Managerial Economics

In Class Exercise Five

 

1.  Explain what "satisfactory inventory level" means and why suppliers try to find it.

 

 

 

 

 

 

 

2.  If there is a shortage -- what will suppliers do and why?  Draw this on a supply and demand graph.

 

 

 

 

 

 

 

 

 

 

3.  If there is a price floor above the market clearing price -- what will happen in the market.  Show on a graph.

 

 

 

 

 

 

 

 

 

 

 

 

4.  What will happen to the market clearing price of candy if the price of sugar increases and at the same time the income of the people who buy candy decreases (candy is a normal good).  Show on a graph.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.  Suppose

 

Qd = 50 - 4P + 16I, and

Qs = -12 + 8P - 5W + 3T

 

Where:

I = Income

W = average hourly wage for labor

T = technology factor that increases productivity of supply

                                   

If W = 25, I =15, T = 3, what are the market clearing values of Q and P?

 

 

Qd =

Qs =

 

So P =

 

So QD =

   

   

 

 

So QS =

 

 

 

 

6.  Consider the market for “popcorn crisps” a new product that you prepare fresh (like popcorn) but that has the look and feel of a potato chip.

 

a.  Suppose that Crisp-Makers of America, Local #458, a trade union that manufactures the crisps, successfully negotiates a wage increase.  Will this affect the supply of or the demand for the crisps.  How would the curve be affected?

 

Supply or Demand (circle one).  Direction of shift?

 

Graph:

 

 

 

 

 

 

 

 

 

 

 

b.  Using this information, relative to the initial market clearing price and quantity, identify the price and/or quantity adjustment.  What process causes the adjustment to the new market clearing price and quantity?

 

Price Change:                    Increase/Decrease /No Change (Circle One)

Quantity Change                 Increase /Decrease /No Change (Circle One)

 

Adjustment Process - why does the adjustment occur?

 

 

 

 

 

 

7.  Suppose that the free market clearing price of bourbon is $6.00 a bottle, and that the government sets a price ceiling of $4.50 a bottle on bourbon.  The most likely result of this action is that:

 

 

 

 

 

 

 

 

 

 

8.         “The winds of the recent hurricanes in Florida are bringing soothing financial gain to California citrus growers.  Due to the extensive damage to the Florida citrus crop, California citrus products are commanding their highest prices ever.”

 

Which of the following statements best explains the economics of the quotation?

 

a          The supply of Florida oranges has increased, causing their price to increase and the demand for the substitute California oranges to also increase.

b.         The supply of Florida oranges has decreased, causing the demand for California oranges to increase and their prices to rise.

c.         The demand for Florida oranges has been reduced by the hurricanes, causing a greater demand for the California oranges and an increase in their price.

d.         The demand for Florida oranges has been reduced causing their prices to fall and therefore increasing the demand for the substitute California oranges.

 

 

 

 

 

 

 

 

 

 

 

 

9.  Suppose:

 

Qd = 100 - 4P +10I, and

Qs = -10 + 6P - 3W

                                   

If W = 25, I =12.

a. what are market clearing values of P and Q?

 

 

 

 

 

b.  Now suppose that a price floor is put on this market of $40.00.  What would Qs and Qd be at this price floor?

 

 

 

 

 

Show this graphically - put all appropriate numbers on your graph.

 

 

 

 

 

 

 

What is happening in this market?