Answers To Econ Hw 1 | Course Paper

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Economics 101

Spring 2011

Answers to Homework #3

Due Tuesday, March 1

Directions: The homework will be collected in a box before the lecture. Staple your

homework before handing it in. Please place your name, TA name and section number on

top of the homework (legibly). Make sure you write your name as it appears on your ID

so that you can receive the correct grade. Please remember the section number for the

section you are registered, because you will need that number when you submit exams

and homework. Late homework will not be accepted so make plans ahead of time. Please

show your work. Good luck!

1. AGRICULTURAL INTERVENTION

Use the following to answer parts (a) through (e).

Consider the market for pineapples in a small island nation. The domestic demand curve

(in Island Dollars) is P = 60 – 3QD and the domestic supply curve is P = 10 + 2QS.

a. What is the market equilibrium price and quantity?

Solution: Set prices equal and solve to get P = $30 and Q = 10

PRICE CEILINGS AND FLOORS:

b. If the government, hoping to help the poor, imposes a price ceiling of $15, what

will be the shortage of pineapples in the market? Graph your response.

Solution: Plug P=15 into the supply and demand curves to find that quantity

demand at this price is 15 and the quantity supplied is 2.5. The shortage is

therefore 15-2.5 =12.5 pineapples.

c. What price floor would yield a surplus of 15 pineapples?

Solution: Solve both equations for quantity to get:

QD=20-P/3 and QS = P/2-5

With the price floor, we know that QS=QD+15

Plug in our equations to get: P/2-5=20-P/3+15

Solving this gives P = 48.

PRICE SUPPORT PROGRAMS

d. Suppose the government price target is $42, which they plan to accomplish by

use of a price support program. How many pineapples will the government have

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to buy with this program, and how much will the program cost the government?

Graph your results, and shade the region corresponding to total government cost.

Solution: By plugging P = 42 into the supply and demand curves, we see that

quantity demanded is 6 and quantity supplied is 16. The surplus is thus 10

pineapples, which will cost them $420 to buy at the price of $42 a pineapple.

Your graph should show the surplus as a horizontal line between the points (Q=6,

P=42) and (Q=16, P=42). The total government cost is the rectangle whose top

side is the surplus line and bottom is the Q axis.

PRICE SUBSIDY PROGRAMS

e. Suppose the government offers the pineapple producers a $10 subsidy on every

unit they sell. Graph the new market supply curve. What will the new market

equilibrium quantity and price be with this program? How much does this

program cost the government?

At any given quantity, the supplier can afford to sell at $10 less per pineapple than

before, since they are now getting the extra money from the government. Thus the

new supply curve is shifted down by $10, or

Psubsidized=(original supply price)-$10=2Qs

To find the new equilibrium price and quantity, set 60-3Q=2Q which gives Q=12.

Plug this into the demand curve to see that consumers pay a price of $24 now.

The program costs the government: (subsidy)x(quantity sold) = 10*12=$120

f. What size of subsidy would the government need to provide to attain a target

price of $27?

Solution: At $27, consumers will buy 11 units. Suppliers will only produce 11

units at a per unit price of $32. The government thus needs to cover the

difference, which is $5 per pineapple.

2. TARIFFS AND QUOTAS

Use the following information to answer parts (a) through (d).

Consider the market for lawnmowers in a small country. The domestic demand curve is

P = 100 – (1/10) QD and the domestic supply curve is P = 10 + (1/5)QS.

a. What is the equilibrium market price and quantity, assuming no imports or

exports?

Solution: Q=300, P=70

b. If the government opens up the economy to outside trade, and the world price is

$60, will the country be importing or exporting lawnmowers? How many

lawnmowers will it import or export? Draw this on a graph.

At this price, domestic consumers demand 400 lawnmowers and domestic

suppliers produce 250 lawnmowers. Thus 150 lawnmowers will need to be

imported to cover the difference between the domestic demand and the domestic

supply.

c. Suppose the world price of lawnmowers is $60 and the government opens this

market to trade while at the same it imposes a $5 tariff on each lawnmower that is

imported. Given this tariff, what will the domestic demand be? Given this tariff,