Please answer the following five questions (20 points each).

1. Show with a supply and demand drawing and explain in words what happens to the shortterm price and quantity if the following market conditions change.
For each question, you should begin by drawing a correctly labeled supply-demand
graph. Then use the information in the question to shift the appropriate curve in the
correct direction. Finally, tell us what has happened to the equilibrium price and quantity
of the commodity and why you shifted the curve in the direction that you chose.
A. The FDA has issued a warning that spinach could be harmful to your health
because of an e-coli outbreak. What happens to the equilibrium price and
quantity of spinach?
B. The price of flour goes up. What happens to the equilibrium price and quantity of
cupcakes?
C. The price of tea goes up. What happens to the equilibrium price and quantity of
coffee? (Assume that coffee and tea are substitute goods.)
D. There is rapid technological improvement affecting the production of computer
chips. What happens to the equilibrium price and quantity of computer tablets?

2. The figure below shows the production possibility curve of the Inca Empire in the early
16th century. In this example, we assume that only potatoes and quinoa are produced.

A. Show what happens to this curve if there is an important technological innovation

that improves the production of potatoes, but not of quinoa.
B. Show what happens to this curve if a smallpox epidemic kills a large proportion
of the Inca population after the Spanish invade Inca territory.
Explain your answers.

3. The following two tables give you data on supply and demand conditions for commodity
X.
Price
$50
$40
$30
$20
$10

Quantity Demanded
100 units
200 units
300 units
400 units
500 units

Price
$10
$20
$30
$40
$50

Quantity Supplied
0 units supplied
100 units supplied
300 units supplied
500 units supplied
700 units supplied

a.

Using the above data, find the equilibrium price and quantity and draw a rough graph
of supply and demand that identifies the correct equilibrium price and quantity.
b. If the government set a price ceiling of $10, will the market still be in equilibrium? If
not, what will be the size of the surplus or shortage? Make sure you tell us whether
or not we have a market shortage or surplus.
c. Answer the same question if the government sets a price floor of $40.
d. Assume this a third party market in which an insurance company pays the supplier
and the consumer also pays the supplier a fixed price. Assume the consumer can buy
a unit of commodity X for $10, and the insurance company commits to paying the
supplier that price which will induce the supplier to provide enough units of the
commodity to satisfy consumer demand. Tell us:
How much of commodity X will be supplied and demanded.
How much consumers will spend on commodity X.
How much the insurance company will spend on commodity X.

4.

Presidential candidate Bernie Sanders has just called for raising the US minimum wage
to $15.00.
a. You have been asked by the American Enterprise Institute (a conservative think tank)
to use supply-demand analysis to construct an argument opposing Senator Sanders
proposal. Present an appropriate graph and a one-paragraph argument against raising
the minimum wage.
b. Assume that you actually support Bernie Sanders minimum wage proposal, how
would you counter the argument that you just developed for the American Enterprise
Institute?
To answer this question, begin by drawing a supply-demand graph depicting the
labor market. Then demonstrate the effect that a minimum wage law will have
on the labor market. Use these findings to write a paragraph opposing the
minimum wage proposal. Then consider how you might change the supplydemand drawing to indicate that it might be appropriate to support the
minimum wage proposal. Write a paragraph supporting the minimum wage
proposal.

5. A government has decided to implement a national service program that will require all
citizens between the age of eighteen and twenty to give two years of service to the nation.
This could include military service, working as a health assistant or a teachers aide,
environmental work at minimum wage.
The government estimates that the budgetary cost of this program will be $25 billion
annually.
a.

Explain why the budgetary cost of this program does not give us a reasonable
estimate of the total opportunity cost of this program.
b. What information do you need to obtain the total opportunity cost?
c. How does this information affect your decision on whether or not to support such a
program?