Equilibrium price and quantity in the specified competitive market.

 

1. (25 points) For each of the following scenarios, use a supply and demand diagram to illustrate the effect
of the given shock on the equilibrium price and quantity in the specified competitive market. Explain
whether there is a shift in the demand curve, the supply curve, or neither.
(a) (5 points) An unexpected temporary heat wave hits the East Coast. Show the effect in the ice
cream market in New England.
(b) (5 points) The government introduces a tax on ice cream which is paid by producers. What is the
effect in the ice cream market?
(c) (5 points) China and Mexico are major producers of textiles. Workers in Mexico decide to go on
strike. Show the effect on the market for Mexican textiles.
(d) (5 points) Show the effect of the situation described in (c) on the market for Chinese textiles.
(e) (5 points) Suppose the government imposes a price cap on bottled water. Show the effect in the
bottled water market.
Problem 1 courtesy of William Wheaton. Used with permission.
2. (20 points) For each of the following pairs of goods, identify which one you would expect to have more
own-price elastic demand. Please explain your reasoning.
(a) (5 points) Computers (generally) vs. Apple MacBook Pro laptops.
(b) (5 points) Stereo headphones (generally) vs. hearing aids.
For each of the following goods, identify whether you would expect demand to be more (own-price)
elastic in the short run or the long run. As above, please briefly explain your reasoning.
(c) (5 points) Retail gasoline in the suburbs of Chicago.
(d) (5 points) Air conditioning units in Miami Beach, Florida.

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