Chapter 2

1. Apples and Oranges are substitutes. A freeze in Florida destroys most of the orange  crop. Using graphs, show and explain what you would expect to happen to the market for the following:

a. Oranges?

b. Apples?

c. Orange juice?

2. American Tennishoe, Inc., is concerned because Congress has proposed an excise tax of $1 on each pair of tennis shoes sold in the United States. They are lobbying against the tax through an advertising campaign that says the tax will raise the price of tennis shoes by $1. Use supply and demand graphs to show how much of the tax will actually be passed on to consumers.

3. The government decides that a specific scare good should be provided for everyone who wants it at a price of zero and passes a law making it illegal to buy or sell the good. However, people can give the good away. This good is highly desirable for some of the population. What effect will this law have on the market? What would happen in this market if the law were removed?

4.. Suppose you are an aide to a U.S.Senator who is concerned about the impact of a recently proposed excise tax on the welfare of her constituents. You explained to the Senator that one way of measuring the impact on her constituents is to determine how the tax change affects the level of consumer surplus enjoyed by the constituents. Based on your arguments, you are given the go-ahead to conduct a formal analysis, and obtain the following estimates of demand and supply:

Q^d= 500- 5P and Q^S = 2P - 60.

a. Graph the supply and demand curves.

b. What are the equilibrium quantity and equilibrium price?

c. If a $2 excise tax is levied on his good, what will happen to the equilibrium price and quantity?

d.What will the consumer surplus be before and after the tax?

5. The demand for your product has been estimated to be Q^d_x = 7,880 - 4P_x - 2P_y + P_z - 0.1M. The relevant price and income data are as follows: P_x = 10, P_y = 15, P_z = 50, M = 40,000.

a. Which goods are substitutes for X? Which are complements? Why?

b. Is X an inferior or a normal good? Why?

c. How much X will be purchased? Why?

d. Graph the demand curve for X given the above information.

e. How will the demand curve change if M falls to 35,000? Why?

6. The supply for your product has been estimated to be Q^s_x= -300 + 4P_x +2P_z and P_x = 30, P_z=40.

a.How much X is produced?

b.What is the inverse supply curve for X given the above information?

c. Graph this supply curve.

d.Show what happens to this supply curve if the price of Z goes up by $10.

7. Consider the following demand and supply curves: Q^d = 5,800 - 6P and Q^s = 4P - 120.

a. Graph the supply and demand curves.

b. What are the equilibrium quantity and equilibrium price?

c. How much consumer surplus exists in this market?

d. What happens in this market if a price floor of $600 is placed on this good?

e.What happens to consumer surplus in part d?

f. If a price ceiling of $500 were placed on this good instead of a price floor, how would the market be affected?

g. What is the full economic price after the implementation of the price ceiling in part f?