Supply and Demand (Problem Set-2)

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Question 1

The average retail price of steel increased by 40% from January 2016 to December 2018.   The following may or may not be a reason for this increase. Using demand and supply analysis, explain why or why not.

(1)    Iron ore is the main component used to manufacture steel. The price of iron ore went up by 10%

(2)    The US was going through a prolonged expansion in its economy

(3)    Imports of steel from China were hit with a 25% tariff

(4)    Steel production is one of the leading producers of C02 emissions which are unfriendly to the environment. Regulatory changes and climate change initiatives have caused steel producers to use more environmentally friendly but more costly production methods.

(5)    Lower profits for US Steel and other steel producers

Question 2

Many illegal drug users commit crimes to finance their addiction. This connection between illegal drugs and crime has led to efforts to stop the smuggling of illegal drugs into the United States.

  1. If attempts to reduce the smuggling of illegal drugs are successful, what will happen to the price of illegal drugs? Explain why.
  2. If attempts to reduce the smuggling of illegal drugs are successful, what will happen to the total expenditure on drugs by illegal drug users? What will happen to the amount of crime committed by illegal drug users? Explain why
  3. What do you think will happen to the number of brand-new illegal drug users? Explain why.

Question 3

The growing of agricultural products and other crops is a highly competitive industry with free entry and exit. A plant called “Lavender” is one of the most profitable specialty crops to grow and harvest in the US.  Growing lavender can give growers a rate of return on their invested capital of close to 25%. The average rate of return for similar specialty crops is 10%

  1. What would you expect to happen to the number of farmers growing lavender in the US?  Explain why.
  2. Growers in Mexico are now growing lavender and have recently started importing lavender into the US. What do you think will happen to the number of growers of lavender in the US? What will happen to the profitability of growers of lavender in the US?  Explain why.
  3. Due to an outcry from lavender growers, a ban on imports of lavender from Mexico was enacted.   What do you think will happen to the number of growers of lavender in the US? What will happen to the profitability of growers of lavender in the US?  Explain why.

Question 4

Your friend is an avid fan of the music superstar Lady Gaga (or your favorite musician). She has recently complained about the high price of tickets to Lady Gaga concerts. She says: “I just cannot afford to pay $100 for a concert anymore. I think ticket prices for Lady Gaga concerts are just too high”. Use supply and demand concepts to answer the questions below

  1. Given that Lady Gaga has sold all of the tickets in all of her concerts, how would you evaluate your friend’s comment that ticket prices “are just too high”. Explain.
  2. Suppose prices of tickets were lowered from $100 to $75. In what sense, is a price of $75 too low? Explain
  3. Suppose Lady Gaga’s next CD got very poor reviews and did not sell well. What do you think would happen to the price of tickets for Lady Gaga’s concerts? Explain why.
  4. Suppose Lady Gaga announced that she was not going to give any more concerts and that her next tour was going to be her last. What do you think would happen to the price of tickets for Lady Gaga’s last concert? Explain why.

Question 5

  1. Suppose you write books for a living.  You are paid 5% of the revenues from sales of each book.
  2. Suppose prices are set by Amazon.  Amazon has notified you that the price of your book is going up by 10%.
  3. As the author of the book, are  you happy about this?  Why or why not?
  4. What are some characteristics of your book which will affect your answer to part 1?

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