Deck 4: Demand and Supply Applications

Question 1

McDonalds and many supermarkets offer vending machines in their stores that rent new movie releases for as low as $1.00 per day provided that they are returned in 24 hours before incurring a late fee. How can Netflix and Blockbuster compete against this type of service? Or is their something else going on there that doesn't first meet the eye?

Answer 1

Patrons who may take advantage of the $1.00 movie rentals were already buying a burger or doing their groceries. The opportunity cost to them is quite low to simply swipe their credit card and take their movie on the run. Netflix and Blockbuster may not necessarily be competing for the precisely the same customers. Netflix customers are willing to wait for their movies to arrive in the mail and Blockbuster customers apparently don't mind making the special drive over to the store to pick up their favorite movie. In either case the Netflix and Blockbuster customer did not choose to make a movie rental on a whim as the McDonalds and supermarket customer most likely did. In addition, the rental agreements are very different. Blockbuster and Netflix customers might also enjoy the convenience of being able to view the movie at their convenience. The supermarket video vending machines offer a lower price but tighter terms of service since the movies need to be returned in 24 hours.

Question 2

Explain what the phrase "price rationing" means.

Answer 2

Price rationing is the process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.

Question 3

Assume that the cost of producing a hardback book is roughly equivalent to producing a paperback book. Explain how and why then do publishing companies charge higher prices for the hardback book and a much lower price for the paperback book.

Answer 3

The hardbound book version typically comes out before the paper bound version is made available. Consumers who have a higher ability and willingness to pay and an aversion to waiting will pay a higher amount of the hardbound version. Those who have a lower ability to pay and a willingness to wait will delay purchase of the book until the paperback version comes out.

Question 4

Explain how low-skilled workers might actually be made worse off from a minimum wage law in terms of working conditions and job training. In addition, what might be the long-run impact on wages and earnings?

Question 5

Colleges and universities often do not pay salaries that are market-driven. For example, it is typical for a history professor to make the same as an economics professor. What kinds of problems are likely to result from this kind of a pay scale?

Question 6

Why is it that people who have to fly at a moment's notice often pay some of the highest air fares whereas people who wait until the last minute to buy a ticket to a live performance of play may be able to get a better price than someone who bought their ticket months in advance.

Question 7

Most modern countries have prohibitions on the trading of human organs in the marketplace. What impact do you believe such laws have had on the availability of organs for patients that need them? Furthermore, which people are most likely to be able to obtain the organs that they require and why? Explain the ethical dilemma that is at work that makes the strict application of basic economic principles difficult to put into practice in cases like this.

Question 8

The Deepwater Horizon oil spill in the Gulf of Mexico which began from an explosion on April 20, 2010 resulted in a ban on shrimp fishing that measures about 10% of the Gulf. Using the graph below assume that the original supply curve before the spill is represented by So and the new supply curve is represented by S2 explain the process that takes place to reach a new equilibrium.
The supply curve shifts to the left. Before the waters are closed, the shrimp market is in equilibrium at the price of $11.00 and a quantity of 75 million pounds. The decreased supply of shrimp leads to higher prices, and a new equilibrium is reached at $16.00 and 56 million pounds (point
B).

Question 9

Assume that the government of the state of New Jersey has determined that a large number of injuries and deaths have occurred as a result of accidents involving the installation and repairs of electrical equipment at private residences. In reaction to this problem the state assembly decided to pass a law which made a requirement that all certified electricians take and pass a tougher state licensing examination. Analyze the impact that this law is likely to have on the market for electricians and explain why safety may not necessarily improve.

Question 10

Consumers are often bewildered by the different array of choices, plans and prices that are offered by cell phone service companies. Explain in terms of consumer surplus why this makes sense from both the company's perspective and that of the consumer.

Question 11

Explain how the price system eliminates a surplus.

Question 12

Assume that the original manuscript of Adam Smith's the Wealth of Nations is discovered and the estate auctions it off to the highest bidder a price of $1,000,000 show with the use of a graph what takes place and explain the process.

