Demand Schedule for Computer Chips and Price Ceiling - Assignment Example

Microeconomics Name Institution Instructor Course Date of Submission Question 1 a) Demand and supply curve of the packs of sweets. . The equilbrium price is 50 cents per pack and quantity is 125 millions of packs b) the quantity demanded will be 80 millions of paccks while the quantity supplied will be160 millions of packs.the sellers in the market will be motivated by the high price per pack of sweets to produce and supply more,thus increasing the total supply in the market.the quantity demanded decreases as many consumers are not able to pay for the sweets at this high price.the increased supply and decreased demand as a result of increased price cause market surplus. The pressure of excess supply will make the producers to reduce price in order to attrack more consumers.The reduced price and increased demand wiil adjust the price and quantity back the normal equilibrium. c) The quantity demanded will be more than the quantity supplied due to low prices.the market will experience a shortage since very few sellers maybe willing to supply the sweets at this low cost.at the same time more consumers will be attracted by the low price to consume more, hence an increase in quantity demanded . Due to less supply than demand in the market,the pressure of high demand in the market will push prices up. When thesellers realize that the price has gone up they will increase the production of the sweets and hence the supply.the equilibrium will be adjusted as a result of increased price and supply. d) a reduction of of the supplies by 40million per week shifts the supply curve to the right.the price shoot up to 60cent per pack while the quantity decreases to 110 millions of packs.the general market equilibrium shifts upwards from the original equilibrium point. Question2 demand schedule for computer chips a) A price decrease from $400 to $350 raises the total revenue from $12,000,000 to$ 12,250,000.a price fall from $350 to $300 reduces the total revenue from $12,250,000 to $ 12,000,000. b) Elasticity of demand=% change in revenue/% change in demand = (12000-12250/122500*100)/ (400-350/350*100) = -2.04/14.28 =0.143 The demand is elastic implying that a unit decrease in demand reduces the revenue by 0.14 units. d) Income elasticity of demand =% change in demand/%change in income. (8-4/4*100)/ (5000-3000/3000*100) = 4/4*100/2000/3000*100 = 1.49%.it implies that a unit increase in income leads to an increase in demand of bagels by 1.49. e) Income elasticity of demand for donuts =% change in demand/% change in income = (6-12/12*100)/ (5000-3000/3000*100) = -50/66.67 = - 0.75 0.75 implies that a unit change in income leads to a decrease in demand of donuts by 0.75.the good in this case can be categorized as Geffen goods whereby it’s demand decrease with increase in demand f) Elasticity of demand 0.5 means, an increase in price by one unit causes an increase in demand by 0.5. A cut in quantity of wheat will increase the demand and hence a rise in price. Therefore; -0.02/p%= 0.5 = 0.04 The price will increase by 0.04% g) Price elasticity of demand of pasta = % change in quantity/% change in price = -8%/25% = - 0.32 It implies that an increase in price of pasta by one unit leads to a decrease in demand of pasta by 0. 32. h) Cross elasticity = % change in the quantity demanded for pasta sauce/ % change in price for pasta. = -5%/25 = -0.2 This implies that an increase in price for pasta by one unit lead to a decrease in quantity demanded for pasta sauce by 0.2 units. The two goods are complements since an increase in price of one good leads to a decrease in demand of another. Question 3. a) A price ceiling is the maximum price charged by sellers on a particular commodity. It is normally put by the government. If the price ceiling is put at $650, the rent paid will be$ 650 because the land lords will always go for the highest price put as rent. The number of rooms demanded is 1750. The market is not efficient since there is a surplus; the rooms supplied are more than those demanded. This is because; the price ceiling of$650 is put above the equilibrium price making the price unaffordable to some consumers. b) If the price ceiling is put at $550, the rent paid is $ 550 since the land lords will go for the highest price in the market. The rooms demanded are 22250.the market will experience a deficit since the number of rooms demanded is more than those supplied. The consumers find the price more attractive hence the demand for more rooms. This leads to inefficiency in the market. c) The black market price might be at $700. The market will be fair since as much as the prices charged by the black markets are high it helps in eliminating the market deficit. d) Graph showing the effects of minimum wage increment on labour demand and supply. The increase of minimum wage form $ 544 to $569 has both negative and positive effects in the labour market. The increase in wage motivates more labour suppliers thus increasing the labour supply from 100 thousand hours per week to Q2. Since the wage increase is too much for small firms and they are unable to cope with the extra cost, some of them may opt to close down. This will lead to a reduction in the labour demand from 100 thousand hours per week to Q1. The hours lost from 100 thousand to Q1 indicate the job lost by employees who were initially employed .from Q1 to Q2 is the total unemployment in the market. e) A graph showing the effects of the minimum wage increment on workers and firms surplus. The minimum wage increment reduces the firm’s surplus as more firms employ fewer workers due to the increased cost. On the other hand workers surplus increases due to the increased salary that enhances their welfare. Consequently the