Economics 102 Introductory Macroeconomics - Spring 2005, Professor J. Wissink

Problem Set 2 – DUE at the start of class on Wednesday Feb 16, 2005

Boxes will be removed ten minutes after the start of class.

Remember: We will NOT accept problem sets late. Period.

Thanks for minding this policy and not asking if you can hand it in late.

  1. The labor market in TompkinsCounty is given by the following table:

Salary
per worker per year (thousand $) / Workers supplied
per year (thousands) / Workers demanded
per year (thousands)
10 / 10 / 70
20 / 30 / 60
30 / 50 / 50
40 / 70 / 40
50 / 90 / 30

a)Graph the demand and supply curves of this market. What are the equilibrium price and quantity?

b)Using your graph, show the impact of a minimum salary law set by the government at $40 thousand per year. Calculate any surplus or shortage that occurs because of this policy.

c)Suppose the government decides to offer unemployment compensation of $7,000 per year to any unemployed worker. To receive this unemployment benefit, a worker must: (a) have been employed before the floor price was introduced; and (b) have become unemployed because the salary floorwas introduced. Estimate the number of workers that will receive unemployment compensation and the cost of this program to the government.

  1. Suppose the demand and supply for newspapers are described by the following equations:
    Demand: XD = 1450 – 100P and Supply: XS = -125 + 125P (Where "P" is measured in dollars and X in number of newspapers, in thousands.)

a)Graph the curves and find the equilibrium price and quantity.

b)Due to the introduction of “news portals” on the internet, the demand curve shifts, becoming
XD = 1000 – 100P. Show this shift and find the new equilibrium.

c)The government decides it wants to protect newspaper editors from this change in market conditions and decides to implement a price floor of $4per newspaper. What will be the effect of this floor on the newspaper market? What if the price floor is $6 per newspaper? Be specific.

d)Comment on the following statement: "Removal of controls would result in an increase in demand but at a higher price, which would benefit newspaper editors." Is this correct?

  1. Consider the market for “Fast Food” burgers.Listed below are some events that could have some effect on one or more of the following with respect to this burger market: quantity demanded, quantity supplied,equilibrium price and quantity, demand, and supply. Indicate which of the above are directly affected and in what direction (i.e., increase, decrease, etc.). Analyze and graphically illustrate each situation/event separately (do not add the events one on top of the other).

a)There is a rise in the wholesale price of ground beef.

b)There is a price reduction in the market for “Fast Food”fajitas(a close substitute for these hamburgers).

c)There is a new outburst of the “Mad-Cow” disease.

d)The price of french fries (usually consumed together with hamburgers) goes down due to an overproduction of potatoes.

  1. “Economists don’t know anything. They claim that demand curves are negatively sloped, however when ‘Nike’ launched its aggressive publicity campaign for their products the people bought more of those and the price went up too.” Agree?Disagree?Comment.
  2. When oranges are "in-season" they are relatively cheaper than when they are out of season, and, in-season, relatively greater quantities are sold. When vacations in Hawaii are "in-season", greater quantities of them are also sold, but in-season rates are relatively higher than out-of-season rates. Explain this seemingly paradoxical situation using supply-demand analysis.
  3. The embargo imposed on Iraqi and Kuwaiti oil after Iraq's invasion of Kuwait in August, 1990 reduced the supply of oil by 4.3 million barrels a day. President Bush claimed on September 26 that there was no need for a surge in oil prices because additional production by Saudi Arabia and other countries had restored 2/3 of the daily production initially removed by the embargo. Was Bush right or wrong? Explain.
  4. Multiple Choice:
  1. Which of the following will increase the demand for SUV’s?
  1. A fall in the price of small automobiles.
  2. A fall in the price of gasoline.
  3. A fall in the price of SUV’s.
  4. A fall in buyers' incomes.
  5. A fall in consumer preferences for driving SUV’s.
  1. A supply curve will shift with changes in:
  1. technology.
  2. income.
  3. tastes.
  4. number of buyers.
  5. market price.
  6. none of the above.
  1. Which of the following would result in a change in the quantity demanded?
  1. An increase in population.
  2. A change in tastes.
  3. An increase or decrease in the price of a substitute or complement.
  4. A change in income.
  5. A shift in the supply curve.
  1. If there is both anincrease in demand and a decrease in supply for a good:
  1. the quantity sold will necessarily fall.
  2. both quantity sold and price will necessarily fall.
  3. the price will necessarily rise.
  4. the quantity sold will necessarily rise.
  5. neither price nor quantity sold will be affected.