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Homework #1 Microeconomics for Public Policy

Name: _________________________________________ Submission: 10/10/2018

1. Suppose you are planning to conduct a study of the running shoe market. List the factors
that you believe would cause changes in the demand for running shoes. In each case, note
whether the relationship would be positive (direct) or negative (inverse). Also list the
factors that you believe would affect the supply, again noting the nature of the
relationship.

Answer:

2. In each case below, identify the effect on the demand curve for beef (a normal good).
a. An increase in the price of lamb
b. A decrease in the population
c. An increase in consumer income
d. A decrease in the price of steak sauce
e. An increase in advertising by chicken producers
3. In each case below, identify the effect on the supply curve for coal.
a. The development of a new, lower cost mining technique
b. An increase in wages paid to coal miners
c. The imposition of a $2 per ton tax on coal
d. A government ban on all imports of coal
e. A new government regulation requiring air purifiers in all work areas
4. If demand for toy drums is described by the equation QD = 300 – 5p and supply is QS = 60 +
3p, find the equilibrium price and quantity. How would your answer change if a decrease in
consumer income shifted the demand curve to QD  220  5 p ?
5. Suppose the hypothetical economy does not produce product X domestically but imports them
from foreign producers. Initially, demand is QD  1000  2 p, and supply (from foreign
producers) is QS  100  p . Determine the equilibrium price and quantity. The government
then decides that no more than 300 X should be imported per period and imposes a quota at
that level. How does this quota affect the equilibrium price and quantity? Show the
solution using a graph and calculate the numerical answer. How might this quota affect the
market for product Y (a substitute good)?
6. In a competitive labor market, demand for workers is QD = 9,900 + 100W, and supply is QS =
2,000 +1,900W, where Q is the quantity of workers employed and W is the hourly wage.
Suppose the government decides to impose a wage ceiling of $3 per hour. What would the
equilibrium be in this labor market?

7. The estimated demand function for a processed beef is Q = 171 - 20p + 20pb + 3pc + 2Y,
where Q is the quantity in million kilograms (kg) of beef per year, p is the dollar price per kg (all
prices cited are in US dollars), pb is the price of mutton per kg, pc is the price of chicken in
dollars per kg, and Y is average income in thousands of dollars. What is the demand function if
we hold pb, pc, and Y at their typical values during the period studied:
pb = 4, pc = 3.3, and Y = 12.5?
8. The Thai government actively intervenes in markets (Nophakhun Limsamarnphun, “Govt
Imposes Price Controls in Response to Complaints,” The Nation, May 12, 2012).

a. The government increased the daily minimum wage by 40% to Bt 300 (300 bahts ≈
$9.63).Show the effect of a higher minimum wage on the number of workers demanded,
the supply of workers, and unemployment if the law is applied to the entire labor market.
b. Show how the increase in the minimum wage and higher rental fees at major shopping
malls and retail outlets affected the supply curve of ready-to-eat meals. Explain why the
equilibrium price of a meal rose to Bt40 from Bt30.
c. In response to complaints from citizens about higher prices of meals, the government
imposed price controls on ten popular meals. Show the effect of these price controls in
the market for meals.
d. What is the likely effect of the price controls on meals on the labor market?
9. Some cities impose rent control laws, which are price controls or limits on the price of rental
accommodations (apartments, houses, and mobile homes). Show the effect of the rent control
law on the equilibrium rental price and quantity of New York City apartments, and show the
amount of excess demand. Explain any rent control in the context of Pakistan.

10. After a major disaster such as the 2005 earthquake, retailers often raise the price of milk,
gasoline, and other staples because supplies have fallen. In some districts, the government
forbids such price increases. What is the likely effect of such a law?
11. Are predictions using the supply-and-demand model likely to be reliable in each of the
following markets? Why or why not?

a. Apples.
b. Convenience stores.
c. Electronic games (a market with three major firms).
d. Used cars.

12. Suppose demand for inkjet printers is estimated to be Q = 1000 – 5p + 10pX – 2pZ + 0.1Y. If p
=80, pX = 50, pZ = 150, and Y = 20,000; answer the following:

a. What is the price elasticity of demand?


b. What is the cross price elasticity with respect to commodity X? Give an example of
what commodity X might be.
c. What is the cross price elasticity with respect to commodity Z? Give an example of what
commodity Z might be.
d. What is the income elasticity?
13. Suppose the demand for antibiotics is Q = 100,000. What is the elasticity of demand? If a
specific subsidy of $1 per dose were levied, who would gain the most from the subsidy?

14. Use a graph to show that the incidence of a $1/lb. tax on grapes is the same whether the tax
is shown as a shift in the supply curve (tax on sellers) or the demand curve (tax on buyers).
Under what circumstances would the incidence of the tax be split equally between buyers
and sellers?
15. Suppose a tax on beans of $0.05 per can is levied on firms. As a result of the tax, the
equilibrium price increases from $0.20 to $0.22. What fraction of the incidence falls on
consumers? On firms? Suppose the supply elasticity is 0.6. What must the demand elasticity
be?

16. Suppose the government institutes a tax on soft drinks. Assume that short-run and long-run
demand curves are the same, while the long-run supply curve is more elastic than the short-
run supply curve. Compare the tax incidence in the short run to the long run.
17. A country offers a per-child subsidy on day care for young children that lowers the price to
$7 per child as of 2011 (at a cost of about $10,000 per child per year). (Hint: A subsidy is a
negative tax.)

a. What is the effect of this subsidy on the equilibrium price and quantity?

b. Show the incidence of the subsidy on day care providers and parents using a supply-and
demand diagram.

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