EXERCISE 5: Supply and Demand applications
J. Wahl – Micro Principles
1. One of your articles maintains that "air travelers need a federal fare standard." What
argument does the writer make? Do you, as an economist, agree with it? Why or why
not?
2. Why might higher women's wages reduce the number of children that couples have?
3. In years of bad harvests in medieval England, some charitable rich people bought up all
the grain from grain sellers and then re-sold it to the poor at half the market price. The
poor don't benefit at all by this charity; only the sellers of grain are better off. True or
false? Use supply and demand curves in your answer. For simplicity, assume that no
inventories can be held, no foreign trade occurs, and rich people consume no grain
themselves. CAREFUL: Think about what you are comparing…
4. A rise in the cost of producing mutton will lower the price of wool. True or false?
5. How does "Congress raise the price of your clothes"? Please analyze the effect of textile
quotas by doing the following:
Suppose first that no trade occurs. Assume domestic demand is represented as Qd=30-2p and
domestic supply is represented as Qs = 3p-15. What is equilibrium Q and p? What is
consumer surplus? Producer surplus?
Now suppose the world price of clothing is 6 (I know this is oversimplifying, but please bear with
me!) Assume that purchasers of clothing consider foreign- and domestic-made clothing to
be perfect substitutes. Domestic D and S remain as above. What is now the equilibrium
Q and p? How much supply comes from domestic producers and how much from
abroad? What happens to consumer and producer surplus?
Now suppose that imported clothing is subjected to a quota of 10 (you can think of this as 10
thousand shirts a month, if that seems more realistic). What now is the equilibrium Q
and p? How much supply comes from domestic producers and how much from abroad?
What happens to consumer and producer surplus?
Given what you discovered in the last part, why do quotas exist?
As an added wrinkle, can you see how quotas and tariffs might be analyzed in a similar fashion?
6. The controversy over Mickey Mantle's liver transplant gave rise to an age-old discussion
about the allocation of organs for transplant. What solutions might an economist suggest
for increasing the supply of organs for those in need? What advantages and drawbacks
do you see with an economic solution to the problem of organ shortages?
7. Studies have shown that sellers at car dealerships typically quote a higher initial price to
female buyers than to male buyers. Is this evidence of discrimination?
8. Modern technology has made it possible for people to have children via egg donors,
sperm donors, womb volunteers, and the like. The price of “renting a womb” is higher
when the would-be parents donate their own cells than when outside donors provide eggs
and sperm. How would you, as an economist, explain this phenomenon?
9. Most cigarette smokers are addicted to nicotine. What does this imply about the shape of
the demand curve for cigarettes? Cigarettes are taxed at a fairly high rate per pack -
please graph the cigarette market under a tax. Given the demand curve you have drawn,
what can you say about the effect of a tax on the quantity of cigarettes bought and sold?
On the price?
