Econ 172
Spring 2006
Homework 1 Due Wednesday Jan 25
First part of the assignment: Join the econ172 class listserv:
To do this, send email to listserv@list.uvm.edu
and place a subscribe command,
sub econ172 your_name_here
in
the body of the message.
Replace "your_name_here" with your first and last name, for
example:
sub econ172 Alan Greenspan
You will receive an email from the server with instructions. This will be a way for you to contact everyone in class and for me to contact you.
Written part of the homework:
1. Use supply-and-demand graphs to explain why parking is free at the suburban shopping mall but one typically must pay to park when shopping downtown.
In the suburban
shopping mall, there are lots of parking spaces that are designed to be part of
the mall (see graphs below). Demand is
fairly small, only accounted for by shoppers and employees. Downtown has multiple uses and demand for
parking is by people who shop, people who work downtown, and for people who
live or visit others. Relative to
supply, demand is high. So in the
shopping mall, at a price of zero, quantity demanded is less than quantity supplied. Downtown, demand intersects supply at a
positive price. Note that during the
peak shopping season, Thanksgiving through Christmas, demand for parking at the
mall (and downtown) is higher and sometimes you can’t find a parking spot. Question: Why doesn’t the mall charge for
parking at that time so price performs its rationing function?
(Note that prices
on the graph below are just made up)
2. During the winter
of 1997-1998, the northeastern
False.
Temperature is one of the factors that can shift the entire demand
curve. A warm winter means people will
not buy as much heating oil at a given price as they would if the winter was
colder. This statement confuses demand
with quantity demanded. The demand curve
shifted left, so quantity demanded and price fell. So the law of demand is not
contradicted.
3. Because people prefer name-brand pain-relieving drugs over store-brand pain-relieving drugs, demand curves do not slope downward for pain-relieving drugs. True or false and why.
False.
Demand slopes downward for each of the two drugs. If people believe the name-brand version is
better, there is a higher demand and price will be higher. But the demand curve still slopes
downward. If the price of the brand-name
pain reliever was cheaper, people would buy more (and less of the store brand).
3. In the early 1990s
the world price of coffee was high.
Today it is much lower. Before
1994,
The supply curve shifted right as
In the text, chapter 2, answer questions 1, 4, 6, and 11 and problems 19, 21 and 22.
Questions:
1. When
4. When a freeze occurs in
6. A usury law is a price ceiling on interest
rates. If there is a price ceiling, then
the price is set below the equilibrium price.
Output is less than it would otherwise be and some people will not be
able to get the amount of the good (in this case credit) as they would like to
buy if the price was higher.
11. A crackdown on cocaine smuggline causes the
supply curve to shift to the left, therefore raising price.
Problems
19. Qd = a – bP Qs = c + eP
At equilibrium Qd
= Qs so a-bP = c+eP ;
therefore
a-c = bP+eP
and a-c = P(b+e) and P = (a-c)/(b+e)
Qd = a – b[(a-c)/(b+e)] = a-
[(ba-bc)/(b+e)] = ab+ae – (ba-bc) = ae + bc
b+e b+e
and just to check that Qd = Qs
Qs = c+e[(a-c)/(b+e)] = cb+ce + ea-ec = cb + ea
b+e b+e
and from high school algebra you of course know
that (ae+bc)/(b+e) = (cb+ea)/(b+e).
21. Qd = 171-20p+20pb+3pc+2y and Qs = 178+40p-60ph
Plugging in the
values given in the problem yields
Qd = 171 – 20p +
80 + 10 + 25 = 286-20p
And Qs = 178 + 40p
– 60 ph = 178 +
40p – 90 = 88 + 40p
and we know that Qd=Qs so 286-20p = 88 + 40p
198 = 60 p and p =
198/60 = $3.30
Therefore Qs = 178
+ (40)(3.30) – 90 = 220
22. Qd = a-bp and Qs = c+ep+ft
A,b,c,e,f are all positive constants and t is temperature.
Note that this
tells us that as temperature rises, Qs will rise (since f is positive).
Solve for price
a-bp = c+ep+ft
a-c-ft = bp + ep
a-c-ft = p(b+e)
(a-c-ft)/(b+e) = p so as temperature rises, price falls . Using
calculus dp/dt = -f/(b+e) which must be negative.