ECO5POE Principles of Economics

ECO5POE Principles of Economics

Yuji Tamura 2015 S2 City
Exercises 3
(These exercises will be discussed on 18/08.)
1. Consider a competitive market for apples. We have the following data about this market:
Price ($ per kg) Demand (Thousand kg) Supply (Thousand kg)
1.00 60 40
1.50 55 45
2.00 50 50
2.50 45 55
3.00 40 60
3.50 35 65
4.00 30 70
a) Draw the market demand and supply in a diagram. What are the equilibrium price and
quantity?
b) The government is considering to introduce a price floor to this market to protect apple
producers. What is the market consequence if the price floor is $1.50 per kg?
c) What is the market consequence if the price floor is $3 per kg instead?
d) If the price floor is $2.50 per kg instead, how many kg of apples the government has to
purchase in order to ensure the equality of demand and supply?
e) What’s the total cost of the purchase?
2. Consider the same apple market above. Now assume that the government has decided to pay
producers a subsidy of $1 per kg (instead of introducing a price floor to support apple producers).
a) Re-draw the initial diagram that you drew in Question 1(a) above, and then superimpose the
post-subsidy supply schedule.
b) What’s the quantity traded in new equilibrium?
c) What’s the market price (the unit price that consumers must pay) in new equilibrium?
d) How much will suppliers receive for each kg of traded apples eventually (i.e. after the
government pays out the subsidy)?
e) What’s the total cost of the subsidy to the government?
3. Suppose that, as new market data have become available, policymakers have discovered that
demand is more elastic than old data indicated. More specifically,
Price ($ per kg) Demand (Thousand kg) Supply (Thousand kg)
1.00 70 40
1.50 60 45
2.00 50 50
2.50 40 55
3.00 30 60
3.50 20 65
4.00 10 70
a) Draw the market demand and supply in a diagram. What are the equilibrium price and
quantity?
b) The government wishes to boost the quantity traded to 60,000kg by giving a subsidy to
apple producers. What’s the size of per-kg subsidy that achieves the target?

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