21 Jul WHAT DOES DEMAND CURVE AND SUPPLY CURVE REPRESENT RESPECTIVELY?
This problem is loosely based on homework problem #4 in chapter 3 but delves much deepe Show more New Updated: This problem is loosely based on homework problem #4 in chapter 3 but delves much deeper into the implications. The following relations describe demand and supply. Qd = 30000 100P Qs = -10000 + 100P where P is price in dollar and Q is quantity in unit. What does demand curve and supply curve represent respectively? Why is demand curve negatively sloped whereas is supply curve positively sloped? What are the implications behind the two questions together about demand and supply curve respectively? Find the market clearing (equilibrium) price and quantity and show them graphically using S and D curves. A free hand graph will do as long as you identify clearly market clearing P and Q. What would be the quantity demanded and the quantity supplied when P = $110? What would happen to price in (c) and why? Incorporate short run rationing function of price in your answer. Suppose this is prescription drug that a terminally ill patient desperately needs. If P of $110 is the only price the patient can afford would the patient be able to get it and why or why not? What would be the quantity demanded and supplied when P = $290. What would happen to price in (f) and why? Incorporate short run rationing function of price in your answer. During the reconstruction period of Iraq US government awarded a contract at P = $290 without an open bidding process. National security was quoted for not having a non-bidding process. In view of the market clearing price in (b) what is negative implication of such a non-bidding contract at P = $290 in terms of market efficiency? At what price would the demand be zero and at what price would supply be zero? What does the spread between two prices imply in this market? Calculate the price when the quantity demanded is 1000 units and also the price when the quantity supplied is 1000 units. Following questions are designed to cover the rationale behind market clearing quantity. Plot the price for 1000 units of the quantity demanded and the price for 1000 units of the quantity supplied in (k) on the same diagram in (b). Would there be buyers for the quantity of 1000 units and would be sellers for the quantity of 1000 and why? How about 5000 units? What is the difference between the case of 1000 units and 5000 units? Why the market clearing quantity in (b) be sold? What is the point behind all three cases? Using the rationale you used in (l) explain why eBay emerged? Ability to get the best deal is not the answer since it could happen at any yard sales on weekend. Remember eBay emerged only after a wide use of internet. Case in point: someone bought a grilled cheese at a price more than $1000 on eBay simply because it [grilled cheese] looked like Virgin Mary a true story. Using the price you got in (k) for the quantity demanded of 1000 calculate the quantity supplied at the price. Using the price you got in (k) for the quantity supplied of 1000 calculate the quantity demanded at that price. Explain why this quantity will not be sold in view of market clearing and quantity obtained in (b). Would there be buyers remorse at Q = 1000? How about at Q = 19000? Be sure to understand what does buyers remorse means. This is why we have a generous return policy in retail sale even on line. Explain why the market clearing price and quantity obtained in (b) is Paretos optimum whereas the quantities of 1000 and 19000 are Paretos inefficiency and why? Use your understanding of Paretos optimality why market economy is truly efficient. In the past students regurgitated what they found about Paretos optimality on line without really understanding it. Explain why market efficiency alone is not enough to improve welfare of a society? Give a specific example. Following questions are designed to understand long run function of price. Suppose the demand for the product in question increases which leads to a new demand equation given below (i.e. an upward shift in demand) Qd = = 35000 100P Find new market clearing price and quantity using new demand equation given above and the old supply equation. Show the result in the same graph with the market clearing price and quantity you obtained in question (b). s. Compare the new market clearing price and quantity to the one in (b) and discuss how does market eliminate the resulting disequilibrium (surplus or shortage). Also explain how sellers (or producers) would make a short run adjustment in quantity so that new market clearing is achieved. Use short run rationing function of price again in its adjustment process. t. Below is the new (increased) supply equation (i.e. a shift in supply). Find new market clearing price and quantity using the new supply equation below and the new demand equation in (r). QS = -5000 + 100P Compare the new market clearing price and quantity above to that in (r) and discuss disequilibrium adjustment process in terms of long run adjustment by sellers (or producers). Incorporate long run rationing function of price. u. Discuss the difference in the role of price played in taking care of shortage/surplus in short run in (r) v. scarcity/abundance in long run in (t). v. Briefly explain how Wal-Mart created an upward shift in demand as in (r) by building its first Wal-Mart in a small town Bentonville AR and then how did they engineer shifts (increase) in supply in (t). If you do not address the essence of what made Wal-Mart the world largest retailer in your answer you may not get credit even though what you said might not be wrong. Following three questions are applications to open economy. w. Please return to the original supply and demand equation at the beginning. Because of entry of foreign suppliers into the market new supply curve is as shown below: Qs = 8000 + 100P There is no change in the original demand equation. Find the new market clearing price and quantity and compare them to (b) at the beginning of the question. What happens to price and quantity demanded in this country and the quantity supplied by the domestic suppliers in such an open economy? How much is imported? x. Who benefits and who loses as a result of this open economy in this country focusing on this economy and ignoring foreign countries. Is there any net gain as a result of open economy in this country and why? y. Explain how the impact of outsourcing covered in (w) and (x) is Paretos optimal in spite of negative impact of outsourcing has on domestic suppliers above? This question is back to the efficiency of market economy. z. Suppose the original demand and supply equation at the beginning describe hypothetical demand and supply equations for human organ (kidney) market. Because of moral implication of such a human organ market supply is limited in our society by voluntary donation which will be 1000 kidneys in this case. Remember that Q of 1000 is considered to be Paretos inefficient earlier. What would be the benefits lost for kidney patients relying upon donated kidneys which creates perennial problem of kidneys shortage ignoring negative moral implication behind such a market for human organ. Use the same numbers used in your answer in (k). Show less
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