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UMGC – Rota u. Landstuhl+ ECON 203

Fall (ii) 2020 Exercise Set 2

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Exercise Set 2 (due beginning of Week 3 class; 15 points, individual submission; 10 points class bonus, guaranteed if each question answered in good faith and present for Week 3 class)

Last Name, First Name:

Individual Score: (- = + /15

Class Score: + /10

Total Score: + /25

1. Question #1 Score (- = + /3

Consider the market for Apple iphone 11 cell phone in the U.S. For each of the following questions, show in the diagram provided how each of the described events affects the equilibrium price and quantity of iphones. (3 points; .6 points per question) Note: for clarity, shade your new curve red.

(a) The cost of RAM memory increases. (-

P (iphones)

S

A

D

Q (iphones, X11)

(b) The price of a Samsung Galaxy S10 (e) cell phone increases. (-

P (iphones)

S

A

D

Q (iphones, X11)

(c) The price of Apple iphone 12 next month rises by 20%. (Consider the supply curve effect here.) (-

P (iphones)

S

A

D

Q (iphones, X11)

(d) The U.S. economy goes into another recession. (-

P (iphones)

S

A

D

Q (iphones, X11)

(e) A new generation of college students graduates with a preference for cell phones that use the Android operating system. (-

P (iphones)

S

A

D

Q (iphones, X11)

2. Question #2 Score (- = + /3
Consider two products: “safe cars” (heavy cars) and “dangerous cars” (lightweight cars). (3 points; .6 points per question)
(a) Are these two products substitutes or complements? (-
Answer:
(b) If new technologies make it less expensive to produce safe cars, what happens to the supply curve of safe cars? (Show in the diagram below.) (-
Answer:

P (safe cars)

S

A

D

Q (safe cars)

(c) So given your answer to (b), what will happen to the equilibrium price of safe cars? (-
Answer:
(d) So now that the price of the safe cars has changed, how does this impact the demand for lightweight (dangerous) cars? (Show your answer in the diagram below.) (-
Answer:
P (lightweight cars)

S

A

D

Q (lightweight cars)

(e) So in a competitive market, as engineers and scientists create new technologies to make cars safer, the number of lightweight (dangerous) cars sold will ____________________. (-
Answer:

3. Question #3 Score (- = + /3
(On substitutes and complements!) Given the increase in immigration from the Middle East to Germany over the past few years, the demand for donor kebabs in Germany has increased. (3 points; .6 points per question)
Note: when displaying shifts of curves, for clarity, shade your new curve red.
(a) Using the diagram below, illustrate and explain how this affects the equilibrium P* and Q* in the donor kebab market. (Answer: the demand curve shifts to the right, as shown by the new (red-shaded) demand curve, D’, below. So at the new equilibrium point, B, the equilibrium price, P, and the equilibrium quantity, Q, of donor kebabs have both increased.) (The first one is done for you.) (-0)!

P (donor kebabs)
S

P

B

A
D’

D

Q (donor kebabs)

(b) Given our answer to (a), since we know that French fries are consumed with donor kebab (i.e., they’re complements), using the diagram below, illustrate and explain what will happen to the market-clearing price and quantity of French fries in Germany. (Hint: focus on what happened to the price of donor-kebabs in (a).) (-
Answer:
P (French fries)
P
S

A

D

Q (French fries)

(c) Given your answer to (b), use the diagram below to illustrate what this means in the market for potato chips, assuming that French fries and potato chips are substitutes. (Hint: again, focus on what happens to the price of French fries in (b).) (-
Answer:

P (potato chips)

P S

A

D

Q (potato chips)

(d) Given your answer to (c), where you show what happens to the price of potato chips, show below what should happen to the demand for beer, given that the two are consumed together, i.e., that they’re complements? (Hint: again, focus on what happens to the price of potato chips in (c).) (-
Answer:
P (beer)

P S

A

D

Q (beer)

(e) Finally, given your answer to (d), show below what we’d expect to happen to the price of wine, assuming, of course, that beer and wine are substitutes? (Hint: again, focus on what happens to the price of beer in (d).) (-
Answer:

P (wine)

P S

A

D

Q (wine)
Summarizing, an increase in the demand for donor kebabs has brought about a(n) _________________ in the price of wine!
4. Question #4 Score (- = + /3
Use the demand and supply framework we developed in class to analyze the market in each of the scenarios (a) through (e) outlined in the Table below. For each scenario, fill in each of the corresponding cells by identifying how the demand and/or supply curves shift (left, right, or no change) and what the effects on equilibrium price and quantity (increase, decrease, ambiguous) are.
(Note: it is a good idea to draw on a separate sheet of paper a demand and supply curve for each market to identify the appropriate curve shift(s) and resulting equilibrium price and quantity. You are not to submit those worksheets, however.) (3 points; .15 points per cell)

Scenario

Market

Demand Curve

Supply Curve

Equilibrium
Price

Equilibrium Quantity

(a)

Processed Meat

(b)

Grapefruit

(c)

Microwavable Meals

(d)

Hotel Rooms in Spain

(e)

Mediterranean Cruises

(a) A recent study claims that consumption of processed meat increases cancer risk, evoking fear among consumers. (-
(b) A new study claims that grapefruit reduces the risk of stroke for women. And a damaging frost in California, Arizona, Texas, and Florida destroys 25% of this year’s grapefruit crop. (-
(c) UMUC students consider microwavable meals to be an inferior good. Due to an unexpected economic downturn, their income falls by 10%. (-
(d) Given waning safety concerns, European summer tourists return to North Africa and Turkey as favorite destinations and reduce travel to Spain by 30%. At the same time, Spanish hotel workers strike for higher wages. (-
(e) Airlines reduce airfares 30% to ports of embarkation (Barcelona and Rome) for passengers booking week-long Mediterranean cruises. (Air travel to and from these ports, of course, is necessary in order to take the cruise.) (-

5. Question #5 Score (- = + /3
Consider the demand and supply of labor. Businesses demand labor; households supply labor. The labor demand curve is downward sloping, meaning that as wages fall, the quantity demanded (by firms) of labor hours increases. Likewise, the labor supply curve is upward sloping, meaning that as wages rise, the quantity supplied of labor (by households) increases. Any variable other than the wage shifts either the labor demand curve or labor supply curve rightward or leftward. See the sample diagram below. (3 points, as indicated per question)

Wage

P S

W*

A

D

Q (labor hours)
Q*

Now, let’s use this new knowledge to explain an oft-observed curiosum!
(a) Suppose a business makes a job seem fun (e.g., free lunches) or at least safe (e.g., nagging the city police to patrol frequently the inner-city factory). Would that affect the demand or supply curve of labor? (1 point) (-
Answer:
(b) Which way would the curve you identified in (a) shift? Right or left? (1 point) (-
Answer:

(c) What would happen to the equilibrium wage as per your answer in (b)? So what happens, in general to the equilibrium wage in work environments that are a “great place to work”? (.5 points) (-
Answer:

(d) So how does this explain why the hourly wage for the typical radio or television announcer is only $13 per hour, lower than almost any other job in the entertainment or broadcasting industry. (.5 points) (-
Answer: