Economics 102 Introductory Macroeconomics - Spring 2006, Professor J. Wissink
Problem Set 2 – ANSWERS
1. Let's model a month in the life of the rental market for apartments in Ithaca.
a) Graph the supply and demand curves.
Supply and Demand
Price
2100
1800
Supply
1500
Demand
1200
900
600
300
0
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
Quantity
b)
Demand is given as: XD = 10,000-5P and supply is given as: XS = -2000+15P
Solve for equilibrium: 10,000-5P = -2000+15P
12,000
= 20P
600
= P
E.g. from demand we get: XD=10,000-5*600=7,000.
The equilibrium rent price is $ 600 and the equilibrium quantity is 7000 apartments
c) At price ceiling $500, there is an excess demand for apartments, since XD(500)=7,500>XS(500)=5,500.
The number of apartments rented will be 5,500.
d) Price ceiling $ 700 is not effective (not binding) because it is above equilibrium price $ 600. Original equilibrium
price (P=600) and quantity (X=7,000) will not change.
e)
Ms. Carolyn Peterson, see:
http://ithaca.govoffice.com/index.asp?Type=B_LIST&SEC={472F75C9-54AC-42C9-ACE4-016834ABB71C}
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2. Critically evaluate the following sequential statements and explain why they are true, false or uncertain.
a) True.
As the price of coffee decreases, consumers demand more coffee creamer at each creamer price, i.e.
demand for coffee creamer increases.
P
D’
D
S
Coffee creamer
b) True.
Since demand for coffee creamer increased, equilibrium price of creamer increased.
c) False.
Since price of creamer increased, producers increased quantity of creamer supplied. There is no increase in
supply of creamer.
d) False.
As we know from part c) there was no change in supply of creamer.
3. Suppose that the demand curve for cantaloupes is P=120-3Qd, where P is the price per pound (in cents) of
cantaloupe and Qd is the quantity demanded per year (in millions of pounds). Suppose that the supply curve
for cantaloupes is P=5Qs, where Qs is the quantity supplied per year (in millions of pounds).
a) Let XS=XD, i.e. 120-3X=5X. It follows that the equilibrium quantity is 15 million pounds per year and the
equilibrium price 75 cents.
b) Suppose the government imposes a price floor of 80 cents per pound on cantaloupe.
i) How much would then be supplied?
At an 80-cent floor: XS(80)=16 million pounds will be supplied.
ii) Calculate the resulting surplus or shortage.
There will be a surplus. The surplus will equal to XS-XD=16-13.33=2.66 million of pounds.
c) Taking each event separately, would the demand curve shift to the left, to the right, or stay in place if:
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i) a report by the U.S. Surgeon General suggested that eating cantaloupes causes cancer?
The demand curve would shift left.
ii) the price of honeydew melons rose by 10 percent?
As long as honeydew is a substitute for a cantaloupe, the demand curve for cantaloupes would shift
right.
iii) per capita incomes rose by 20 percent?
Assuming that a cantaloupe is a normal good, the demand curve would shift right.
Assuming that a cantaloupe is an inferior good, the demand curve would shift left.
iv) the wages of workers employed in supplying cantaloupes to the market increased by 25 percent?
The demand curve would stay in place unless workers demand cantaloupes, in which case, it would
shift right as in (iii).
4. Assume an isolated island economy has two labor markets (unskilled and skilled). The supply and demand
conditions in each labor market are as follows.
a) Equilibrium is at P=20, Q=80 for unskilled labor, and P=40, Q=120 for skilled labor. The graphs
follow:
Skilled workers' market
Unskilled Workers' Market
Wage
Wage
60
60
50
40
30
20
10
0
50
40
30
20
10
10
30
50
70
90
Number of workers
110
130
0
20
40
60
80
100 120 140 160
Number of workers
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b) Assume that the government sets a minimum wage of $30,000 per year. (No company can pay less
than the minimum wage.) Using diagrams, illustrate the impact of this minimum wage on equilibrium
price and quantity in EACH labor market.
A minimum wage of $30,000 per year is illustrated by the following graphs.
Wage (thousand $)
< Unskilled >
Wage (thousand $)
< Skilled >
Notice that the minimum wage causes greater
quantity supplied of unskilled labor compared to
quantity demanded. This represents a shortage of
jobs or unemployment in the unskilled labor market.
40
30
20
However, the skilled worker market continues to
clear at equilibrium
# of workers
# of workers
120
80
c) The minimum wage is eliminated. However, producers can now replace unskilled workers with
robots. The rental rate of a robot is $15,000 per year, and each robot can do the work of one unskilled
worker. Using diagrams, illustrate the impact that access to robots has on the market for unskilled labor.
Access to $15,000 robots mean that the producers will never pay more than $15,000 to employ an
unskilled worker. Therefore, demand drops to zero for all prices above $15,000.
Unskilled Workers' Market
Wage
60
50
40
30
20
10
0
10
30
50
70
90
110
130
Number of workers
5. MULTIPLE CHOICE ANSWERS: C, C, D.
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