Tutorial 1 - Problems February 2014 Problem 1 Consider the market for apple juice. In this market, the supply curve is given by QSJ = 10PJ − 5PA and the demand curve is given by QD J = 100 − 15PJ + 10PT , where J denotes apple juice,A denotes apples, and T denotes tea. a.) Assume that PA is fixed at $1 and PT = 5. Calculate the equilibrium price and quantity in the apple juice market. b.) Suppose that a poor harvest season raises the price of apples to PA = 2. Find the new equilibrium price and quantity of apple juice. Draw a graph to illustrate your answer. c.) Suppose PA = 1 but the price of tea drops to PT = 3. Find the new equilibrium price and quantity of apple juice. d.) Suppose PA = 1, PT = 5, and there is a price ceiling on apple juice of P = 5. What is the excess demand for apple juice as a result? Draw a graph to illustrate your answer. Problem 2 1. Suppose the demand and supply for milk are described by the following equations: QD = 600 − 100P QS = −150 + 150P where P is price in dollars, QD is quantity demanded in millions of litres per year, and QS is quantity supplied in millions of litres per year. a) Graph supply and demand and determine graphically equilibrium price and quantity b) Calculate the equilibrium 2. Suppose a growth hormone is introduced that allows dairy farmers to offer 125 million more litres of milk per year at each price. 1 a) Describe what happened to the supply and the demand curve and graph the new curves b) Determine equilibrium price and quantity c) Suppose the Government set the price of milk at $3 a litre. Demonstrate the effect of this regulation on the market for milk. What is quantity demanded? What is quantity supplied? Discuss. Problem 3 By taking an airplane Larry can travel from Denver to Houston in one hour. The same trip takes 5 hours by bus. Airfare is $90 and the bus fare is $30. Larry, when he is not travelling, can work and earn $30/hour. Answer the following questions: a What is the economic cost for Larry of travelling by bus? b What is the economic cost for Larry of travelling by plane? c Which is the cheaper mode of travel for Larry? d How would the answers be different for another person Moe (who can work and earn $6/hour when he is not travelling)? Problem 4 Graph the effect on equilibrium price and quantity in the market for oranges for each of the following changes. a) A chemical routinely sprayed on orange orchards is found to cause cancer b) The wages of farm workers increase c) A new orange picking machine is invented. For the same cost, it can pick more oranges, faster, and with less damage than other machines d) Consumer income falls e) The price of tangerines falls. Problem 5 The local pub is advertising a special. If you buy one beer, you get the next one at 25% off, the third one for 50% off and the forth one for 75% off. Your marginal benefit from drinking beer is shown in the table below. If the price of a beer is $6, how many should you buy? 2 #beers MB 0 1 2 3 4 0 7 4 2 1 Problem 6 The demand and supply for a good are respectively: 1 D : QD = 5 − P 2 S : QS = −4 + P a) Determine equilibrium price and quantity and show them on a graph b) Due to a positive shock to supply, the supply curve shifts outward. The new curve is: S 0 : QS = −1 + P Describe what happens to the equilibrium in the market and calculate the new equilibrium price and quantity. c) Now suppose that, given a negative shock, the quantity demanded declines by 20%. What happens to the demand curve? Graph the new curve and calculate the new equilibrium. 3