Problem set 1: demand and supply
J. Wahl – Microeconomic Principles – Winter 2009
1. What happened to LA's manhole covers and why? Think as an economist.
2. Please read the article "At last, 'guests'." Before Puerto Rican convicts came to
Appleton, MN, how would you characterize the markets for prison cells in Puerto Rico and
in Appleton? Draw supply-demand diagrams to help explain your answer. What are the
costs and benefits of "opening up" the market for prison cells?
3. Lee Harvey Oswald's signature sells for more than John F. Kennedy's. How do
you, as an economist, explain this phenomenon?
4. Some people advocate a federal bailout of farmers when the farmers lose money
due to flooding. These advocates argue that total agriculture spending will not increase
because government price subsidies will shrink substantially as scarce crops raise market
prices.
a. Graph the supply, demand, and equilibrium quantity and price of agricultural
products when subsidies exist. (No numbers necessary here -- just draw the general
graph and explain where equilibrium lies when subsidies are present. Assume that
subsidies take the form of a price floor –that is, farmers are guaranteed a certain price for
their crops regardless of market demand.)
b. Why would subsidies fall as a result of a flood? Use your graph to buttress your
explanation.
c. Who wins and who loses from a subsidy? Please explain. Keep in mind that the
demand curve represents marginal willingness to pay and the supply curve represents
marginal cost.
5. One of your articles talks about Minnesotans' magnanimity in getting tickets to an
Iowa fan when there is a quota on tickets. Graph the market for tickets under a quota.
Carefully indicate relevant points. What could an enterprising Minnesotan do who has
bought up lots of tickets and is visiting Iowa?
6. Beer costs $1.50 per glass at the Tavern and wine costs $2.50.
a. What is the opportunity cost of wine in terms of beer?
b. Suppose a 5% tax is placed on both wine and beer. What happens to the
opportunity cost of wine in terms of beer?
c. Suppose instead of a percentage (or ad valorem) tax, an excise tax of 5 cents per
glass of alcoholic beverage is assessed. What happens to the opportunity cost of wine in
terms of beer?
7. Jennifer receives 10 brownies and 40 smoked trout from home each month; she is
willing to trade 4 trout for 1 brownie. John receives 30 brownies and 20 trout each month;
he is willing to trade 3 brownies for 2 trout. Will they tend to stay at this allocation of
brownies and trout? Explain your answer.
