econ 405

You are free to collaborate with your classmates on this assignment and are encouraged to do so. However, all students must individually write up and submit their own assignment. Assignments are due in class at the beginning of the lecture on the due date. Late assignments may receive no credit. 1. Beer-o-nomics. Show graphically using Supply and Demand the effects of the following on the U.S. beer market. (a) A bumper harvest of grapes causes the price of wine to decrease. (b) A major drought hits the Midwest and damages the barley crop, sharply driving up barley prices. Barley is an ingredient in beer production. (c) A severe recession hits the U.S., lowering the incomes of American households. Assume that beer is a normal good. 2. The local donut market in Burlington, Vermont, is characterized by the following supply and demand curves, where Q is the quantity (millions of boxes, annually) of donuts, and P is the price (dollars per box): S : Q = 2P D : Q = 20 − 2P (a) Graph the supply and demand curves. Label all axes, intercepts, and curves. Find the equilibrium price P ∗ and quantity Q∗ in this market. Identify these in your graph. (b) Calculate the price elasticity of demand  at the equilibrium price and quantity. (c) Senator Sanders is seeking to impose a $6 price floor in this market to discourage donut consumption. Analyze the effects of the proposal using a new graph that shows both the original equilibrium and the effects of the price floor. In your analysis, include the following: i. How many donuts are traded in this market after the price floor is imposed? 1 ii. How many surplus donuts are produced? iii. Compute the change in producer surplus. Are donut merchants better off? iv. Compute the deadweight loss and label it in your graph. (d) An advisor to Senator Sanders wants to compare the effects of an alternative policy. Suppose the government instead puts a $1 tax on donuts (i.e. $1 per box). In your analysis, include the following: i. What is the new price faced by consumers? ii. What price do producers now receive? iii. What is the new quantity traded in the market? iv. How much revenue does the government receive? 3. Explain whether the following statements are true, false, or uncertain. Use graphs and/or equations to support your arguments. (a) Raising the minimum wage will benefit all workers. (b) If Senator Cruz buys one pint of milk regardless of its price and $1 worth of cookies every day, then his demand curve for milk and his demand curve for cookies are both price inelastic. (c) A minimum wage leads to relatively less deadweight loss in labor markets where labor demand is relatively more inelastic. (d) Governor Palin notices that, on average, wages are much higher in Alaska than Arizona. Thus, she concludes, everyone in Arizona could raise their incomes by moving to Alaska. (e) Raising the minimum wage always increases the total payments from firms to workers. (Total payments from firms to workers equal the wage times the quantity of labor exchanged in the market = w × L.) 2

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