PROBLEM SESSIONS BEFORE MIDTERM EXAM_30-31.10.2013 & 06-07.11.2013
1. Suppose that due to more stringent environmental regulation it becomes more expensive for steel production firms to operate. Also, recent technological advances in plastics have reduced the demand for steel products. Use Supply and Demand analysis to predict how these shocks will affect equilibrium price and quantity of steel. Can we say with certainty that the market price for steel will fall? Why?
Solution: The increase in the cost of production of steel will shift the supply curve to the left. This effect alone on the market will influence the market price to rise while the market quantity will fall. ...view middle of the document...
a. Compute the supply and demand for truck hoods.
b. If the local county government imposed a per unit tax of $25.00 per hood manufactured, what would be the new equilibrium price of hoods to the truck manufacturer?
c. Would a per unit tax on hoods change the revenue received by Midcontinent?
Given: P* = $500 Q* = 80 hoods per day
Ed = -0.40 Es = 1.5
a. Demand: Qd = aO + a1P Supply: Qs = bO + b1P
Use: to compute a1 and b1.
a1 = -0.064 b1 = 0.24
Solve for a0 and b0
Qd = aO + a1P Qs = bO + b1P
80 = aO + -0.064(500) 80 = bO + 0.24(500)
ao = 112 bo = -40
Qd = 112 - 0.064P Qs = -40 + 0.24P
b. The tax represents a price increase to the purchaser regardless of the current price. Thus, the supply curve will be adjusted vertically upward by $25.
Qs = -40 + 0.24P or
P = 166.67 + 4.17 Qs, then
Pt = P + $25 = 166.67 + 25 + 4.17Qs
Pt = 191.67 + 4.17Qs or
Qs = -45.96 + 0.24P
The new equilibrium price will be:
New Supply = Demand
Qs= -45.96 + 0.24P = 112 - 0.064P = Qd
Solving yields P = $519.60 per truck hood
c. Since the new selling price in (c) is $519.60 and the tax is $25 per hood, Midcontinent would receive only $494.6 per hood. As quantity sold has fallen too, revenues would fall.
3. Suppose that the long-run world demand and supply elasticities of crude oil are -0.906 and 0.515, respectively. The current long-run equilibrium price is $30 per barrel and the equilibrium quantity is 16.88 billion barrels per year. Derive the linear long-run demand and supply equations. Next, suppose the long-run supply curve you derived above consists of competitive supply and OPEC supply. If the long-run competitive supply equation is: what must be OPEC's level of production in this long-run equilibrium?
Solution: If the demand curve is linear, it is in the form of Also, we know that Rearranging the linear expression for demand allows us to solve for a as follows: We may now write the linear expression for demand as If the supply curve is linear, it is in the form of Also, we know that Rearranging the linear expression for demand allows us to solve for c as follows: We may now write the linear expression for supply as OPEC's supply is the difference between the world supply and competitive supply at $30. We know that world supply at $30 is 16.88. Competitive supply at $30 is This implies that OPEC's supply is 0.4 billion barrels per year at $30 in this long-run equilibrium.
4. Harding Enterprises has developed a new product called the Gillooly Shillelagh. The market demand for this product is given as follows:
Q = 240 - 4P
a. At what price is the price elasticity of demand equal to zero?
b. At what price is demand infinitely elastic?
c. At what price is the price elasticity of demand equal to one?
d. If the Shillelagh is priced at $40, what is the point price elasticity of demand?
The demand curve given in this...