Dr. Barry Haworth
University of Louisville
Department of Economics
Econ 201-01
Fall 2010

 

 

Homework #2 (due by 10:00pm on Thursday, September 23)

 

 

 

Please submit your answers to this homework through the assignment link on Blackboard.  No credit will be given for answers submitted in class or emailed to me.

 

To access this homework on Blackboard, do the following.  After logging into Blackboard, check “Assignments” for this class.  You should see a link that says “Homework #2”.  By clicking on this link, you should be able to start answering the homework questions.  When you are done, you may submit your answers, but once answers have been submitted – you cannot go back and change anything.  If you don’t finish, then it’s possible to save your answers and submit them later – just remember that anything submitted after the due date is considered late.

 

Questions 3 and 5
Your answers in the first three parts of question #3 and both parts of question #5 involve your calculating a value.  When submitting your answer, understand that your answer can be "technically correct" but graded as "wrong" because you didn't follow directions.  For grading purposes, a wrong answer is still be considered wrong - even if your mistake is "only" a result of not following directions.
 
In that regard, please note the following comments below.
   (i) If you get a fraction for your answer, you can either leave the fraction as is or you can put your answer in decimal form (i.e. you can record your answer as 2/5 or 0.4).
   (ii) If you record your answer as a fraction, then you must reduce that fraction to its simplest form (e.g. record your answer as 2/5 instead of 4/10).
   (iii) Except for 0.25 and 0.75, all other decimals should be rounded to the nearest 10th (e.g. 0.1 or 3.4, rather than 0.12 or 3.35).
   (iv) If your answer is 0.25 or 0.75 (only), then record it as 0.25 or 0.75.  You do not need to round your answer up to 0.3 or 0.8 respectively.
   (v) On question #5, the price can be expressed in terms of dollars or just as a numerical value (e.g. ten dollars can be stated as $10.00 or as 10.00).
If you have any questions about the comments in i-v above, then please ask them before submitting your homework for grading.  Once homework is submitted, however, it's too late to make any changes.  Note that you can save incomplete homework, come back to access it later on and then complete it before officially submitting the homework for grading.

 

 

1. Consider the Louisville-area market for lawyers and assume that this market can be described by demand and supply curves.  I.e., there are many buyers and sellers of lawyer services in Louisville.  For convenience, we’ll also assume that all lawyer services are essentially the same.  Of course, in the provision of lawyer services, you also have paralegals (legal assistants) who assist lawyers with their court cases (see http://www.bls.gov/oco/ocos114.htm), and that the demanders for lawyer services in Louisville have access to lawyer services in areas like Frankfort and Lexington, but that these area-markets are considered separate markets.

You must identify how different events affect this market by matching each event (listed under “Events” below) to the item which represents the most likely effect on the market for lawyer services.

Events:

a. Law firms purchase new imaging software that allows lawyers to copy legal documents more inexpensively

b. Increase in consumer income

c. Decrease in the price of lawyer services in the Lexington area

d. Increased computerization leads to an increase in the productivity of lawyers

e. Better opportunities in other areas lead to many lawyers leaving Louisville (i.e. to live and work elsewhere)

f. Government subsidizes the provision of lawyer services by giving demanders a “voucher” that allows those demanders to obtain free legal advice and reduced court costs

g. Government taxes the suppliers of lawyer services, a tax that’s paid whenever lawyers take on a new case

 

Effect on Market:

A.  Increase (shift right) in Demand for lawyer services

B.  Decrease (shift left) in Demand for lawyer services

C.  Increase (shift right) in Supply of lawyer services

D.  Decrease (shift left) in Supply of lawyer services

E.   Increase (shift right) in Demand for lawyer services and Increase (shift right) in Supply of lawyer services

F.   Decrease (shift left) in Demand for lawyer services and Decrease (shift left) in Supply of lawyer services

G.  Increase (shift right) in Demand for lawyer services and Decrease (shift left) in Supply of lawyer services

H.  Decrease (shift left) in Demand for lawyer services and Increase (shift right) in Supply of lawyer services

 

 

This next question relates to how we explain changes in price and quantity on the basis of the demand and supply model from class.  The question should be taken generally, and does not necessarily relate to the market discussed above.  The one important assumption here is that we assume the demand and supply curves in this market are not horizontal or vertical (i.e. that these curves have their "typical" slope).

