Economics 101Fall 2011Homework #3Due 10/11/11Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework (legibly). Make sure you write your name as it appears on your ID so that you can receive the correct grade. Please remember the section number for the section you are registered, because you will need that number when you submit exams and homework. Late homework will not be accepted so make plans ahead of time. Please show your work. Good luck!Please realize that you are essentially creating “your brand” when you submit this homework. Do you want your homework to convey that you are competent, careful, professional? Or, do you want to convey the image that you are careless, sloppy, and less than professional. For the rest of your life you will be creating your brand: please think about what you are saying about yourself when you do any work for someone else!1. Shifting Supply and DemandEach of the following questions describes a change in one or more markets and asks how these changes affect other markets. Your response should include which curves (supply, demand, or both) shift, in what direction, and what the result is for equilibrium price and quantity. Please include at least one graph for each part.(a) We want to study the interactions in the market for Paper, Pens, and Pencils. Pens and Pencils are substitutes for each other, and Paper is a complementary good for both Pens and Pencils. Assume all three goods have upward sloping supply curves and downward sloping demand curves. Assume that each of the described changes is the only change that occurs (e.g., the change described in (i) is not continued into (ii)).i. The price of Paper rises. What happens in the markets for Pens and Pencils?Demand falls for Pens and for Pencils. The demand curve in each market shifts left, with equilibrium prices and quantities decreasing.ii. The price of Pens falls. What happens in the markets for Paper and Pencils?Demand for Paper increases, while demand for Pencils decreases. Demand curve for paper shifts right, price and quantity rise. Demand curve for Pencils shifts left, price and quantity fall.iii.The price of Pens falls, while the price of Pencils rises. What happens to the market for Paper?The falling price of Pens increases demand for Paper, but the rising price of Pencils decreases demand for Paper. This means there are two demand shifts for Paper, one to 1the left and one to the right. The net effect is unknown, so we cannot make any predictions about price or quantity.(b) If multiple curves are shifting, you may not be able to always determine what’s happening to equilibrium price or quantity. In addition to the information requested above, draw at least two graphs for each of the following cases to demonstrate why one part of the equilibrium is undetermined. i. A recent report claimed that apple juice contains high levels of arsenic (a chemical dangerous to human health). News agencies also recently reported that fire blight (a bacterial disease only harmful to apple trees) has struck apples trees in Australia. What can you predict about the market for apples in Australia?Demand will shift left since fewer people will want to buy apple juice. Supply will shift left since producers will produce less apple juice. Equilibrium quantity will drop. Equilibrium price cannot be determined without more information about the size of these two shifts.ii. Amazon.com recently announced that it’s selling the Kindle Fire, a device designed to lure customers away from buying the Apple iPad. Rumors are also circulating that Apple has found a way to produce the iPad with less materials (and therefore more cheaply). What do you expect will happen to the market for iPads?Demand will shift left since at least some people will prefer the Kindle. Supply will shift right because Apple can produce more iPads at the same price now that materials cost less. Equilibrium price will decrease. Equilibrium quantity cannot be determined without more information about the size of these two shifts.2. Market SupplyConsider the (simplified) market for peanut butter. There are only two producers: Jif and Skippy. They each make identical peanut butter and have unique supply schedules:•Jif’s Supply Schedule: Qs = 2P•Skippy’s Supply Schedule: Qs = 4P – 40(a) Graph each brand’s individual supply curve.Jif’s Supply can be rewritten as P = 1/2QsSkippy’s Supply can be rewritten as P = 1/4Qs + 10Graph each of these equations on its own graph, with P on the y-axis2(b) Graph the market supply curve for peanut butter.3Horizontally sum the two graphs from part (a). There should be a kink in the line at P = 10.(c) What is the equation for the market supply curve for peanut butter?We want to add the two quantities supplied together:QsTotal = QsJif + QsSkippyQsTotal = 2P + 4P – 40 = 6P – 40P = 1/6 QsTotal + 20/3Note that this is equation for when P > or equal to 10. For P < or equal to 10, the market supply curve is equal to Jif’s supply curve, because Skippy will not enter the market.3. Quota and Deadweight LossConsider the market for haircuts in the small town of Harrison, Wisconsin, during a typical day. In this market, hair stylists are producers and any resident of Harrison with hair is a consumer. There is only one type of haircut in Harrison. The demand curve and supply curves for the market for haircuts are given byDemand: Qd = 25 – ½P 4Supply: Qs = 2P(a) Find the equilibrium price and quantity in this market for haircuts.Set supply and demand equal: 25 – 1/2P = 2P P = $10Plug this price into supply or demand: Q = 2P = 2*10 = 20(b) Calculate the consumer's surplus and producer's surplus in the market for haircuts. Sum consumer and producer surplus to get the total surplus in the market for haircuts.For consumer surplus, find the area beneath the demand curve and above the price line. In this case, this is a triangle with height 40 and base 20. The area equals ½ b*h = ½ * 40 * 20 = $400.For producer surplus, find the area above the supply curve and below the price line. In this case, it’s a triangle with height 10 and base 20. ½ b*h = ½ * 10 * 20 = $100.Total surplus = $400 + $100 = $500.Assume now that the government of Harrison imposes a quota of 10 haircuts per day. That is, the government of Harrison is going to limit the number of haircuts per
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