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Supply and Demand and Budget Line

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1. The countries of A and B are small island countries. Both produce fruit and timber. Each island has a labor force of 30. The following table gives production per month for each worker in each country. Workers| Baskets of Fruit| Board Feet of Timber| A| 10| 10| B| 4| 8| a. Which country has an absolute advantage in the production of fruit? Which country has an absolute advantage in the production of timber? b. Which country has a comparative advantage in the production of fruit? Which country has a comparative advantage in the production of timber? c.

Sketch the PPF’s of both countries.

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d. Assuming no trading between the two, if country A use 19 workers to produce fruits and 11 workers to produce timbers and if country B use 20 workers to produce fruits and 10 workers to produce timbers. How many fruits and timbers would be produce and consume in each country? Show your answer on the PPF’s in each country. e. Show that by specialization there are much more fruits and timbers would be produce in total.

f. If the two countries specialize in the production of good that has low opportunity cost compared to the other and if country B sell 130 of its timbers for 100 fruits to country A.

How many fruits and timbers would be produce and consume in each country? g. Show that by trading each country can consume more than its PPF. 2. Explain how each of the following situations would affect a nation’s production possibilities curve. a. A technological innovation allows the nations to more efficiently convert solar energy into electricity. b. A prolonged recession increases the number of unemployed workers in the nation. c. A category 5 hurricane destroy over 40% of the nation’s productive capacity. d.

The quality of education in the nation’s college and universities improves greatly. e. The nation passes a law requiring all employers to give their employees 16 weeks of paid vacation each year. Prior to this law, employer were not legally required to give their employees any paid vacation time. 3. Explain each of the following statements describes change in demand or change in the quantity demanded, and specify whether each change represents an increase or a decrease. In addition draw a demand graph representing the appropriate changes. a.

A seller experiences a 40% increase in sales of clothes during 10-day, half price sale. b. Anna gets a promotion and 20% increase in her salary and decides to reward her self by purchasing a new car. c. When the price of hamburger unexpectedly rises, many consumers choose to purchase sandwich instead. d. Due to the problem of taste, A seller has experienced a decline in sales of his hand – made cake. e. An accountant working for the city of Jakarta, decides to forego his annual vacation to Bali when word leaks out that the city may be in danger following the terrorism issue. 4.

Explain each of the following statements describes change in supply or change in the quantity supplied, and specify whether each change represents an increase or a decrease. In addition draw a supply graph representing the appropriate changes. a. Political unrest overseas threatens to distrupt the supply of Indonesia’s batik clothes. b. As the price goes up, farmers have motivation to do anything they can to get their product to the market. 5. Consider the markets for CD, laptop, and windows For each pairs, identify whether they are substitutes or complements. Laptop and CD CD and Windows

Windows and laptop a. Suppose a technological advance reduces the cost of manufacturing laptop. Draw a diagram to show what happen in the market for laptop. b. Draw two more diagram to show how the change in the market for laptop affects the markets for CD and Windows. . 6. For each of the following statements, draw a diagram that illustrates the likely effect on the market for meat. Indicate in each case the impact on equibrium price and quantity. a. A surgeon general warns that high-colesterol foods cause hear attacks. b. The price of chicken, a subsitute product decreases. c.

An increase in the price of chicken occurs. d. A technological innovation in health increases the weight of a cow. 7. Cassava has an elastic demand, and rice has an inelastic demand. Suppose that the government places a tax on each product that lowers the supply of each product by half. a. What happen to the equibrium price and quantity in each market ? b. Which product experiences a larger change in price ? c. Which product experiences a larger change in quantity ? d. What happen to total consumer spending on each product? e. What happen to total revenue received by the producer of each product ?

Kuis 3 1. Suppose that the business travelers and vacationers have the following demand for airline tickets from New York to Boston: Price| Qd (business travelers)| Qd(vacationers)| $150| 2100 tickets| 1000 tickets| 200| 2000| 800| 250| 1900| 600| 300| 1800| 400| a. As the price of tickets rise from $200 to $250, what’s the price elasticity of demand for business travelers and vacationers ? use the mid point formula. % change in quantity demanded for business travelers is = (1900-2000)/(1900+2000)/2= – 0. 013 % change in quantity demanded for vacationers is = (600-800)/(600+800)/2= – -0. 71 % change in price is = (250-200)/(250+200)/2= 0. 056 So, Ed for business travelers is = -0. 231 and, Ed for business travelers is = -1. 286 b. Why might vacationers have different price elasticity of demand compared to business travelers ? Because business travelers have some schedules to go . Therefore they don’t have any choices when the price increase. However vacationers can choose to cancel their demand for the ticket until the price is affordable to them because they don’t have any compulsory schedules to go. 2. Consider public policy aimed at smoking. a.

