U. Houston ECONOMICS 2233 – The first two problems in this set are S&D

The first two problems in this set are S&D applications,
to confirm your solid understanding of that very important model of economics
(S&D) which is tremendously useful in business analyses.
1 Use the
S&D table given for Problem #3 on p. 73 of your textbook to answer the
following questions. The table gives supply and demand data for wheat.
Determine what effect each of the following would have on the wheat market.
(State whether there will be a “shortage” or “surplus” – and specify the proper
quantity—or whether there will be “no effect”.)
a A price
ceiling set at $3.70/bushel
b A price
floor set at $3.40/bushel
c A price
ceiling set at $4.60/bushel
d A price
floor set at $4.30/bushel
e A fixed
price of $3.40/bushel
2 Read
“Lobbyists Who Want Nothing (Links to an external site.)?”
(BusinessWeek, Jan 22, 2007, p72). It gives you an idea of the zany things that
can happen when politics interferes with economics. Let’s de-construct the
issue, using S&D analysis.
a Describe
(in terms of S&D graphs) the impact of the sugar import tariffs on the
S&D of the sugar market in the US.
b Who gain
from those tariffs? Who are hurt by those tariffs?
c Why is
the Sweetener Users Assn. strongly pushing the US government to switch to a
subsidy program for sugar instead of the current program? Describe (in terms of
S&D graphs for sugar) the effect of a subsidy. [Yes, the answer becomes
plain to see if you do a proper S&D analysis.)
d Why is
the sugar industry against the sugar subsidy program? [Hint: This is mentioned
in the article.]
e As
consumers, how are you hurt by the sugar tariff? And how would you be hurt by
the sugar subsidy?
3 Good
weather brings a bumper tomato crop. The price of tomatoes falls from $6 to $4
a basket, and the quantity demanded increases from 200 to 400 baskets a day.
a Over
this price range, what is the price elasticity of demand? Is demand elastic, or
b If the
quantity of fish demanded decreases by 5% when the price rises by 10%, is the
demand for fish elastic, or inelastic? Explain.
4 For each
of the following pairs of goods, which good would you expect to have a more
elastic demand, and why?
a College-course
textbooks versus mystery novels
b Cold soda
on a cool day versus cold soda on a hot day
c Plane
tickets for business travelers versus plane tickets for vacationers
5 When
McDonald’s McCafes successfully invaded Starbucks’ territory, the ____ (supply
of/demand for) Starbucks’ coffee shifts to the ____ (right/left).
a And (when
McD entered the coffee market) what happened to the Ed-value for Starbucks
coffee – increase, or decrease? Explain briefly.
b When a
firm (like Starbucks’) succeeds in increasing the loyalty of its buyers
(through ads or ‘loyalty programs’) what happens to the Ed for its product?
6 In the
1970s the Organization of Petroleum Exporting Countries (OPEC) worked as a
cartel and they reduced the supply of oil in the world market. This caused the
price of oil to increase sharply, and as a result, OPEC’s revenues also
increased greatly.
a Given
the above information, what can you infer about the demand for oil — elastic,
or inelastic? Explain what given information here supports your answer.
b Would you
expect countries that export bananas or pineapples will be able to duplicate
OPEC (i.e., form a cartel and reduce supply, in order to raise prices and
revenues)? Explain why or why not, using elasticity concepts.
7 Two
drivers – Tom and Jerry – each drive up to a gas station. Without looking at
the price of gas, each one places an order with the pump attendant. Tom says,
“I’d like 10 gallons of gas.” Jerry says, “I’d like $10 of gas.” What is each
driver’s price-elasticity of demand for gas (give the Ed-value for each)?
8 “Built
for the Long Haul (Links to an external site.)?”
(BusinessWeek Jan30’06, p.66) talks about Paccar’s ability to charge premium
prices for its trucks.
a Premium-pricing
power indicates what type of demand – elastic or inelastic? And what is the
basic explanation for this characteristic in Paccar’s case?
b Since
Paccar is now charging premium prices, we know – from the Law of Demand – that
it should be able to sell more cars if it lowered its prices. But, as MBAs who
understand elasticity, you would nonetheless advise Paccar against doing so,
for its revenues could fall while costs would rise if they reduced price. Why
would revenues TR drop? And why would total costs TC rise? (Use critical
economic analysis here.)
9 As a
transit planner, you must predict how many people ride commuter trains and how
much revenues are generated from train fares. According to a recent study, the
elasticity of demand for commuter-train rides is -0.62. The current ridership
is 100,000 people per day. If the transit authority decides to raise its fares
by 20%, predict the change in ridership per day. Show your computations.
10 Consider
public policy aimed at smoking. Studies indicate that the Ed for cigarettes is
about 0.3. If a pack of cigarettes currently costs $2, and the government wants
to reduce smoking by 40%, then by how much should it increase the price?
11 You are a
tax analyst for the city of Econburgh, and have been asked to predict how much
tax revenues will be generated if the city imposed a gasoline tax. Initially,
100 million gallons per day are bought in the city, and the price elasticity of
demand is -4.0. The tax, which is $0.10/gallon, will increase the price of
gasoline by 5%.
a With the
tax, predict how many gallons of gasoline will be bought in the city.
How much tax revenues will be generated?

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