 

2. Match the change in equilibrium on the left with the shift(s) on the right that best explains that change.  E.g., if you believe that an increase in equilibrium price and quantity (left) is best explained by a decrease in supply (right), then you would match those two.

 

a.  P* increases and Q* decreases                                A.  Increase in demand

b.  P* decreases and Q* decreases                              B.  Decrease in demand

c.  P* increases and Q* increases                                 C.  Increase in supply

d.  P* decreases and Q* increases                                D.  Decrease in supply

                                                                                    E.  Increase in demand and increase in supply

                                                                                    F.  Decrease in demand and decrease in supply

                                                                                    G.  Increase in demand and decrease in supply

                                                                                    H.  Decrease in demand and increase in supply

 

 

3. Assume that researchers determine the following information about good X, in terms of how the quantity demanded for good X is affected by changes in specific variables.

·        When the price of good X increases by 8%, the quantity demanded for good X decreases by 4%

·        When consumer income increases by 5%, the quantity demanded for good X increases by 10%

·        When the price of a related good (e.g. good W) increases by 1%, the quantity demanded for good X increases by 3%

·        When suppliers of good X spend 2% more on advertising for good X, the quantity demanded for good X increases by 2%

 

Use the information above to answer parts a, b and c below (please read the instructions above about rounding your answer in Question #3). Note that it's not necessary to include % in your answer or indicate that a number is positive by including "+" before the number.  If applicable, you do need to indicate whether a number is negative (i.e. include "-" in front of any negative number to indicate that it's a negative number).

a. What is the (own) price elasticity of good X?

b. What is the income elasticity of good X?

c. What is the cross price elasticity of good X?

 

4. When looking at the information given in the question above (i.e. #3) it is possible to characterize good X in terms of whether it is a normal good, inferior good, substitute for good W, complement to good W, etc.  In the responses given below, check all correct responses when it comes to characterizing good X in the manner described above.  E.g., based on the information from Question 3, if you think Good X is an inferior good, a luxury, and also a substitute for good W, then you would check those three boxes below.

 

□       The demand for good X is inelastic

□       The demand for good X is elastic

□       The demand for good X is "unit elastic"

□       Good X and good W are not related goods

□       Good X and good W are substitutes

□       Good X and good W are complements

□       Good X is a normal good

□       Good X is an inferior good

□       Good X is a necessity

□       Good X is a luxury


 

 

5. Assume that the demand and supply curves for good A are given as the equations you see below.  Note: please read the instructions above about rounding your answers.  Note also that you will be using these equations to not only answer parts a and b below, but also Question #6.

 

Demand:

P = 500 - 4Qd

(Qd = quantity of A demanded, P = price)

Supply:

P = 300 + Qs

(Qs = quantity of A supplied)

 

a.  What is the equilibrium quantity in this market?

b.  What is the equilibrium price in this market?

 

 

Multiple Choice Question.

6. Recall that you will be using the equations from Question #5 above in answering this question.  Assume that government has placed a price floor on the market for good A.  If the price floor is set at $460, then which one of the following (direct) effects is the most likely to occur:

 

a)      No effect (i.e. no shortage, no surplus)

b)      Shortage of 10 units

c)      Surplus of 10 units

d)      Shortage of 30 units

e)      Surplus of 30 units

f)        Shortage of 120 units

g)      Surplus of 120 units

h)      Shortage of 150 units

i)        Surplus of 150 units

j)        Shortage of 160 units

k)      Surplus of 160 units