Eco 201 Name_______________________________ Problem Set 4 20 September 2011 Cowen & Tabarrok, Chapter 3: Equilibrium 1. What happened in Vernon Smith’s lab? Choose the right answer: a. The price and quantity were close to equilibrium, but gains from trade were far from the maximum. b. The price and quantity were far from equilibrium, and gains from trade were far from the maximum. c. The price and quantity were far from equilibrium, but gains from trade were close to the maximum. d. The price and quantity were close to equilibrium, and gains from trade were close to the maximum. 2. What’s the best way to think about the rise in oil prices in the 1970s, when wars and oil embargoes wracked the Middle East? Was it a rise in demand, a fall in demand, a rise in supply, or a fall in supply? A fall in supply. The price spiked up, and it was tougher to get oil out of the Middle East. That fits the fall in supply story. 3. Suppose the market for batteries looks as follows: What is the equilibrium price and quantity? Price: $4, Quantity: 204. Consider the following supply and demand tables for bread. Draw the supply and demand curves for this market. What is the equilibrium price and quantity? Price of One Loaf ($/loaf) Quantity Supplied Loaves/day Quantity Demanded Loaves/day 0.50 10 75 1.00 20 55 2.00 35 35 3.00 50 25 5.00 60 10 P = $2, Quantity = 35. 5. In the figure below how many pounds of sugar are sellers willing to sell at a price of $20? How much is demanded at this price? What is the buyer’s willingness to pay when the quantity is 20 lbs? Is this combination of $20 per pound and a quantity of 20 pounds an equilibrium? If not, identify the unexploited gains from trade. At a price of $20 sellers are willing to supply 20 pounds and buyers are demanding 40 lbs. The buyer’s willingness to pay at a quantity of 20 is $45 so the buyers are willing to pay more than the $20 sellers require to sell an additional pound of sugar. This is not an equilibrium. Unexploited gains from trade are shaded.6. The market for sugar is diagramed below: a. What would happen to the equilibrium quantity and price if the wages of sugar cane harvesters increased? b. What if a new study was published that emphasized negative health effects of If a new study emphasized the negative health effects of sugar, then the demand for sugar would decrease. That is, the demand curve would shift down/to the left causing the equilibrium price and quantity to decrease. If the wage of sugar cane harvesters increased, then the cost of producing sugar increases, which shifts the supply curve up/to the left, thereby increasing price and decreasing the equilibrium
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