Managerial Economics and Strategy 3rd Edition by Jeffrey M Perloff Solution manual

 
 
p2

p1

Q1

Q2

 
 
 
 
 
 
 

4.10  An increase in petroleum prices shifts the aluminum supply curve to the left because the cost of producing aluminum is more expensive at each price. An increase in the cost of petroleum also shifts the demand curve for aluminum to the right because the petroleum price increase makes a substitute, plastic, more expensive (by making the cost of plastic production higher). The new equilibrium is where the new aluminum supply curve intersects the new aluminum demand curve.
When the supply curve shifts to the left, the new equilibrium price is higher and the new equilibrium quantity is lower. When the demand curve shifts to the right, the new equilibrium price is higher and the new equilibrium quantity is higher. When both curves shift, the new equilibrium price is higher, but the new equilibrium quantity could be higher, lower, or unchanged.

4.11 The cartoon seems to show a bumper harvest of lobsters. A large increase in the catch will shift the supply curve to the right (from S1 to S2) which will cause price to fall from p1 to p2.
 
4.12      When drilling increases in response to the rising price of crude oil, the demand for bentonite increases as well. The demand curve will shift to the right and cause the equilibrium price and quantity of bentonite to increase. This is illustrated in the picture below:
 

 

 
Effects of Government Interventions
 
5.1    The effect of vendor licensing is to reduce the number of street vendors relative to the undistorted market equilibrium. Therefore, the number of handbags (and other products) offered for sale by street vendors is less than it would be without licensing (with free entry). As a result, the supply curve for handbags available from street vendors has shifted in compared with what it would be without licensing. The diagram representing the street vendor handbag market is therefore similar to the diagram in Q&A 2.2. The market price is higher and the quantity sold is lower than it would be without mandatory licensing.
5.2    In the absence of price controls, the leftward shift of the supply curve as a result of Hurricane Katrina would push market prices up from p0 to p1 and reduce quantity from q0 to q1. At a government imposed maximum price of p2, consumers would want to purchase qd units, but producers would only be willing to sell qs units. The resulting shortage would impose search costs on consumers making them worse off. The reduced quantity and price also reduced firms’ profits.

5.3    With a binding price ceiling, such as a ceiling on the rate that can be charged on loans, some consumers who demand loans at the rate ceiling will be unable to obtain them. This is because the demand for bank loans is greater than the supply of bank loans to low-income households with the usury law.
5.4    With the binding rent ceiling, the quantity of rental dwellings demanded is that quantity where the rent ceiling intersects the demand curve (QD). The quantity of rental dwellings supplied is that quantity where the rent ceiling intersects the supply curve (QS). With the rent control laws, the quantity supplied is less than the quantity demanded, so there is a shortage of rental dwellings.

5.5    We can determine how the total wage payment, W = wL(w), varies with respect to w by differentiating. We then use algebra to express this result in terms of an elasticity:

where e is the elasticity of demand of labor. The sign of dW/dw is the same as that of 1 + e. Thus, total labor payment decreases as the minimum wage forces up the wage if labor demand is elastic, e < –1, and increases if labor demand is inelastic, e > –1.
For a graphical explanation, see the figures below. In the top panel with very flat supply and demand curves, the imposition of a minimum wage causes overall wage payments to fall dramatically. On the other hand, when supply and demand curves are steep (as in the bottom panel), overall wage payments increase substantially.
5.6    Before the tax is imposed, the demand for avocados can be rewritten as
Q = 160 − 40p
and the supply of avocados is given as
Q = 50 + 15p.
When all market participants are able to buy or sell as much as they want, we say that the market is in equilibrium: a situation in which no participant wants to change its behavior. Graphically, a market equilibrium occurs where supply equals demand. Thus, the equilibrium price is
D = S
160 − 40p = 50 + 15p
110 = 55p
p = $2.00.
         Find the equilibrium quantity by substituting this price into either the supply or demand function. For example, using the supply function, the equilibrium quantity is