Question 13

What two important functions are performed by the price system?

Question 14

Why is it true that shortages usually occur mainly when price controls are in effect?

Question 15

Suppose you came across the following headline in a story of a daily newspaper: "Automobile prices are so high right now that there must be a shortage. As a consequence not everyone who needs an automobile will be able to buy one." Is this statement necessarily correct?

Question 16

Explain how the price system eliminates a shortage.

Question 17

The rash of hurricanes that pelted the Gulf Coast in 2005 resulted in a large decline in gasoline production as many offshore rigs were shut down and many refineries were taken off line while waiting out the hurricane. The decrease in supplies of gasoline led to a run up in prices. Many voters clamored for relief by calling on their congressman and senators to enact temporary price controls. Analyze the impact on the gasoline market that would have transpired had politicians actually headed the calls by voters to impose price controls on gasoline.

Question 18

Many people are offended when they learn that the CEO of a charitable organization makes a salary commensurate with a CEO of a private company that is run for profit. Explain why it would be a mistake for charitable organizations to pay their CEOs less than companies that are driven by profit?

Question 19

Assume that policy makers in the state of California respond to the fury by residents of recent price hikes for the price of water and respond by capping water prices in 2010 to $.10 per gallon that they were a few years ago rather than what the market price otherwise would be at $.25 per gallon. Explain with the use of a graph what would happen if the state legislature were to impose such a price control.

Question 20

Rent control is typically imposed ostensibly for the purpose of helping the poor. Why might you be able to argue that few poor people will actually be the beneficiaries of such controls?

Question 21

Critically evaluate the following statement. "It's better to make people wait in line than it is to make them have to pay more for the product."

Question 22

Define the process of queuing.

Question 23

Suppose the demand for bananas increases. Explain how the price of bananas adjusts after the increase in demand.

Question 24

Explain what will happen when the government imposes a minimum price that is below the market equilibrium price. Why is this true?

Question 25

Suppose that Bill is a big movie buff and enjoys renting movies from the local video rental outlet. Assume that he is willing to pay $5 for the first movie he rents for the weekend but would only pay $4 for a second and still only $3 for a third movie. If the video rental franchise charges $3.50 per movie what will Bill's consumer surplus be and why? Assume now that the video rental franchise now has a new package deal in which it offers to rent three movies to customers at a price of $9.00 would Bill be interested? How much consumer surplus would he enjoy now? What is the maximum price that the video rental franchise could charge and still make Bill interested in the package deal?

Question 26

List some types of non-price rationing systems.

Question 27

If ration coupons are used to determine who gets the products available, what happens if the government allows individuals to trade them?

Question 28

The U.S. government has two different methods to deal with illegal drug use. First, the government has tried a "war on drugs", with the idea of keeping illegal drugs out of the country. Second, the "Just say no" campaign has been used to make individuals more aware of the harmful effects of drugs. Use supply and demand to analyze the effects of these two separate policies.

Question 29

How does price serve as a signal to resource owners?

Question 30

Often bar owners will require that patrons stand in a line to get a wristband entitling them to pay a preferred price for drinks if they arrive early to the bar. The wristbands are typically tamper- resistant and can be easily identified if patrons have been switching wristbands with other customers. What is the bar owner concerned about and why does he make his patrons wear these bands?

Question 31

Explain what a black market is and how it functions. What is a black market generally a response to?

Question 32

What reasons do governments often give to justify the decision to not allow price to ration goods?

Question 33

Explain what will happen when the government imposes a maximum price that is above the market equilibrium price. Why is this true?

Question 34

What is a price ceiling?

Question 35

What are ration coupons and what is their purpose? Provide a historical or current example.

Question 36

When is the price of a product demand determined?

Question 37

Assume the government is concerned about the high price of Atlantic Red Crab and announces that it is going to shorten the fishing season to one week. What impact will this have on the quantity of crab caught and the price of crab? Will this actually result in greater protection of the Atlantic Red Crab?