Introductory Microeconomics - Assignment Example

c) The concern is that the observation of falling prices of shipping could instead be caused by increase in supply since number of operators has increased. This is shown in the diagram below. Since there has been an increase in supply of shipping services for each given price, this implies an outward shift of the supply curve. As a result the Price drops from P1 to P2. The concern is that this may have been the reason behind the observed drop in prices. Q2. a) No, this would not be enough information to identify that the reason for the observed movements were entirely due to demand side factors.

The rise in oil prices could increase wine prices through supply side effects as well. For instance if the increase in oil prices leads to a significant increase in transport costs, then this rise will be reflected in wine prices as well. But this is a supply side effect. However, since the correlation was as strong as 90%, it should be suspected that there was both a demand rise as well as a decline in supply together to generate the effect. Particularly, it should be noted that a rise in the CPI implies a steady rise in the prices of inputs for production of wine as well.

Thus, taking these factors in consideration, it is not possible to conclude that the observed correlation stems entirely from demand side factors. . However, we could take more educated guesses given this set of information. For instance, if the observed transactions data showed that a negative relation ship between prices and quantities traded, it would be evident that the traced curve was a demand curve. Thus the changes that have caused the prices to fall were supply side effects. On the other hand if we observed a positive relationship, i.e., if we observe as prices rise, so do the traded amounts, the conclusion will be that it is the demand that is changing.

But, it should be noted that such clean and precise one-to-one mappings are unlikely, and the only realistic conclusion can be that the observed changes reflect a combination of both demand and supply side factors. Q3.a) The situation may lead to a market crash since there is an excess supply of permits. This excess supply will lead to falling prices. And since demands are not rising for permits given the situation of the economy, if there is sufficiently high excess supply this will drive the market price down to very low levels and thus cause a market crash. Q3.b) The idea was to create high enough prices so that switching over to low carbon fuels.

However, because of the low demands and excess supplies, market prices of permits have not risen to the degree that would make it profitable for producers to switch to low carbon fuels. As a result, the ETS has been unsuccessful in inducing firms to switch from using high-carbon to using low-carbon fuels. Q3.c) As shown in the diagram, assume that the government sets the reserve price at Pr. If the market operated freely, the equilibrium price would be Po and the equilibrium quantity would be Qo.

By setting the reserve price at Pr, the