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 United States experienced warmer than usual conditions. The price of home heating oil was less than it was during the previous winter, but people bought less home heating oil. This contradicts the Law of Demand. True or false and why.

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, Vietnam was a negligible producer of coffee. Today it produces 14 million pounds annually, second to Brazil’s 42 million pounds. Show what happened to the world coffee market using a supply and demand diagram.

The supply curve shifted right as Vietnam entered the world coffee market. This increased supply (shifted the curve to the right), pushing price down.

In the text, chapter 2, answer questions 1, 4, 6, and 11 and problems 19, 21 and 22.

Questions:

1. When Japan banned US imports of US corn, the corn that used to be exported to Japan remained in the US; hence the supply of corn available in the US shifted to the right (it increased). This pushed the price down by 11.1%. The graph is identical to the one above (with different numbers).

4. When a freeze occurs in Florida, the US supply falls. The US price rises. More orange juice is sold by Brazilian firms since the higher US price gives them more of an incentive to sell their juice in the U.S. rather than in Brazil. Less juice is sold by American firms.

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.