Economics 102 Introductory Macroeconomics - Spring 2006, Professor J. Wissink
Problem Set 2 – DUE at the start of class on Wednesday Feb 15, 2006
Boxes will be removed ten minutes after the start of class.
Remember: We will NOT accept problem sets late. Period.
Thanks for minding this policy and not asking if you can hand it in late.
1. Let's model a month in the life of the rental market for apartments in Ithaca. Suppose that the market
demand curve for apartments is XD = 10,000-5P, where XD is the number of apartments in the month
tenants are willing and able to rent at any given rent price P. Suppose that the market supply curve of
apartments is XS = -2000+15P, where XS is the number of apartments landlords are willing and able to
rent at any rent price P.
a) Graph the supply and demand curves.
b) What are the equilibrium quantity and price in this market?
Suppose that the mayor of Ithaca wants to decrease rental costs to people residing in Ithaca. The mayor
decides to issue a regulation stating a maximum rent landlords can charge in Ithaca.
c) Assume the rent ceiling is set at $500 per apartment and discuss the consequences of this regulation.
(Be sure to determine: how many apartments will be rented and calculate any surplus or shortage of
apartments.)
d) Assume the rent ceiling is set at $ 700 per apartment and discuss consequences of this regulation.
(Be sure to determine: how many apartments will be rented and calculate any surplus or shortage of
apartments.)
e) Fun question: Who is the mayor of Ithaca right now?
2. Critically evaluate the following sequential statements and explain why they are true, false or uncertain.
Assume that coffee creamer and coffee are complements and let each part build on the previous part.
Use graphs to illustrate your arguments. (a) As the price of coffee decreases, consumers demand more
coffee creamer, i.e. demand for coffee creamer increases. (b) The equilibrium price of coffee creamer
will increase. (c) At the new creamer equilibrium price, sellers will produce more coffee creamer,
namely there will be an increase in supply of coffee creamer. (d) Hence the equilibrium price will
decrease and it may move back to its original level.
3. Suppose that the demand curve for cantaloupes is P=120-3Qd, where P is the price per pound (in cents)
of cantaloupe and Qd is the quantity demanded per year (in millions of pounds). Suppose that the supply
curve for cantaloupes is P=5Qs, where Qs is the quantity supplied per year (in millions of pounds).
a) What is the equilibrium price per pound of cantaloupe? What is the equilibrium quantity of
cantaloupes produced?
b) Suppose the government imposes a price floor of 80 cents per pound on cantaloupe.
i) How much would then be supplied?
ii) Calculate the resulting surplus or shortage.
c) Taking each event separately, would the demand curve shift to the left, to the right, or stay in place
if:
i) a report by the U.S. Surgeon General suggested that eating cantaloupes causes cancer?
ii) the price of honeydew melons rose by 10 percent?
iii) per capita incomes rose by 20 percent?
iv) the wages of workers employed in supplying cantaloupes to the market increased by 25 percent?
4. Assume an isolated island economy has two labor markets (unskilled and skilled). The supply and
demand conditions in each labor market are as follows.
Unskilled Workers
Skilled Workers
Salary
per worker
per year
(thousand
$)
Number of workers
willing and able to
work at given salary
per year (thousands)
Number of
workers
demanded
per year
(thousands)
Salary
Number of workers Number of
per worker willing and able to
workers
per year
work at given
demanded
(thousand $)
salary
per year
per year
(thousands)
(thousands)
10
65
90
10
30
160
20
80
80
20
45
155
30
90
55
30
80
135
40
110
40
40
120
120
50
120
20
50
130
110
a) For both markets, use separate supply-and-demand diagrams to illustrate the equilibrium price (the
salary per worker, per year) and quantity.
b) Assume that the government sets a minimum wage of $30,000 per year. (No company can pay less
than the minimum wage.) Using diagrams, illustrate the impact of this minimum wage on
equilibrium price and quantity in EACH labor market.
c) The minimum wage is eliminated. However, producers can now replace unskilled workers with
robots. The rental rate of a robot is $15,000 per year, and each robot can do the work of one
unskilled worker. Using diagrams, illustrate the impact that access to robots has on the market for
unskilled labor.
5. Multiple Choice
1. A developing country industrializes, increasing worldwide demand for oil. Assuming the supply of oil
does not change, then worldwide equilibrium price:
a)
b)
c)
d)
will fall and quantity will fall.
will fall and quantity will rise.
will rise and quantity will rise.
will stay constant, but quantity will increase.
2. Which one of the following will necessarily cause a market’s equilibrium price to rise? (Hint: draw the
curves.)
a)
b)
c)
d)
a decrease in both supply and demand.
an increase in both supply and demand.
an increase in demand combined with a decrease in supply.
a decrease in demand combined with an increase in supply.
3. Which of the following would result in a change in the quantity supplied but not a change in supply?
a) An increase in factor prices.
c) A change in the price of an alternative in production.
b) A change in technology.
d) A shift in the market demand curve.