Economics 102: Microeconomic Principles Fall Semester 2013

Instructor: Kerry Tan

Chapter 3: Where Prices Come From: The Interaction of Demand Supply

1. State whether each of the following events will result in a movement along the demand
curve for McDonalds Big Mac hamburgers or whether it will cause the curve to shift. If
the demand curve shifts, indicate whether it will shift to the left or to the right and draw a
graph to illustrate the shift.
a. The price of Burger Kings Whopper hamburger increases. (1 point)
b. McDonalds distributes coupons for $1.00 off the purchase of a Big Mac. (1 point)
c. Because of a shortage of potatoes, the price of french fries increases. (1 point)
d. Fast-food restaurants post nutrition warning labels. (1 point)
e. The U.S. economy enters a recession, in which there is a rapid decline in incomes. (1
point)
2. Briefly explain whether each of the following statements describes a change in supply
or a change in quantity supplied:
a. To take advantage of current high prices for snow shovels during a snowy winter,
Alexander Shovels Inc. decides to increase output. (1 point)
b. The success of the Apple iPad leads to more firms to begin producing tablet computers.
(1 point)
c. In the six months following the Japanese earthquake and tsunami in 2011, production
of automobiles in Japan declined by 20 percent. (1 point)
3. The following is from an article in the Wall Street Journal: Fuel prices tend to rise
[during the summer] for a number of reasons, from the use of more expensive fuel
additives in warm weather to maintenance shutdowns at refineries that tend to tighten the
supply. Demand for gasoline also traditionally rises during the summer driving season as
more people head out on long vacation road trips.
Draw a demand and supply graph of the market for gasoline to analyze the situation
described in this article. Be sure to indicate the equilibrium price of gasoline at the
beginning of summer and the equilibrium price of gasoline during summer, and any shifts
in the demand curve and supply curve for gasoline. (2 points)
1
Chapter 4: Economic Efficiency, Government Price Setting, and Taxes

4. Use the information on the kumquat market in the table to answer the following
questions:
Price (per crate)
$10 15 20 25 30 35
Quantity Demanded (Millions of Crates per Year) 120
110
100
90
80
70
Quantity Supplied (Millions of Crates per Year)
20
60
100
140
180
220
a. What are the equilibrium price and quantity? How much revenue do kumquat
producers receive when the market is in equilibrium (Note: revenue = price * quantity
sold)? Draw a graph showing the market equilibrium and the area representing the
revenue received by kumquat producers. (2 points)
b. Suppose the federal government decides to impose a price floor of $30 per crate. Now
how many crates of kumquats will consumers purchase? How much revenue will
kumquat producers receive? Assume that the government does not purchase any surplus
kumquats. Redraw your graph from part (a), but also show the price floor, the change in
the quantity of kumquats purchased, and the revenue received by kumquat producers
after the price floor is imposed. (2 points)
c. Suppose the government imposes a price floor of $30 per crate and purchases any
surplus kumquats from producers. Now how much revenue will kumquat producers
receive? How much will the government spend on purchasing surplus kumquats? Redraw
your graph from part (a), but also show the area representing the amount the government
spends to purchase the surplus kumquats. (2 points)
5. During 2007, the Venezuelan government allowed consumers to buy only a limited
quantity of sugar. The government also imposed a ceiling on the price of sugar. As a
result, both the quantity of sugar consumed and the market price of sugar were below the
equilibrium price and quantity. Draw a graph to illustrate the situation. On your graph, be
sure to indicate the areas representing consumer surplus, producer surplus, and
deadweight loss. (2 points)
6. Suppose the current equilibrium price of a quarter-pound hamburger is $5, and 10
million quarter- pound hamburgers are sold per month. After the federal government
imposes a tax of $0.50 per hamburger, the equilibrium price rises to $5.20, and the
equilibrium quantity falls to 9 million. Illustrate this situation with a demand and supply
graph. Be sure your graph shows the equilibrium price before and after the tax, the
equilibrium quantity before and after the tax, and the areas representing consumer surplus

after the tax, producer surplus after the tax, tax revenue collected by the government, and
deadweight loss. (2 points)
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Answers:
1. a. demand curve shifts to the right
b. shift along demand curve
c. demand curve shifts to the right
d. demand curve shifts to the left
e. demand curve shifts to the right
2. a. This is a change in quantity supplied because Alexander
Shovels Inc. is producing more shovels due to the favorable
market.
b. This is a change supply. Since the demand is so high for
tablets, other companies want to profit off of tablet computers.
c. This is a change in supply because due to the earthquake and
tsunami people dont have the money to buy new cars so
production has decreased due to lack of buyers.
3. See graph page
4. a. The equilibrium price is 20$ and the quantity is 100 million
crates. Revenue=200 million $ at equilibrium.
b. At 30$ per crate, 80 million crates will be purchased a year
and the revenue would be 240$ million
c. The revenue is 5,400 million dollars if the government buys all
surplus crates. The government would spend 3,000 million
dollars on surplus kumquat crates.
5. See graph page