Studies indicate that the price elasticity of demand for cigarettes is about 0. 4. If a pack of cigarettes currently cost $2 and government wants to reduce smoking by 20%, by how much should it increase the price ? Ed (Elasticity of demand) is equal to % change in quantity demanded divided by % change in price. Therefore % change in price is equal to % change in quantity demanded divided by Ed and it’s equal to 0. 5 or 50 %. b. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking one year from now or 5 years from now ? years from now because people cannot easily decrease their consumption of cigarettes. Therefore they have to decrease smoking gradually until they stop smoking. c. Studies also find that teenagers have a higher price elasticity than do adults. Why might this be true ? There are two reason. First because adults have been addicted to smoke compared to teenagers so they find difficulty to decrease smoking behavior. Second because adults have more money than teenagers so they can still buy cigarettes although the price has risen.

Therefore when the price of cigarettes increase teenagers can decrease their smoking more easily than adults. 3. Corn has an elastic demand, and gasoline has an inelastic demand. Suppose that the government places a tax on each product that lowers the supply of each product by half (that’s the quantity supplied at each price is 50% of what it was). Demand corn S S P Demand gasoline Q f. What happen to the equibrium price and quantity in each market ? Both equibrium price and quantity decrease. g. Which product experiences a larger change in price ? Gasoline h.

Which product experiences a larger change in quantity ? Corn i. What happen to total consumer spending on each product? Because demand for corn decrease more than the increase of its price consumer spending for this product will decrease an because demand for gasoline decrease less than the increase of its price consumer spending for this product will increase. j. What happen to total revenue received by the producer of each product ? the change in total revenue must be the same with the change in consumer spending for both product. So, the answer is the same with d. 4.

For each of the following pairs of goods, which good would you expect to have more elastic demand and why ? a. Required text book or mystery novels. Mystery novels have more elastic demand because people – actually you as a college student – think that reading novels is not as important as reading required text book. Therefore when price of novels suppose to increase, you can easily substitute to other book. But when the price of your required text book increase you don’t have any choice except to buy the book for your studying purpose. b. Beethoven recordings or classical music recordings in generals.

Classical music recordings in general because they are in broader market. Therefore people have many substitute in classical music recordings. c. Subway rides during the next 6 months or subway rides during the next 5 years. Subway rides during the next 5 years because people can change their behavior more easily in the next 5 years than in the next 6 month. d. Root beer or water. Root beer because people can easily change their demand for this product when the price has changed. It’s because root beer is not important as water for them. Kuis 4 1.

Assume that a household receives a weakly income of $100. If the figure below represents the choice of that household as the price of x changes, plot three points on the household demand curve. First, we must find the price at each these consumer equibrium points. The figure below shows that the price of product X has decreased that makes the budget line pivot to the right. When consumer choose to buy 30 products of good X, the price is $1 ($100/100). When consumer choose to buy 140 products of good X, the price is $0. 5 ($100/200). consumer choose to buy180 products of good X, the price is $0. ($100/300). 200 180 140 100 300 30 Y X consumer choose to buy 30 products of good X, the price is $1 ($100/100). Px consumer choose to buy 30 products of good X, the price is $1 ($100/100). 1 0. 5 0. 3 180 30 140 X consumer choose to buy 30 products of good X, the price is $1 ($100/100). 2. If a person marginal rate of substitution of X for Y – that’s MUx/MUy – is equal to 5 and Px=$9, Py=$5. She is spending too much of her income to X. Do you agree ? explain your answer using a graph.

We know that the slope of budget line is Px/Py (assume that product X is at horizontal axis and roduct Y is at vertical axis ) and we also know that the slope of indifferent curve is MRS that’s Mux/Muy. The consumer choose to consume at the point which the slope of budget line and the slope of indifferent curve are tangent, that’s at the point where Mux/Px=Muy/Py or at Mux/Muy=Px/Py. Y A B C X Let’s look at the three points at the figure above. At point B the slope of budget line and indifferent curve are tangent. At point A the slope of indifferent curve is higher than the slope of budget line and at point C the slope of indifferent curve is less than the slope of budget line.

