problem week 3

Answer the following questions in a Microsoft Word document and upload to submit. Note that this assignment requires you to express your thoughts and analyses in full sentences and paragraphs (unlike the Quizzes where most questions are multiple-choice).

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”.)
   1. A price ceiling set at $3.70/bushel
   2. A price floor set at $3.40/bushel
   3. A price ceiling set at $4.60/bushel
   4. A price floor set at $4.30/bushel
   5. A fixed price of $3.40/bushel

1. Read “Lobbyists Who Want Nothing (Links to an external site.)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.
   1. 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.
   2. Who gain from those tariffs? Who are hurt by those tariffs?
   3. 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.)
   4. Why is the sugar industry against the sugar subsidy program? [Hint: This is mentioned in the article.]
   5. As consumers, how are you hurt by the sugar tariff? And how would you be hurt by the sugar subsidy?

1. 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.
   1. Over this price range, what is the price elasticity of demand? Is demand elastic, or inelastic?
   2. If the quantity of fish demanded decreases by 5% when the price rises by 10%, is the demand for fish elastic, or inelastic? Explain.

1. For each of the following pairs of goods, which good would you expect to have a more elastic demand, and why?
   1. College-course textbooks versus mystery novels
   2. Cold soda on a cool day versus cold soda on a hot day
   3. Plane tickets for business travelers versus plane tickets for vacationers

1. When McDonald’s McCafes successfully invaded Starbucks’ territory, the ____ (supply of/demand for) Starbucks’ coffee shifts to the ____ (right/left).
   1. And (when McD entered the coffee market) what happened to the Ed-value for Starbucks coffee – increase, or decrease? Explain briefly.
   2. 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? Explain.

1. 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.
   1. Given the above information, what can you infer about the demand for oil — elastic, or inelastic? Explain what given information here supports your answer.
   2. 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.

1. 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)?

1. “Built for the Long Haul (Links to an external site.)Links to an external site.” (BusinessWeek Jan30’06, p.66) talks about Paccar’s ability to charge premium prices for its trucks.
   1. Premium-pricing power indicates what type of demand – elastic or inelastic? And what is the basic explanation for this characteristic in Paccar’s case?
   2. 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.)

1. 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.

1. 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?

1. 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%.
   1. With the tax, predict how many gallons of gasoline will be bought in the city.
   2. How much tax revenues will be generated?