Question

1. Graph the market for Beer when there is a price floor put on it, AND news comes out that beer is bad for you. Label the size of any shortage or surplus.

2. Graph the USA market for pharmaceuticals under international trade where the world price is lower than the autarky price, AND enough USA pharmaceutical companies go out of business that domestic production goes to zero. Label the size of any imports or exports.

Answer 1

1) When the price floor is put on the market for beer, the price becomes equal to the floor amount (P in figure 1). At this price quantity of beer demanded is given by Q2 and the quantity of beer supplied is given by Q1. There is a shortage of beer in the market as the quantity demanded exceeds the quantity of beer supplied. The amount of this shortage is (Q2-Q1).

Now the news comes out that beer is bad for you. This reduces the demand for beer in the market and the demand curve of beer shifts from D1 to D2. The quantity demanded reduced to Q3. Still, there is a shortage in the market as the quantity of beer supplied (Q1) is less than the quantity of beer demanded (Q3). The amount of shortage is (Q3-Q1).

2) Let the autarky price of pharmaceuticals be Pa (figure 2). At this price, market for pharmaceuticals clears out and the quantity of pharmaceuticals demanded = quantity of pharmaceuticals supplied = Qa.

When  USA market for pharmaceuticals is opened up for international trade, then the new price becomes equal to the world price (Pw). At this price, the quantity of pharmaceuticals demanded = Q2 and quantity of pharmaceuticals supplied = Q1. Thus, USA imports the amount Q2-Q1.

But enough USA pharmaceutical companies go out of business and domestic production goes to zero. The demand still remains the same (Q2) but the supply (or production) has gone to 0. Therefore, USA will now import the entire quantity of pharmaceuticals demanded (Q2) from the world market. Imports now become Q2.