If MUx/MUy is equal to 5 and Px=$9 and Py=$5. So, we know that this consumer consume at the point which the slope of indifferent curve is higher than the slope of budget line because 5 is higher than 1. 8. Therefore this consumer consumes too much in good Y such as at point A. At this point, the consumer is exactly not afford to buy the bundle of good X and good Y because the point is at outside the budget line. To use his budget as a whole and to maximize his utility this consumer must choose to consume at the point B by decreasing his consumption of good Y and increasing his consumption of good X.

By doing this way, Mux will decrease and Muy will increase which makes the slope of indifferent curve decreases relative to the slope of budget line. Consumer should stop decreasing his consumption of good Y and increasing his consumption of good X until the slope of indifferent curve and the slope of budget line are the same, that’s at point B. 3. Assume a person consumes only two goods — A and B. Assume also that his MRS of A for B is given by the following formula: MRS = MUa/MUb = B/A a. The person income is $ 100. Pa=5 and Pb=$10. What’s quantity of A and B will he consume ?

Remember this formula to find the quantity of goods that maximize consumer utility given his budget or income: Mua/Mub=Pa/Pb B/A=5/10 B/A=1/2 A=2B To find A and B, we can use budget line equation that’s 5A+10B=100 and substitutes A=2B to this equation. Therefore: 5(2B)+10B=100 20B=100 B=5 Therefore A=2B=2(5)=10 b. Derive his demand curve for A and add two additional points when Pa= $7. 5 and Pa=$10. Always use this formula: Mua/Mub=Pa/Pb B/A=7. 5/10 B/A=0. 75 B=0. 75A To find A and B, we can use the new budget line equation that’s 7. 5A+10B=100 and substitutes B=0. 5A to this equation. Therefore: 7. 5A+10(0. 75A)=100 7. 5A+7. 5A=100 15A=100 A=6. 67 Therefore B=0. 75A=0. 75(6. 67)=5 And, if Pa=10, continue to use this formula: Mua/Mub=Pa/Pb B/A=10/10 B/A=1 B=A To find A and B, we can use the new budget line equation that’s 10A+10B=100 and substitutes B=A to this equation. Therefore: 10A+10(0. 75A)=100 10A+7. 5A=100 17. 5A=100 A=5. 71 Therefore B=A=5. 71 Now, we summarize at Pa=5, A= 10, at Pa=7. 5, A=6. 67, at Pa=10, A=5. 71. Therefore we can attach these point the demand curve like this: Pa 10 7. 5 5 6. 67 10 5. 71 A c.

Sketch those points on budget line and indifference curve graph. 13. 3 10 6. 67 Y 5. 71 X consumer choose to buy 30 products of good X, the price is $1 ($100/100). 10 20 4. C and D spend their time performing two favourite activities, knitting scarves and making meatballs. C takes 2 hours to knit a scarf and 1 hour to make a dozen meatballs. D takes 3 hours to knit a scarf and 2 hour to make a dozen meatballs. a. What’s each individual opportunity cost of knitting a scarf ? who has absolute advantage in knitting scarf ? who has comparative advantage in knitting scarf ? . If they trade with each other, who will take away scarves in exchange for meatballs? 5. You are the curator of the museum. The museum is running short of funds, so you decide to increase revenue. Shoud you increase or decrease the price of admission ? 6. Explain the following might be true. A drought around the world raises the total revenue that farmer receive from the sale of grain, but a drought only in Kansas reduces the total revenue that Kansas farmers receive. 7. Suppose the price elasticity of gasoline is 0. 3 in the short run and 0. 9 in the long run. a.

If the price of a gallon of gasoline falls from $2. 5 to $2. 25, What happen to the quantity of gasoline demanded in the short run ? in the long run ? ( use the mid point formula ). b. Why might the elasticity of demand for gasoline depend on time horizon ? 8. Using supply and demand diagrams, show the effect of the following events on the market for personal computers. a. The price of computer chip falls. b. There is a rise in consumer incomes. c. The price of computer software rises. d. Universities require incoming freshmen to have their own personal computers. 9.

Ketchup is a complement for hod dogs. If the price of hod dogs rises, what happen to the market for ketchup ? for tomatoes ? for tomatoes juice ? for orange juice ? 10. Explain each of the following statements using supply and demand diagrams. a. When a cold snap hits Florida, the price of orange juice rises in supermarkets through out the country. b. When the weather turns warm in New England every summer, the price of hotel rooms in Carribean resorts plummets. c. When a war breaks out in the Middle East, the price of gasoline rises and the price of used Cadillac falls.

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Supply and Demand and Budget Line. (2016, Oct 22). Retrieved from https://graduateway.com/supply-and-demand-and-budget-line/

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