Purdue PSY 12000 - answerstohomework3summer2012 (9 pages)

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answerstohomework3summer2012



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answerstohomework3summer2012

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9
School:
Purdue University
Course:
Psy 12000 - Elementary Psychology
Elementary Psychology Documents
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Economics 101 Summer 2012 Answers to Homework 3 Due 6 12 12 Directions 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 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 Suppose the market for corn in a country is described by the following demand and supply equations Demand P 100 1 2 Q Supply P 10 13 10 Q Use this information to answer the following set of questions a What is the equilibrium price and quantity in this market For your answers you may round to the nearest whole number b What is the value of total revenue for farmers in this market Suppose the government institutes a price support in this market of 80 per unit of corn c Given the price support how many units of corn will consumers buy d Given the price support how many units of corn will the government buy e Given the price support what is the cost to the government of this program if storage costs are 10 per unit of corn stored f Draw a diagram illustrating this price support program Make sure you label your diagram clearly and completely Suppose the government cancels the price support program and in its place institutes a price guarantee program where the guaranteed price for corn is 80 per unit of corn g Given the price guarantee how many units of corn will consumers buy h Given the price guarantee what is the price per unit of corn that consumers will pay What is the total expenditure on corn made by consumers i Given the price guarantee how many units of corn will the government purchase j Given the price guarantee what is the cost to the government of this program if storage costs are 10 per unit of corn stored k Draw a diagram illustrating this price guarantee program Make sure you label your diagram clearly and completely Answer a To find the equilibrium use the demand and supply curves 100 1 2 Q 10 13 10 Q or Q 50 units of corn When Q is equal to 50 units of corn the price of each unit of corn is 75 b Total revenue for farmers is equal to price times quantity Or total revenue is equal to 75 per unit of corn 50 units of corn 3750 1 c When the price of corn is 80 per unit of corn consumers will purchase 40 units of corn Use the demand curve to find this quantity P 100 1 2 Q or 80 100 1 2 Q or Q 40 units of corn d When the price of corn is 80 per unit of corn suppliers will supply 54 units of corn Use the supply curve to find this quantity P 10 13 10 Q or 80 10 13 10 Q or Q 54 units of corn this is rounded Since consumers consume 40 units this means that the government will purchase the surplus of 14 units e The cost to the government is equal to the price per unit of corn units of corn purchased by the government units of corn purchased by the government storage costs per unit of corn Or the cost to the government is equal to 80 per unit of corn 14 units 14 units 10 per unit of corn 1260 f g With a price guarantee of 80 per unit of corn consumers will purchase 54 units of corn To see this recall that if the guaranteed price of corn is 80 per unit then suppliers will be willing to produce 54 units With the price guarantee program the farmers will then sell all of this corn for whatever price they must in order to sell 54 units Thus consumers will buy the entire 54 units of corn h With the price guarantee suppliers produce 54 units of corn Consumers are only willing to pay 73 per unit of corn for this amount To see this use the demand curve P 100 1 2 Q where Q 54 Thus P 100 1 2 54 73 per unit of corn The total expenditure on corn made by consumers is 73 per unit of corn 54 units of corn 3942 i With a price guarantee program the government does not buy any of the good There are no storage costs since the government has not purchased the good j The cost to the government is the difference in the guaranteed price of 80 per unit of corn minus the price the corn actually sells for 73 per unit of corn times the number of units of corn sold Thus the cost to the government is 80 per unit of corn 73 per unit of corn 54 units of corn 378 There are no storage costs k 2 2 Suppose the market for candy bars can be described as follows When the price of candy bars is 1 00 per candy bar 500 candy bars are demanded When the price of candy bars increases by 10 the quantity of candy bars demanded falls by 20 The demand curve for candy bars is linear The supply curve for candy bars is linear and contains the points Q P 300 60 and 200 50 a What is the equation for the demand curve given the above information b What is the equation for the supply curve given the above information c What is the equilibrium price and quantity in the market for candy bars d Suppose the government wants to institute an effective price ceiling in the market for candy bars What must be true for this price ceiling to be effective e Suppose the government wants to institute an effective price floor in the market for candy bars What must be true for this price floor to be effective Answer a We are given one point on the demand curve Q P 500 1 00 We are given enough information that we can easily find a second point If the price of candy bars increases by 10 and the initial price was 1 00 then the new price would be 1 10 When the price of candy bars increases by 10 the quantity decreases by 20 20 of 500 is 100 So we know a second point on the linear demand curve Q P 400 1 10 Use these two points to find the slope of the demand curve change in y change in x change in price …


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