Economics Homework 2 - Model

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1. Fill in the blanks in the following sentence: The supply and demand for a good determine both the _________ and ___________ at which the good is sold.

price and quantity.

2. Suppose the price demand curve for a particular good is P = $30 - Q, where P is the price and Q is the quantity. Also suppose the price supply curve is P = $6 + Q. At which price and quantity will the good be sold?

Price and quantity are determined by where supply and demand equal each other. The supply price (P) must equal the demand price (P). Therefore:
P = $30 - Q is equal to P = $6 + Q
$30 - Q = $6 + Q
24 = 2Q

Once we know that Q=12, then we can plug it back in:

P = $30 - Q
P = $30 - 12
P = $18

We can check this answer by plugging P into the other equation and making sure we get the same value above of Q=12:

P = $6 + Q
$18 = $6 + Q
Q=12 (which matches the Q above)

Therefore P=$18 and Q=12. Be sure to include the "$" for P.

3. When the supply of a good or service increases, such as increasing the number of oil wells, what happens to the market price of oil? Explain. When the demand for a good or service increases, such as more people driving cars that need gasoline (refined oil), what happens to the market price of oil? Explain.

Greater supply of oil means less scarcity, more competition, and a need by the sellers to lower the price to sell their goods. So the market price decreases. When the demand increases for a good, there is greater scarcity and the sellers can raise their prices.

4. Why do grocery stores lower the price of their fruit (such as grapes) when they have an oversupply of ripened fruit? Explain by citing the downward slope of a demand curve, and describe what happens to this fruit after the grocery store lowers its price.

The downward slope of the demand curve means that when price (P) decreases, then the quantity demanded (Q) increases. The seller needs to caues a greater demand for the ripened grapes, in order to sell them quickly before they rot and no one wants them. How does the seller cause an increase in demand? By lowering the price.

5. When the New York Yankees built their new $1.5 billion ballpark, they made a decision about how many "obstructed view" bleacher seats to include. Due to the design of this new stadium, people sitting in these "obstructed view" bleacher seats would not be able to see all of the field because stadium walls or poles or other fans would block part of their view. An economist studied the "supply and demand" in the market, and developed this table:

Price/Ticket for an "Obstructed View" seat Supply quantity at that price Demand quantity at that price
$30 1000 (the high sales price => high supply) 300 (the high sales price => low demand)
$25 800 450
$15 600 600
$8 300 (the low sales price => low supply) 1200 (the low sales price => high demand)

(A) Given the above supply and demand (you might find it easier to graph it), how many "obstructed view" bleacher seats did the New York Yankees build, and how much does the team make from sales of "obstructed view" tickets at each game?

The price and quantity are where supply equals demand, which according to the table is at P=$15 and Q=600. Total revenue is then P times Q, which is $9000.

(B) Suppose the City of New York passed a law for a maximum price (a "price control") of $2 per "obstructed view" bleacher ticket, because politicians felt that fans should not pay more if they do not get a full view of the field. Will the obstructed-view seats sell out under this law, and will people have to wait in line in order to buy them? Would you oppose or support such a law, and why?

The price control causes supply to decrease (because their is less revenue to the seller), and demand to increase (due to the Law of Demand). The result will be waiting lines and a sell-out of the cheap tickets. It will become impossible for some people to obtain these tickets, even though they were willing to pay the market price, and the seller may eventually decide not to offer these seats at all if he loses money on them.
Most students opposed this government interference with the free market.

6. Suppose you own a restaurant, and your average customer spends $10. Suppose further that your marginal cost for each customer is $5. But in addition you have costs of $20 per hour in electricity and wages. From 6-7pm each night, you usually have about 40 customers, but then it decreases by 50% each hour thereafter as it gets later in the evening. At what time do you close your store for the night? Explain your answer.

The marginal profit (revenue minus cost) per customer is $5

6-7pm: profit is 40 customers times $5 each=$200, minus $20 per hour = $180 STAY OPEN
7-8pm: profit is 20 customers times $5 each=$100, minus $20 per hour = $80 STAY OPEN
8-9pm: profit is 10 customers times $5 each=$50, minus $20 per hour = $30 STAY OPEN
9-10pm: profit is 5 customers times $5 each=$25, minus $20 per hour = $5 STAY OPEN
10-11pm: profit is 2.5 customers time $5 each=$12.5, minus $20 per hour = NEGATIVE, CLOSE AT 10pm TO PREVENT THIS LOSS

7. Explain why waiting lists develop in countries (like Canada) where the government prohibits anyone from charging more than fixed prices for medical services, assuming that these fixed prices are lower than what the prices would be under supply and demand in the free market. (Hint: the reason is related to the effect of price controls on the supply of a good or service.)

Price controls (fixed prices) cause the supply to decrease because the sellers cannot make as much as in the free market. If the price controls are much lower than the free market price, then many sellers may go out of business. In the case of medical prices, the price controls discourage people from practicing medicine or providing medical services. So there is not enough, and demand is greater than supply. The lower price, due to the Law of Demand, causes the demand to increase, which makes the shortage even worse. As a result of the shortage, waiting lists exist.