ASSIGNMENT
Problem 1: (10 points)
The following events occur one at a time.
i. The price of crude oil rises.
ii. The price of a car rises.
iii. All speed limits on highways are abolished.
iv. Robots cut car production costs.
Explain the effect of each of these events on the market for gasoline (the equilibrium price and the equilibrium quantity).
Problem 2: (10 points)
Early in 2011, the world price of copper reached a record high of over $10,000 per ton. Two events appeared to lie behind this high price. First, China’s rapid
economic growth and the massive building of infrastructure. Second, an explosion closed a major Chilean port used for shipping a substantial fraction of the world’s
copper output.
a demand–and–supply diagram to illustrate these events in the
copper market, and explain how each event shifts either the demand curve or the
supply curve.
Problem 3: (7.5+7.5)
a. With higher fuel costs, airlines raised their average fare from $0.75 to $1.25 per
passenger kilometer and the number of passenger kilometers decreased from 5
million a day to 3 million a day. What is the price elasticity of demand for air
travel over this price range?
b. In 2013, the price of corn fell and some corn farmers switched from growing
corn in 2014 to growing soybeans.
i. Does this effect illustrate the law of demand or the law of supply? Explain your answer.
ii. Why would a corn farmer grow soybeans?
Problem 4: (15 points)
The following supply and demand schedules describe a hypothetical Canadian
market for potash.
Price
($ per ton)
Quantity Supplied
(million tons)
Quantity Demanded
(million tons)
280
300
320
340
360
380
8.5
9.0
9.5
10.0
10.5
11.0
12.5
11.0
9.5
8.0
6.5
5.0
i. What is the equilibrium price of potash?
ii. How much potash would actually be purchased if the price was
$280 per tonne?
iii. How much potash would actually be sold if the price is $360 per
tonne?
iv. At a price of $280 per tonne, is there excess supply or excess demand? How much?
v. At a price of $360 per tonne, is there excess supply or excess demand? How much?
vi. If the price is $280 per tonne, describe the forces that will cause
the price to change.
vii. If the price is $360 per tonne, describe the forces that will cause the price to change.
Problem 5: (15 points)
Suppose the market for frozen orange juice is in equilibrium at price of $2.00 per can and a quantity of 4200 cans per month. Now suppose that at a price of $3.00 per can, quantity demanded falls to 3000 cans per month and quantity 4500 cans per month.
i. Draw the appropriate diagram for this market.
ii. Calculate the price elasticity of demand for frozen orange juice
between the prices of $2.00 and $3.00. Is the demand elastic or
inelastic?
iii. Calculate the elasticity of supply for frozen orange juice between the price of $2.00 and $3.00. Is the supply elastic or inelastic?
iv. Explain in general what factors would affect the elasticity of demand for frozen orange juice.
v. Explain in general what factors would affect the elasticity of supply of frozen orange juice.
