Question

1. The demand and supply curves for T-shirts in Platteville, WI, are given by the following equations:

Q1 = (P / 4)

Q2 = [(30 – P) / 2]

Where P is measured in dollars and Q is the number of T-shirts sold per year.

a. Find the equilibrium price and quantity algebraically.

b. Construction and graph the market schedule with at least 3 different price levels including Pe , $30 and $10. Please label you graph.

c. If a price of $10 is imposed in this market, does the market face a surplus or a surplus? How many units?

2. In the late eighteenth century, the price of bread in New York City was controlled, set at a predetermined price above the market price.

a. Draw a diagram showing the effect of the policy. Did the policy act as a price ceiling or a price floor?

b. What kinds of inefficiencies were likely to have arisen when the controlled price of bread was above the market price? Explain in detail. One year during this period, a poor wheat harvest caused a leftward shift in the supply of bread and therefore an increase in its market price. New York bakers found that the controlled price of bread in New York was below the market price.

c. Draw a diagram showing the effect of the price control on the market for bread during this one - year period. Did the policy act as a price ceiling or a price floor?

d. What kinds of inefficiencies do you think occurred during this period? Explain in detail.

3. European governments tend to make greater use of price controls than does the U.S. government. For example, the French government sets minimum starting yearly wages for new hires who have completed le bac, certification roughly equivalent to a high school diploma. The demand schedule for new hires with le bac and the supply schedule for similarly credentialed new job seekers are given in the accompanying table. The price here—given in euros, the currency used in France—is the same as the yearly wage.

Wage (per year)	Quantity Supplied (New (Job seekers)	Quantity Demanded (New Job Seekers)
$45,000	200,000	325,000
40,000	220,000	220,000
35,000	250,000	310,000
30,000	290,000	290,000
25,000	370,000	200,000

a. In the absence of government interference, what are the equilibrium wage and number of graduates hired per year? Illustrate with a diagram. Will there be anyone seeking a job at the equilibrium wage who is unable to find one—that is, will there be anyone who is involuntarily unemployed? (Hint: involuntary unemployment occurs when the current wage results in a surplus of labor.)

b. Suppose the French government sets a minimum yearly wage of €35,000. Is there any involuntary unemployment at this wage? If so, how much? Illustrate with a diagram.What if the minimum wage is set at €40,000? Also,illustrate with a diagram.

c. Given your answer to part b and the information in the table, what do you think is the relationship between the level of involuntary unemployment and the level of the minimum wage? Who benefits from such a policy? Who loses? What is the missed opportunity here?

4. What can you conclude about the price elasticity of demand in each of the following statements?

a. “The pizza delivery business in this town is very competitive. I’d lose half my customers if I raised the price by as little as 10%.”

b. “I owned both of the two Jerry Garcia autographed lithographs in existence. I sold one on eBay for a high price. But when I sold the second one, the price dropped by 80%.”

c. “My economics professor has chosen to use the Krugman/Wells textbook for this class. I have no choice but to buy this book.”

d. “I always spend a total of exactly $10 per week on coffee.”

5. The U.S. government would like to help the American auto industry compete against foreign automakers that sell trucks in the United States. It can do this by imposing an excise tax on each foreign truck sold in the United States. The hypothetical pre-tax demand and supply schedules for imported trucks are given in this table.

Price of imported trucks	Quantity of imported trucks (thousands)
	Quantity Demanded	Quantity Supplied
$32,000	100	400
31,000	200	350
30,000	300	300
29,000	400	250
28,000	500	200
27,000	600	150

a. In the absence of government interference, what is the equilibrium price of an imported truck? The equilibrium quantity? Illustrate with a diagram.

b. Assume that the government imposes an excise tax of $3,000 per imported truck. Illustrate the effect of this excise tax in your diagram from part a. How manyimported trucks are now purchased and at what price? How much does the foreign automaker receive per truck?

c. Calculate the government revenue raised by the excise tax in part b. Illustrate it on your diagram.

d. How does the excise tax on imported trucks benefit American automakers? Whom does it hurt? How does inefficiency arise from this government policy?

Answer 1

Since there are so many questions here and time will not permit me to solve all of them, i am doing the first question and part a and b of the second one.

1a) Q= (P/4) is supply function.

1b) Q= (30 - P)/2 is the demand function.

At the equilibrium supply = demand.

(P/4)= (30-P)/2

15= 3P/4

P*=20

Q*= (P*/4)

=5

P*=20, Q*=5

1b is shown in the handwritten diagram.

1c) When P= 10, it is below the equilibrium price.

From Supply side Q1= 10/4 = 2.5

From Demand side, Q2= (30-10)/2 = 10

There is excess demand in the market. Market faces a shortage by (10 - 2.5) ie 7.5 units.

2a is done in handwritten part. It is price floor, not price ceiling. Governments use price floors to make sure the price isnt too low.

2b) Producers are in favour of price floors because price floors transfer a part of consumer surplus to producers.However it stops some transactions between consumer and producer resulting in a dead weight loss. This is the economic inefficiency present.