1. MICROECONOMICS BU224 SeminarFour

2. Course Issues and Questions Course Issues and Questions Review of Chapter Five and Six Review of Chapter Five and Six Concepts Concepts Homework Review Homework Review

3. Government Set Prices Price Ceilings Set below equilibrium price Rationing problem Black markets Example: Rent control LO5 3-3

4. Government Set Prices LO5 S P Q D P0P0 PCPC Q0Q0 Shortage QdQd QsQs ceiling $3.50 3.00 3-4

5. Government Set Prices Price Floors Prices are set above the market price Chronic surpluses Example: Minimum wage laws LO5 3-5

6. Government Set Prices LO5 S P Q D P0P0 PfPf Q0Q0 Surplus QsQs QdQd floor 2.00 $3.00 3-6

7. Chapter 4 Questions 1. Suppose it is decided that rent control in New York City will be abolished and that market rents will now prevail. Assume that all rental units are identical and are therefore offered at the same rent. To address the plight of residents who may be unable to pay the market rent, an income supplement will be paid to all low income households equal to the difference between the old controlled rent and the new market rent. a. Use a diagram to show the effect on the rental market of the elimination of rent control. What will happen to the quality and quantity of rental housing supplied? b. Now use a second diagram to show the additional effect of the income-supplement policy on the market. What effect does it have on the market rent and quantity of rental housing supplied in comparison to your answers to part a? c. Are tenants better or worse off as a result of these policies? Are landlords better or worse off? d. From a political standpoint, why do you think cities have been more likely to resort to rent control rather than a policy of income supplements to help low-income people pay for housing?

8. Chapter 4 Questions

10. If the price of a rock concert increases by 10%, what effect will this have on sales? It depends on the price elasticity of demand for this rock concert

11. What is elasticity? The relative change in an economic variable, e.g. demand, that occurs in reaction to changes in other variables, e.g. price

12. What is price elasticity of demand? The ratio of the percentage change in the quantity demanded of a product to a percentage change in its price

13. Price Elasticity of Demand Measures buyers’ responsiveness to price changes Elastic demand Sensitive to price changes Large change in quantity Inelastic demand Insensitive to price changes Small change in quantity LO1 4-13

14. Price Elasticity of Demand E d = % Change in price % Change in Q demanded

15. Suppose a university’s enrollment drops by 20% because tuition rises by 10%, what is the price elasticity of demand?

16. EdEd =EdEd = -20%+10% = -.20+.10 = 2

17. Interpretation of Elasticity of Demand E d > 1 demand is elastic E d = 1 demand is unit elastic E d < 1 demand is inelastic Extreme cases Perfectly inelastic Perfectly elastic LO1 4-17

18. Why is elasticity 2 in the previous example and not -2? Because we know from the law of demand that quantity demanded and price are inversely related

19. $40 $30 $20 $10 10203040 Perfectly Elastic Demand E d = 8 D Q P

20. Price change Infinite change in quantity demanded Perfectly Elastic Demand

21. A condition in which the quantity demanded does not change as the price changes

22. $40 $30 $20 $10 10203040 Perfectly Inelastic Demand E d = 0 D Q P

23. Price change Zero change in quantity demanded Perfectly Inelastic Demand

24. Price Elasticity of Demand LO1 Selected Price Elasticities of Demand Product or Service Price Elasticity of Demand (E d )Product or Service Price Elasticity of Demand (E d ) Newspapers.10Milk.63 Electricity (household).13Household appliances.63 Bread.15Liquor.70 MLB Tickets.23Movies.87 Telephone Service.26Beer.90 Cigarettes.25Shoes.91 Sugar.30Motor vehicles1.14 Medical Care.31Beef1.27 Eggs.32China, glassware1.54 Legal Services.37Residential land1.60 Automobile repair.40Restaurant meals2.27 Clothing.49Lamb and mutton2.65 Gasoline.60Fresh peas2.83 4-24

25. What factors influence demand sensitivity? Availability of substitutesAvailability of substitutes Narrowly Defined GoodsNarrowly Defined Goods TimeTime Proportion of Income Spent on the GoodProportion of Income Spent on the Good

26. What do substitutes have to do with a price change? The more substitutes a product has, the more sensitive consumers are to a price change, and the more elastic the demand curve

30. Chapter 6 Questions -Explain why the choice between 1, 2, 3, 4, 5, 6, 7, and 8 “units” or 1000, 2000, 3000, 4000, 5000, 6000, 7000, and 8000 movie tickets, makes no difference in determining elasticity in Table 18.1. - What are the major determinants of price elasticity of demand? Use those determinants and your own reasoning in judging whether demand for each of the following products is probably elastic or inelastic: (a)bottled water; (b) toothpaste; (c) Crest toothpaste; (d) ketchup; (e) diamond bracelets; (f) Microsoft Windows operating system. - What is the formula for measuring the price elasticity of supply? Suppose the price of apples goes up from $20 to $22 a box. In direct response, Goldsboro Farms supplies 1200 boxes of apples instead of 1000 boxes. Compute the coefficient of price elasticity (midpoints approach) for Goldsboro’s supply. It its supply elastic, or is it inelastic? - Research has found that an increase in the price of beer would Reduce the amount of marijuana consumed. Is cross elasticity between the two products positive or negative? Are these products substitutes Or complements? What might be the logic behind this relationship?

31. Chapter 6 Questions 1.If good X has a price elasticity of demand equal to 2 and the price increases by 10 percent then by what percent will the quantity demanded change? 2.Why are convenience stores able to charge higher prices than grocery stores for some items? 3.If a firm wishes to increase its revenues and the product it is selling has an inelastic demand, then should the firm increase or decrease its price?

32. Chapter 6 Questions 4. If the income elasticity of demand is greater than zero does this indicate the product is normal or inferior? Why ? 5. In each of the following situations, indicate who bears the biggest burden of a tax imposed on sellers, buyers or sellers? a. Given supply, demand is quite inelastic? b. Given supply, demand is quite elastic? c. Given demand, supply is quite inelastic? d.Given demand, supply is quite elastic?

34. Microeconomics BU224 Questions?