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USC ECON 203 - Demand, Supply and Market Equilibrium

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Name: ______________________________________________________________Demand, Supply and Market EquilibriumElasticity and Total RevenueElasticity and Market EquilibriumHomework – Week 3Name: ______________________________________________________________Demand, Supply and Market EquilibriumFor the following exercises you will start by drawing the initial demand, supply and marking the initial equilibrium prices and quantities. Next, you will make the necessary shifts in supply and demand, and plot the new price and equilibrium quantities. Make sure to specify what is the final effect on equilibrium prices and quantities (increase, decrease, or ambiguous).1) LinkedIn opens a new office in Los Angeles. At the same time, a new minimum wage is implemented in Los Angeles that increases wages of all workers. What happens in the local coffee shop market to demand, supply, and equilibrium price and quantity? (Hint: software engineers work long hours and need caffeine and coffee shops hire workers at low wages that are affected by the change in regulation.)2) Consider the market for pens. Suppose that the number of students with an allergy to pencil erasers increases, causing more students from using pencils to using pens. At the same time, the price of ink drop considerably. What happens in the pen market to demand, supply, and equilibrium price and quantity?For the following questions, circle the correct answer.1) A change in which of the following will not shift the demand curve for hamburgers?a) The price of hot dogs.b) The price of hamburgers.c) The price of hamburger buns.d) The income of hamburger consumers2) An increase in ____ will cause a movement along a demand curve, which is called a change in ____.a) supply, demandb) supply, quantity demandedc) demand, supplyd) demand, quantity supplied3) Movie tickets and film streaming services are substitutes. If the price of film streaming increases, what happens in the market for movie tickets?a) The supply curve shifts to the left.b) The supply curve shifts to the right.c) The demand curve shifts to the left.d) The demand curve shifts to the right.Elasticity and Total Revenue1) Consider the following demand schedule for craft beer in California:Quantity Price0 $1410,000 $1012,000 $830,000 $650,000 $360,000 $0A) Suppose the price in the market is $8 until new craft beer producers come in the California market and the price drops to $6. Calculate the demand elasticity using the mid-point method for this change, and classify it as elastic or inelastic.B) What was the total revenue in the old equilibrium? What is the total revenue in the new equilibrium? Why has total revenue increased or decreased? C) Redo A) and B) but now assuming the market price goes from $8 to $10.Elasticity and Market EquilibriumFor the following exercises you will start by drawing the initial demand, supply and marking the initial equilibrium prices and quantities. Then, you will make the necessary shifts in supply and demand, and plot the new price and equilibrium quantities. Compare initial equilibrium to final equilibrium, in particular write if prices and quantities increase or decrease. Also mention if the effect is greater on prices or quantities and explain why.A) In the market for health insurance demand is inelastic while supply is elastic. Given the uncertainty regarding health care policy there’s several insurance companies leaving the market. What happens in the health insurance market? What changes more: prices or quantities? Why?B) In the market for almonds demand is elastic while supply is inelastic. After the long rainy winter there is a lot of water in California, and because of that water price goes down for almond producers. What happens in the almond market? What changes more: prices or quantities?


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USC ECON 203 - Demand, Supply and Market Equilibrium

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