Homework 2, Micro - Honors (1)

Principles of Microeconomics Homework 2 Name ____Julia Stenhard____________________ Due: September 19, 2020 1. Consider the market for oil. Suppose that some political unrest in Middle Eastern countries is causing it to be more and more dangerous to extract oil from reserves. At the same time, we are going into colder months when people will need fuel to heat their homes. On the two graphs below, show the potential outcomes of these changes in the market for oil. Fully explain what is happening in each graph. You do not need to use elasticity in your analysis. Market: oil Market: oil As the season changes and the weather is getting As the season changes and the weather is colder the demand for fuel and oil to heath peoples getting colder the demand for fuel and oil houses are increasing therefore the demand shifts to heath peoples houses are increasing to the right from QD to QD1. Also the quantity therefore the demand shifts to the right from supply is decreasing because it is getting more QD to QD1. Also the quantity supply is and more dangerous to extract the oil therefore decreasing because it is getting more and the supply curve shifts to the left from QS to dangerous to extract the oil therefore the QS1. supply curve shifts to the left from QS to QS1 P QS1 QS P P1* QS P1* P* QD1 P* QD1 QD QD Q1* Q* Q1* Q Q* Q

If price remained the same a shortage would occur so price increases from P* to P1* and quantity QS1. If price remain the same a shortage increases from Q* to Q1*. would occur, therefore the price increases from P* to P1* and quantity decreases from Q* The price is increasing the quantity is to Q1*. increasing which is positive for the producer The price is increasing and quantity is therefore, the producer surplus is increasing and decreasing which is bad for the consumer, the consumer surplus is decreasing. therefore the consumer surplus is decreasing and producer surplus will increase. 2. Define elasticity. A measurement of the responsiveness of one economic factor to changes in another economic factor. 3. Suppose A is the initial changing factor in the economy and B is the responding factor. What is the mathematical formula for the A elasticity of B ? E AB = ( %ΔB )/( %ΔA ) 4. Give an example of a good whose price elasticity of demand is inelastic. Explain why you believe this is the case. One example of a good whose price elasticity of demand is inelastic is utilities such as water. If the price changes a lot the demand will not change much because people are still going to buy the good. 5. Suppose that the price elasticity of demand for gasoline is equal to E =− 0.25 . When the price increases by 5%, by how much will the quantity demanded of gasoline change? E PD = %ΔQD %ΔP -0.25= %ΔQD 5% %ΔQD =− 0.25 × 5 =− 1.25 The quantity demanded of gasoline will only decrease by 1.25%. The change in price is larger but the change of quantity demanded will not be affected as much.

The price elasticity of demand is inelastic because veterinary services is a necessity. Since the price of veterinary services is increasing the supply of veterinary services decrease from QS to QS1 resulting in a left shift in the supply curve. If price remained the same a shortage would occur. Therefore, price increases greatly from P1* to P2* and quantity decreases slightly from Q1* to Q2*. As price increases greatly and quantity is decreasing the consumer surplus is decreasing. Producer surplus is increasing as the change is price is greater than the change in quantity. 8. Consider the market for hotel rooms. Make an assumption about the price elasticity of supply for hotel rooms. Suppose the price elasticity of demand is normal. As the pandemic continues people are no longer traveling as much. Suppose the pandemic elasticity of demand for hotel rooms is elastic. At the same time, suppose the government has increased safety and cleanliness standards at hotels. Suppose the government standard elasticity of supply is inelastic. What will likely happen in the market for hotel rooms due to these changes. Use the graph below to support your answer. Fully label your graph and fully explain your answer. Market: hotel rooms Q1* Q2* Q P QS1 QS P* P1* QD QD1 Q Q1* Q*

I assume that price elasticity of supply inelastic since the hotel has a capacity constraint. As the pandemic continues people want to stay home more and do not take a lot of trips or travel therefore the demand decreases greatly from QD to QD1. Since the pandemic elasticity of demand is elastic. Also the government has decided to increase safety and cleanliness at the hotels. The government standard elasticity of supply is inelastic therefore the QS decreases slightly from QS to QS1. If price stayed the same a surplus would occur, price decreases greatly from P* to P1* and quantity decreases slightly from Q* to Q1*. Consumer surplus increases and producer surplus decreases. 9. Although question (1) and question (8) of this homework are similar, how and why do your answers different? Is your analysis in question (8) more or less accurate than you analysis in question (1). Why? Explain. They are similar but the answers are different because in question 1 we do not take any elasticities in consideration so two graphs would have to be made to see the possible outcomes. The answer in question 8 is more accurate because we take elasticity into consideration and can identify the steepness of curve, as well as if the decrease or increase is a big or small shift. With elasticity we can see if price and quantity change greatly or slightly. Complete the following book problems. Page 100: Under Question for Review: Number 7 Page 143: Under Study Problems: Number 5 Page 144: Number 6, Number 7, Number 12 Page 100: 7- The process that leads the market back to equilibrium is because either a surplus or a shortage would occur. A surplus occurs when p>p* and QS> QD, if a surplus occurs then the inventory increase and producers decrease price until inventories stabilize. A shortage would occur if p<p* and QD>QS and the inventories would decrease. Producers increase the price until inventories stabilize. Page 143: 5- a) Perfectly inelastic

12- E = B 2 − B 1 B 1 + B 2 2 A 2 − A 1 /( A 2 + A 1 )/ 2 E = 6,000 − 9,000 9,000 + 6,000 2 / 20,000 − 15,000 ( 15,000 + 20,000 )/ 2 E= − 3000 7500 x 17,5000 5,000 =− 1.4 The price elasticity of demand for (out-of-state applicants) is -1.4 which elastic. E = B 2 − B 1 B 1 + B 2 2 A 2 − A 1 /( A 2 + A 1 )/ 2 E = 4 , 000 − 5 , 000 5 , 000 + 4 , 000 2 / 20,000 − 15,000 ( 15,000 + 20,000 )/ 2 E= − 1000 4,500 x 17,500 5,000 =− 0.777 The price elasticity of demand for (in-state applicants) is -0.777 which is inelastic.