Important definitions:
"Demand curve: a schedule or curve showing the quantity of a good that
buyers would purchase at each price, other things equal. Normally a
demand curve has price on the vertical or y-axis and quantity demanded
on the horizontal or x-axis." (Page 734)
"Change in demand versus change in quantity demanded: a change in the
quantity buyers want to purchase, prompted by any reason other than a
change in price (e.g. increase in income, change in tastes, etc.), is
a "change in demand." (In graphical terms, it is a shift of the
demand curve.) If, in contrast, the decision to buy more were less is
prompted by a change in the good's price, then it is a "change in
quantity demanded." (In graphical terms, a change in quantity
demanded is a movement along an unchanging demand curve.)" (Page 731)
"Supply curve: a schedule showing the quantity of a good that
suppliers in a given market desire to sell it each price, holding
other things equal." (Page 747)
"Change in supply versus change in quantity supplied: this distinction
is the same for supply as for demand...." (page 731)
"Substitution effect (of a price change): the tendency of consumers is
to consume more of a good when its relative price falls (two
"substitute" in favor of that good), and to consume less of the good
when its relative price increases (two "substitute" away from that
good). The substitution effect of a price change leads to a
downward-sloping demand curve. (Page 747)
The equilibrium price and quantity are when the quantity supplied is
equal to the quantity demanded at a given price.
#1
a) demand for hot chocolate will increase, leading to a higher price.
b) demand for hot chocolate will decrease because consumers will
substitute tea in favor of hot chocolate.
c) suppliers can afford to supply more hot chocolate for a given
price. This will lower the price of hot chocolate, thereby increasing
the quantity demanded. The supply curve will shift to the right.
d) the effective price of consuming a hot chocolate with whipped cream
has decreased, so there will be an increase in the consumption of hot
chocolate and an increase in its price.
e) suppliers can afford to supply more hot chocolate for a given
price. This will lower the price of hot chocolate, thereby increasing
the quantity demanded. The supply curve will shift to the right.
f) consumers will demand more hot chocolate, thereby increasing its
price.
g) given that milk is an ingredient in hot chocolate, the price of a
cup of hot chocolate will increase, leading to a decrease in demand.
h) consumers will consume less hot chocolate, resulting in a decline
in its price. In this case, the demand curve will shift to the left.
i) the price of hot chocolate will increase, resulting in a decline in
consumption.
j) the price of hot chocolate will decrease, resulting in an increase
in consumption.
#2
a) a producer can increase his or her revenue by producing more green
eggs and ham.
b) the prices of green eggs and ham will decrease.
c) eventually, the price of green eggs should be twice the price of
ham because producers will produce more of the ham and less of the
green eggs if their prices are the same, causing the price of ham to
fall and the price of green eggs to rise.
#3
a) the shoppers who know which clerk is the fastest will switch to
that line, causing it to lengthen and the other lines to shorten.
b) at equilibrium, the wait times at all the lines will be the same (a
shopper will no longer gain an advantage by changing lines). The line
with the fastest clerk will be twice as long as the other three lines.
The three lines will each have 20 shoppers in line, in the fourth
line with the fastest clerk will have 40 shoppers in line.
#4
a) in the short run, people will buy less land. In the long run, more
skyscrapers will be built to better utilize the supply of land.
b) in the short run, people will conserve electricity. In the long
run, they will switch to other forms of energy like natural gas.
c) in the short run, people will install insulation. In the long run,
they will move to warmer climates.
d) in the short run, people will have fewer children. In the long
run, they will choose to have their children outside of the United
States.
e) in the short run, people will be less concerned about conservation.
In the long run, they will switch all of their appliances to
electricity from other sources of power.
f) in the short run, more work will be done by hand. In the long run,
some of the workers will be trained and lower wages in more skilled
jobs as well.
#5
If we express the ditch digger's wage as X and the interior
decorator's wage as Y, then given the definition of linkage as being a
number of steps that are 10% apart between the respective wages, we
derive the equation: Y = X (1.1)^n where n is a number of linkages.
We can use this equation to solve for any given the ditch digger's
wage and interior decorator's wage. For example, if we assume that
ditch diggers make five dollars an hour and interior decorators make
$10 an hour, we solve for n by interpolation and round up to the
nearest integer which is 8.
#6
a)"Price-elastic demand: the situation in which price elasticity of
demand exceeds 1 in absolute value. This signifies that the
percentage change in quantity demanded is greater than the percentage
change in price. In addition, elastic demand implies the total
revenue (price times quantity) rises when price falls because the
increasing quantity demanded is so large." (Page 744)
If price elasticity is low, then there is minimal change in the
quantity demanded when the price goes up or goes down. If the
government is successful in reducing the supply of illegal drugs, then
prices will go up, but demand will remain constant. This will likely
increase the crime rate as more people have to steal in order to
afford the more expensive drugs.
b) assuming that nurse practitioners are less expensive than doctors
and that consumers view the quality of services being equivalent, the
substitution effect will result in less demand for the service of
doctors because consumers will seek to replace the more expensive
resource with the less expensive.
#7
a) if the government had not intervened, wages for nurses would have
increased because of the supply shortage. Eventually, the increased
wages would have attracted more people into the profession, thereby
resolving the shortage. However, the cost of medical care would have
risen to pay for the higher wages for nurses.
b) by subsidizing the cost of going to nursing school, the supply of
nurses will be increased (the supply curve will shift to the right).
This will cause a decrease in the wages of nurses and a decrease in
the wages of nursing assistants (as nurses become cheaper, hospitals
will substitute away from nursing assistants unless their wages also
fall). Falling wages should lead to a decrease in the cost of medical
care, assuming all other components of medical care cost are fixed.
However, taxes will have to rise to pay for the nursing school
subsidy.
Source: "Economics" 14th edition, by Samuelson and Nordhaus,
McGraw-Hill Inc., 1992
Please request clarification if needed before rating this answer.
Sincerely,
Wonko |
