Coursework: Questions and Answers to Economics Course (Coursework Sample)

Q 10
Consider a market where supply and demand are given by Qs = -10+ p and Qd = 56 – 2p. Suppose the government imposes a price floor of $25, and agrees to purchase any and all units consumers do not buy at the floor price of $25 per unit.
* Determine the cost to the government of buying firms’ unsold units.
Equilibrium price is given by:
Qs = Qd
-10 + p = 56 – 2p
P = $22
Since the price floor is above the equilibrium price of $22, the floor results in a surplus. More specifically, when the price is $25, quantity demanded is:
Qd = 56 – 2(25) = 6 units
And the quantity supplied is:
Qs = -10 + 25 = 15 units
Thus, there is a surplus of 15 – 6 =9 units. Consumers pay a higher price ($25), and producers have unsold inventories of 9 units. However, the government must purchase the amount consumers are unwilling to purchase at the price of $25. Thus, the cost to the government of buying the surplus of 9 units is $25 x 9 = $225
* Compute the lost social welfare (deadweight loss) that stems from the $25 price floor.
Social welfare will be given by:
½ x (Pf – Pc) x (Qe – Qs)
½ x (25 -22) x (12-15) = -$4.50
Q 14
You are the manager of an organization in America that distributes blood to hospitals in all 50 states and the District of Columbia. A recent report indicates that nearly 50 Americans contract HIV each year through blood transfusions. Although every pint of blood donated in the United States undergoes a battery of nine different tests, existing screening methods can detect only the antibodies produced by the body’s immune system—not foreign agents in the blood. Since it takes weeks or even months for these antibodies to build up in the blood, newly infected HIV donors can pass along the virus through blood that has passed existing screening tests. Happily, researchers have developed a series of new tests aimed at detecting and removing infections from donated blood before it is used in transfusions. The obvious benefit of these tests is the reduced incidence of infection through blood transfusions. The report indicates that the current price of decontaminated blood is $80 per pint. However, if the new screening methods are adopted, the demand and supply for decontaminated blood will change to Qd = 175 – p and Qs = 2p – 200. What price do you expect to prevail if the new screening methods are adopted? How many units of blood will be used in the United States? What is the level of consumer and producer surplus? Illustrate your findings in a graph
The equilibrium price and quantity for the new screening models will be:
Qd = Qs
175 – p = 2p – 200
P = $125
Q = 50 units
This price and quantity will adopted.
Since the consumers will pay 125 – 80 = $45 more than they are willing to pay, the producer surplus will be given by:
From the graph above, P = $125, E = $80 and QB = 50 units therefore producer surplus will be given by:
½ x 50 x ($125 - $50) = $1,125.
Q 20
Viking InterWorks is one of many manufacturers that supplies memory products to original equipment manufacturers (OEMs) of desktop systems. The CEO recently read an article in a trade publication that reported the projected demand for desktop systems to be Qddesktop = 1000 – 2pdesktop + 0.6M (in millions of units), where Pdesktop is the price of a desktop system and M is consumer income. The same article reported that the incomes of the desktop systems’ primary consumer demographic would increase 4.2 percent this year to $52,500 and that the selling price of a desktop would decrease to $940, both of which the CEO viewed favorably for Viking. In a related article, the CEO read that the upcoming year’s projected demand for 512 MB desktop memory modules is Qdmemory = 10,000 – 80pmemory - Pdesktop(in thousands of units), where Pmemoryis the market price for a 512 MB memory module and Pdesktop is the selling price of a desktop system. The report also indicated that five new, small start-ups entered the 512 MB memory module market bringing the total number of competitors to 100 firms. Furthermore, suppose that Viking’s CEO commissioned an industry wide study to examine the industry capacity for 512 MB memory modules. The results indicate that when the industry is operating at maximum efficiency, this competitive industry supplies modules according to the following function: QSmemory = 1000 + 20Pmemory+ N(in thousands), where Pmemory is the price of a 512 MB memory module and N is the number of memory module manufacturers in the market. Viking’s CEO provides you, the production manager, with the above information and requests a report containing the market price for memory modules and the number of units to manufacture in the upcoming year based on the assumption that all firms producing 512 MB modules supply an equal share to the market. How would your report change if the price of desktops were $1,040? What does this indicate about the relationship between memory modules and desktop systems?
