Prof. Bryan Caplan

Econ 103

Spring, 2000


HW#2 Answer Key


Gwartney and Stroup:


Chapter 2

Critical Analysis: 2, 7, 9 (2-3 sentences)


2.  This makes very little sense.  It would make a lot more sense to say that businesses gain by alleviating their customers' suffering.


7.  This scenario is quite possible, but you have to compare private ownership to common ownership.  Under common ownership, ranchers over-graze even if they aren't desperate to make money now!  At least private property encourages ranchers not to over-graze when they aren't desperate.  (It is also worth pointing out that a desperate rancher could borrow against the value of his land, and therefore need not actually ruin the land to rapidly get money into his hands).


9.  I would expect (and know it to be the case) that the private plots would have a much higher value of output per acre than state-owned farms.  The incentive to produce on private plots is large, the incentive to produce on state-owned plots is small.  (You could also graph this in terms of quantity of labor effort supplied when the effective wage is small or large).


Chapter 3

Critical Analysis: 1, 2 (2-3 sentences)


1.  It is even to analyze this in terms of supply and demand: just show a demand curve that starts out really high (people will pay a lot for their first glass of water), but then rapidly falls.  Then draw a supply curve that intersects the demand curve at a low price. 









Intuitively, you need to think in terms of marginal analysis.  How useful is one more glass of water once you already have a lot?  And how hard would it be to find more water if the price of water increased?


2.  Low prices of medicine mean large quantities of medicine demanded.  (Just look at the intersection of the demand curve with the x-axis, which shows the quantity people want if it's free). 




This could definitely result in "too much" consumption: people may want very costly medical services that convey small benefits, just because they aren't paying.


Problems: 1


1.  a.








b.  The equilibrium price is $1.00/pound.


c.  If the price were $.75, quantity demanded would be 110, while quantity supplied would be 40.  Demand exceeds supply.  There would be a shortage of 70 units.


d.  If the price were $1.50, quantity demanded would be 20, while quantity supplied would be 120.  Supply exceeds demand.  There would be a surplus of 100 units.










Chapter 4

Critical Analysis: 1, 4, 8 (2-3 sentences)




a.  The demand for large cars would increase - they are now cheaper to drive per mile. 


b.  The demand for small cars would decrease, because people are shifting to larger cars instead. 


c.  The demand for hotels would increase, because it is now cheaper to travel.


e.  The demand for gasoline doesn't change!  This confuses a movement ALONG the demand curve with a movement OF the demand curve.




a.  Supply of ice cream increases - it is now cheaper to make a given quantity of ice cream, so suppliers will sell more at every price.


b.  Supply decreases - it is now more expensive to make a given quantity of ice cream, so suppliers will sell less at every price.


c.  Demand increases - some people switch from yogurt to ice cream.


d.  Demand increases - when the price of toppings falls, people consume more toppings, and buy more ice cream to combine with the additional toppings.


e.  Demand increases - as income rises, people can afford more of everything.


8.  No - a surplus means that S exceeds D at the current market price.  A good would not be scarce if the S and D curves intersected at a price of zero.









Problems: 3


a.  Equilibrium price=$3.75; equilibrium quantity=155.








b.  With a $3.25 price ceiling, consumers would want 180 bushels, but sellers would only sell 110.  Thus, only 110 units would be produced and traded, and the marginal value attached to the 110th bushel would be $4.50.  Both consumer and producer surplus could be increased if more apples were produced.


c.  With a $4.25 price floor, consumers would want 130, but sellers would want to sell 250.  130 units would be traded if this floor were enforced.  To maintain the floor, the government would probably have to set up licenses for selling apples, or else buy the surplus apples.



Additional Problems


Using supply and demand curves, draw diagrams to represent each of the following events.


1.  How the creation of the internet affected the market for computer programmers.


The demand for programmers increased.










2.  How the LA earthquake affected the market for concrete.


The demand for concrete increases.









3.  How a drought in Columbia affects the market for coffee in the U.S.


The supply of coffee decreases.









4.  How the repeal of import quotas (which limit the number of cars Japanese manufacturers can sell in the U.S.) on Japanese cars affects the market for suburban housing.


The demand for suburban housing increases.










5.  Medical researchers find that computer monitors cause cancer.  How does this affect the market for computers?  (Hint: Think of all the people who use computers).


BOTH the supply and demand for computers falls.  Why?  The demand falls because some consumers will go without a computer for health reasons.  The supply falls because fewer people will be willing to work in the computer industry due to the health risks.