Principles of Economics Name: EC 201 Section/Time: Cal Poly PomonaFall, 2009Dr. BresnockMarkets Module Assignment Answers (50 points)Please limit your answers to the spaces provided. If necessary, write on the back of the page.Do not attach printout or additional pages. All questions pertain to the Markets module in theSimEconâ software package. Make sure you have read the “Markets Manual” which may befound at the ClassWeb site prior to beginning the assignment. For many of the assignment'squestions, it will be necessary to refer to those instructions. For many of the assignment'squestions, it will be necessary to refer to your text. Please use this website to obtain the module:http://class-ms-web.class.csupomona.edu/ To begin the exercise, click on “Markets” and note the “Initial Conditions” which are thebeginning values for each supply and demand variable. Write these values down for futurereference. Now, click “Continue”. You will observe the initial equilibrium for the wheatmarket.(1) With respect to the wheat market, if income is decreased, explain what will happen toeach of the following. (Use increase or decrease of stays the same, for your answers.Arrows are acceptable.)(a) Demand? Stays the same. Or decreases by a tiny amount.(b) Quantity Demanded? No change, or Decreases at EACH alternative price.(c) Supply? No change.(d) Quantity Supplied? No change, or decreases by a tiny amount.(e) Equilibrium Price? Decreases by a tiny amount, or no change.(f) Equilibrium Quantity? Decreases by a tiny amount.(g) Offer a brief intuitive explanation of these results.Wheat is almost a neutral good. A change in income has very little effect ondemand. If the change in income isn’t very large the impact may be too small todetect. If you viewed the change as a decrease, then wheat would besuperior/normal. (2) With respect to the wheat market, if the seed cost is decreased, explain what happens toeach of the following. (Use increase or decrease or stays the same for your answers.Arrows are acceptable.)(a) Demand? Stays the same.(b) Quantity Demanded? Increases.(c) Supply? Increases.(d) Quantity Supplied? No Change, or Increases at EACH alternative price.(e) Equilibrium Price? Decreases.(f) Equilibrium Quantity? Increases.EC 201 Page 2Markets Module Assignment Answers(g) Offer a brief intuitive explanation of these results.As costs of production go down, supply increases. At the original equilibrium, thereis a surplus , so quantity demanded increases, equilibrium price decreases, andequilibrium quantity increases.(3) In this model of the wheat market, a change in income leads to no change (an increase, adecrease, no change) in demand (demand, supply, quantity demanded, quantitysupplied). Thus, wheat is a/an neutral (superior/normal, inferior, neutral) good.Note, if the student noticed small changes in demand, then wheat would appear tobe a very, very slightly superior/normal good. In this case they can have either anincrease, or a decrease in demand, and superior/normal good for correct answers.(4) What is the total revenue for the wheat farmers when the price of butter is $8? $20,274.61If the price of butter falls to $2, what is the change in total revenue to the wheat farmers?$101.92. Why?Original TR = $20.376.53 Both price and quantity along the supply curve, so TRalso increases.New TR - $20,374.61Change in TR $101.92(5) What is the total revenue for the initial wheat market equilibrium? $20,339.71(a) If the number of farms decreases from 1000 to 600, what is the new total revenue?$25,114.57. Compared to the initial equilibrium, the total revenue has increased(increased, decreased, stayed the same). Demand is price inelastic from A to B. As price decreases along the demandcurve, total revenue also decreases.(782.63 – 869.59) (782.63 + 869.59) EP = = -0.3333 (32.09 – 23.39) (32.09 + 23.39)(b) If the number of farms increases from 1000 to 2000, what is the new totalrevenue? $14,694.43. Compared to the initial equilibrium, the total revenue hasincreased (increased, decreased, stayed the same). Why? Demand is price inelastic from A to B. As price increases along the demandcurve, total revenue also increases.EC 201 Page 3Markets Module Assignment Answers(948.64 – 869.59) (948.64 + 869.59) EP = = -0.2139 (15.49 – 23.39) (15.49 + 23.39)(6) If the price of corn increases from 10 to 20, what is the new total revenue? $21,371.76.Compared to the initial equilibrium, the total revenue has increased (increased,decreased, stayed the same). Use the initial and new wheat market equilibria to calculatethe price elasticity below. (Include the completely specified formula that you used inorder to receive full credit.) Explain why this is the price elasticity of supply and not theprice elasticity of demand.(894.59 – 869.59) (894.59 + 869.59) EP = = 1.34(23.89 – 23.39) (23.89 + 23.39)A 1% increase in price generates a 1.34% increase in quantity supplied. This is theprice elasticity of supply because the numbers represent two points on the same supplyline, observed because of a shift in demand. The price elasticity of demand could onlybe determined by observing two points on the same demand line as a result of a shift insupply.******************************************************************************Now, restart the “Markets Module”.Choose “Continue” on the “Initial Conditions” screen. Now select “Regulate the Market”.Select “Control Price” and “Continue”. Then, select “Price Ceiling”.(7) Put in a price ceiling of $10.(a) As a result of this price ceiling, there will be a shortage (surplus, shortage,equilibrium) in the wheat market of $803.50. Show this result in a graph below.Write your mathematical proof for this answer below your graph. (Hint: See theMarkets Manual for the complete equations for the supply and demand of wheat.)QD = 1000 – 10(10) + 3(10) - .5(4) + .3(250) + .10(5)QD = 1003.50QS = 200.00 803.50