling after this news?
2. For each of the following, explain what you can conclude from the information provided.
(a) The cross-price elasticity of demand between goods A and B is 5. Does this suggest that goods A and B are substitutes, complements, or neither?
(b) The income elasticity of demand for good C is -0.5. Does this suggest that good C is a normal or inferior good?
(c) At the current retail price of \$30 per haircut, the price elasticity of demand for a haircut at Barber Bob’s is 0.6. Should Barber Bob raise the price of a haircut or not?
3. The demand and supply of U.S. labor are described by the following equations:
QD = 450 − 45P
QS = −180 60P,
where Q is the quantity in millions of workers’ hours and P is dollars per hour.
(a) Find the equilibrium price and quantity of labor.
(b) Suppose that the U.S. government passes a minimum wage law, where the minimum wage is \$7 per hour. How many worker hours are available when the minimum wage is \$7 per hour? How many worker hours will actually be employed?
(c) Calculate consumer and producer surplus after the minimum wage is imposed. Does this minimum wage benefit workers overall? Which workers don’t benefit from this policy? Mark this carefully on a graph of the U.S. labor market.
(d) Many tasks that were once performed by U.S. workers have been outsourced to China in recent years. In response to human rights pressure, the Chinese government requires that its factories increase safety precautions and pay Chinese workers a higher wage. How does this affect the unemployment in the U.S. labor market originally caused by the minimum wage? Explain and show graphically.
4. The demand and supply for milk are described by the following equations:
QD = 33 − 230P
QS = −27 270P,
where Q is quantity in billions of pounds and P is price is per pound of milk.
(a) Find the equilibrium price and quantity of milk. Show the market for milk graphically.
(b) Find the amount of consumer surplus, producer surplus, and total surplus that is created.
(c) Suppose the U.S. Department of Agriculture imposes a price floor of \$0.14 per pound of milk. At this price, how much milk will be produced? How much milk will be bought? Does this lead to a surplus or shortage? Show the effect of the price floor on the milk market graphically.
(d) What is the size of consumer surplus after the price floor? What is the size of producer surplus after the price floor?
(e) What is the size of deadweight loss created by the price floor?
(f) How does the imposition of the price floor on milk affect the equilibrium price and quantity of cereal? Explain both verbally and graphically.
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