Qd desktop in the coming year will be given by:
1000 – 2(940) + 0.6($52,500) = 30620 million units
Qd memory in the coming year will be given by:
10000 – 80(Pmemory) – 940 (in thousand units)
Qs memory in the coming year will be given by:
1000 + 2(Pmemory) + 100 (in thousand minutes)
Equilibrium price and units of memory is given by:
10000 – 80p -940 = 1000 +2p +100
P = $97.07
Q = 1294.146 thousand units
Increasing the price of desktops to $1040;
10000 – 80p -1040 = 1000 +2p +100
Pmemory = $95.85
Qmemory = 1291.707 thousand units
The quantity demanded of memory reduces with increase in price of desktops. This indicates that the two products are complementary goods.
Q 23
In a recent speech, the governor of your state announced: “One of the biggest causes of juvenile delinquency in this state is the high rate of unemployment among 16 to 19 year olds. The low wages offered by employers in the state have given fewer teenagers the incentive to find summer employment. Instead of working all summer, the way we used to, today’s teenagers slack off and cause trouble. To address this problem, I propose to raise the state’s minimum wage by $1.50 per hour. This will give teens the proper incentive to go out and find meaningful employment when they are not in school.” Evaluate the governor’s plan to reduce juvenile delinquency.
A higher minimum wage will serve as a higher price floor, reducing quantity demand for labor by firms.
While there is undoubtedly a link between unemployment and crime, the governor’s plan is likely flawed since it only examines one side of the market. Raising the minimum wage will make the prospect of working more appealing for teenagers, but it will also have an effect on business owners and managers in the state. The minimum wage is a price floor. Raising the minimum wage will reduce the quantity demanded for labor within the state, and result in a labor surplus. More teenagers will seek jobs, but fewer businesses will hire teenagers. It is very likely the governor's plan will result in greater juvenile delinquency.
Q2
The demand curve for a product is given by Qd = 1000 – 2px + 0.02pz where Pz = $400.
* What is the own price elasticity of demand when Px = $154? Is demand elastic or inelastic at this price? What would happen to the firm’s revenue if it decided to charge a price below $154?
If px = $154, Qdx will be given by 1000 – 2(154) + 0.02(400) = 854 units
Own price elasticity will be given by; ax * (px/Qx)
= -2 * (154/854) = - 0.361
Since own price elasticity is between 0 and -1, demand is elastic
If firm lowers prices, the percentage decline in the quantity demanded of good X will be less in absolute value than the percentage fall in price. Total revenues will rise if it lowers price of good X.
* What is the own price elasticity of demand when Px = $354? Is demand elastic or inelastic at this price? What would happen to the firm’s revenue if it decided to charge a price above $354?
If px = $354, Qdx will be given by 1000 – 2(354) + 0.02(400) = 300 units
Own price elasticity will be given by; ax * (px/Qx)
= -2 * (354/300) = - 2.36
Since own price elasticity is less than -1, demand is inelastic
If firm raises prices, the percentage decline in the quantity demanded of good X will be greater in absolute value than the percentage rise in price. Total revenues will fall if it raises price of good X.
* What is the cross-price elasticity of demand between good X and good Z when Px = $154? Are goods X and Z substitutes or complements?
If px = $154, Qdx will be given by 1000 – 2(154) + 0.02(400) = 854 units
cross price elasticity will be given by; bz * (pz/Qx)
= 0.02 * (400/854) = 0.0094
Since this is positive, good X and Z are substitutes
Q 3
Suppose the demand function for a firm’s product is given by
Ln Qdx = 3 -0.5 ln px -2.5 ln py + ln M +2 ln A
Where:
Px = $10,
Py = $4,
M = $20,000, and
A = $250
* Determine the own price elasticity of demand, and state whether demand is elastic, i...