increment of this minimum wage worsens the efficiency of the market shown by the dead weight region on the graph. Since the minimum wage increment creates unemployment to workers as well as cutting down on the profit gained by firms. Question 4 a) These are price ceiling. The china government has put the price charged by producers and sellers ons coal below the equilibrium price resulting to the shortage of the commodity. It has also frozen the retail prices of gasoline and diesel. b) By putting a price ceiling on coal, petrol and diesel. The price is lower than the equilibrium price that the firms were charging initially on the same commodities. At this price the demand for the commodities increases since the price is favorable for consumers. But as for the supplies the price is very low and they end up making losses. The sellers and producers cut down on the production causing a deficit in the market since the demand is far much more than the supply. c) Graph showing the effect of price ceiling on the efficiency of the market. On the graph, the total supply is Q1 and total demand is Q2. The market deficit is Q2- Q1. d) The price ceiling have increased the consumer surplus and reduced the producer surplus as compared to when the prices were at equilibrium. It has also created a dead-weight which was not there initially thus resulting to an inefficiency in the market. e) A graph showing the effect of price ceiling on producer and consumer surplus and dead weight loss The consumer surplus, the producer surplus and the dead weight loss is as shown above. The price ceiling is below the equilibrium price thereby reducing the producer surplus indicated by PS; this is due to the reduced profit as a result of increased cost of production. The consumer surplus is increased as shown on the graph by the region C.S. this is because; the low price is favorable for consumers and they can consume more. There is also the dead weight loss region caused by market deficit from Q2 to Q1. Question 5 A graph showing the 40% tariff effect a) Tariff refers to the tax the government of a particular country imposes on imports from foreign countries. Tariff normally helps to regulate the quality and quantity of goods imported in the country. Before the 40% tariff, the price of beef per kilo tone is $5 the domestic supply and demand is 10 kilo tonne and 50 tonne respectively. Thus the number of tone of beef imported is 40 tonne. After the imposition of the tariff the price of beef per kilo shoot up to $7.the domestic supply as well increases to 20 kilo tonne, since the high selling price attracts more sellers to the market. The domestic demand decreases to 40 kilo tonne as some buyers are unable and unwilling to part with $2 more for the same quantity of beef. The imported beef also decreases to 20kilo tonne due to the increased domestic supply, decreased demand and the tariff imposed to the imported beef. b) The gainers from the 40% tariff are; the extra suppliers that joined the market after realizing the rise in price from $5 to $7.These are responsible for the increase in supply. The government of Korea is another beneficiary of this tariff since they receive the tariff revenue from the foreign sellers who export the beef in the country. The amount of revenue in the above case is obtained by multiplying the quantity of beef imported by the extra price. The losers include; the 10 consumers who dropped out the market due to the high and unaffordable price per a kilo of beef. By imposing the 40% tariff, the Korean government may think they are hurting the foreigners, but in real sense this cost is transferred to the domestic consumers inform of high price per kilo of beef. c) Consumer surplus before 40% tariff. = ½*50*10 =225 After tariff =1/2*8*50 =200 The change in consumer surplus =225-200 =25 Producer surplus before 40% tariff. =1/2*2*10 =10 After tariff =1/2*4*20 40 Change in producer surplus =40-10 =30 Tariff revenue before 40% tariff =40*0 =0 After 40% tariff =20*2 = 40 Dead weight loss =1/2*10*2 =10 d) A graph showing the effects of the 20 quota A quota can be defined as physical restriction on imports. If the Korean government imposes a quota of 20 kilo tonne, the effect is almost the same as that one of 40% tariff. The price remain at $ 7, the domestic supply increases from10 kilo tonne to 20 kilo tonne. The demand reduces to 40 kilo tonne and imports reduce by 20 kilo tonne. The losses are; the 10 kilo tonne demand implying that 10 consumers cannot afford to buy a kilo of meat. The increase of price of meat makes those consumers who can afford a kilo of meat at$7, $2 poorer since they were used to purchase the same quantity of meat at$5. The government of Korea also loses the tariff revenue since they have restricted the importation of beef in the country. The gainers are; the foreign suppliers who manage to sneak in to the market. A profit of $2 gained on each kilo of beef. The supplies also increases from 10 kilo to 20 kilo tonne due to the increase in prices hence increase the profit earned by the producers. References Bhagwati, J. N., Panagariya, A., & Srinivasan, T. N. (2001). Lectures on international trade. Cambridge, Mass. [u.a.], MIT Press Feenstra, R. C. (2004). Advanced international trade theory and evidence. Princeton, N.J., Princeton University Press. http://site.ebrary.com/id/10333511. Mankiw, N. G., & TAYLOR, M. P. (2007). Microeconomics. London [u.a.], Thomson. Mceachern, W. A. (2012). Macroeconomics: a contemporary introduction. Mason, OH, South-Western Pub. Mceachern, W. A. (2012). Microeconomics: a contemporary introduction. Mason, OH, South- Western Cengage Learning. Mceachern, W. A. (2014). Macroeconomics: a contemporary introduction. . Taylor, J. B. (2008). Economics. Boston, Mass, Houghton Mifflin. Read More