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P4.2 Demand and Supply Curves. The following relations describe monthly demand and supply relations for dry cleaning services in the metropolitan area:
where Q is quantity measured by the number of items dry cleaned per month and P is average price in dollars.
A. At what average price level would demand equal zero?
B. At what average price level would supply equal zero?
C. Calculate the equilibrium price/output combination.
P4.3 Demand Analysis. The demand for housing is often described as being highly cyclical and very sensitive to housing prices and interest rates. Given these characteristics, describe the effect of each of the following in terms of whether it would increase or decrease the quantity demanded or the demand for housing. Moreover, when price is expressed as a function of quantity, indicate whether the effect of each of the following is an upward or downward movement along a given demand curve or involves an outward or inward shift in the relevant demand curve for housing. Explain your answers.
A. An increase in housing prices
B. A fall in interest rates
C. A rise in interest rates
D. A severe economic recession
E. A robust economic expansion
P4.4 Demand and Supply Curves. Demand and supply conditions in the market for unskilled labor are important concerns to business and government decision makers. Consider the case of a federally mandated minimum wage set above the equilibrium, or market clearing, wage level. Some of the following factors have the potential to influence the demand or quantity demanded of unskilled labor. Influences on the supply or quantity supplied may also result. Holding all else equal, describe these influences as increasing or decreasing, and indicate the direction of the resulting movement along or shift in the relevant curve(s).
A. An increase in the quality of secondary education
B. A rise in welfare benefits
C. An increase in the popularity of self-service gas stations, car washes, and so on
D. A fall in interest rates
E. An increase in the minimum wage
P4.5 Demand Function. The Creative Publishing Company (CPC) is a coupon book publisher with markets in several southeastern states. CPC coupon books are either sold directly to the public, sold through religious and other charitable organizations, or given away as promotional items. Operating experience during the past year suggests the following demand function for CPC's coupon books:
where Q is quantity, P is price ($), Pop is population, I is disposable income per household ($), and A is advertising expenditures ($).
A. Determine the demand faced by CPC in a typical market in which P = $10, Pop = 1,000,000 persons, I = $30,000, and A = $10,000.
B. Calculate the level of demand if CPC increases annual advertising expenditures from $10,000 to $15,000.
C. Calculate the demand curves faced by CPC in parts A and B.
P4.6 Demand Curves. The Eastern Shuttle, Inc., is a regional airline providing shuttle service between New York and Washington, DC. An analysis of the monthly demand for service has revealed the following demand relation:
where Q is quantity measured by the number of passengers per month, P is price ($), POG is a regional price index for other consumer goods (1967 = 1.00), IB is an index of business activity, and S, a binary or dummy variable, equals 1 in summer months and 0 otherwise.
A. Determine the demand curve facing the airline during the winter month of January if POG = 4 and IB = 250.
B. Determine the demand curve facing the airline, quantity demanded, and total revenues during the summer month of July if P = $100 and all other price-related and business activity variables are as specified previously.
P4.7 Supply Function. A review of industrywide data for the jelly and jam manufacturing industry suggests the following industry supply function:
Q = -59,000,000 + 500,000P - 125,000PL - 500,000PK + 2,000,000W
where Q is cases supplied per year, P is the wholesale price per case ($), PL is the average price paid for unskilled labor ($), PK is the average price of capital (in percent), and W is weather measured by the average seasonal rainfall in growing areas (in inches).
A. Determine the industry supply curve for a recent year when PL = $8, PK = 10 percent, and W = 20 inches of rainfall. Show the industry supply curve with quantity expressed as a function of price and price expressed as a function of quantity.
B. Calculate the quantity supplied by the industry at prices of $50, $60, and $70 per case.
C. Calculate the prices necessary to generate a supply of 4 million, 6 million, and 8 million cases. P4.8 Supply Curve Determination. Olympia Natural Resources, Inc., and Yakima Lumber, Ltd., supply cut logs (raw lumber) to lumber and paper mills located in the Cascade Mountain region in the state of Washington. Each company has a different marginal cost of production depending on its own cost of landowner access, labor and other cutting costs, the distance cut logs must be shipped, and so on. The marginal cost of producing one unit of output, measured as 1,000 board feet of lumber (where 1 board foot is 1 square foot of lumber, 1-inch thick), is
The wholesale market for cut logs is vigorously price competitive, and neither firm is able to charge a premium for its products. Thus, P = MR in this market.
A. Determine the supply curve for each firm. Express price as a function of quantity and quantity as a function of price. (Hint: Set P = MR = MC to find each firm's supply curve.)
B. Calculate the quantity supplied by each firm at prices of $325, $350, and $375. What is the minimum price necessary for each individual firm to supply output?
C. Assuming these two firms make up the entire industry in the local area, determine the industry supply curve when P < $350.
D. Determine the industry supply curve when P > $350. To check your answer, calculate quantity at an industry price of $375 and compare your result with part B.
P4.9 Supply Curve Determination. Cornell Pharmaceutical, Inc., and Penn Medical, Ltd., supply generic drugs to treat a variety of illnesses. A major product for each company is a generic equivalent of an antibiotic used to treat postoperative infections. Proprietary cost and output information for each company reveal the following relations between marginal cost and output:
The wholesale market for generic drugs is vigorously price competitive, and neither firm is able to charge a premium for its products. Thus, P = MR in this market.
A. Determine the supply curve for each firm. Express price as a function of quantity and quantity as a function of price. (Hint: Set P = MR = MC to find each firm's supply curve.)
B. Calculate the quantity supplied by each firm at prices of $8, $10, and $12. What is the minimum price necessary for each individual firm to supply output?
C. Assuming these two firms make up the entire industry, determine the industry supply curve when P < $10.
D. Determine the industry supply curve when P > $10. To check your answer, calculate quantity at an industry price of $12 and compare your answer with part B.
P4.10 Market Equilibrium. Eye-de-ho Potatoes is a product of the Coeur d'Alene Growers' Association. Producers in the area are able to switch back and forth between potato and wheat production depending on market conditions. Similarly, consumers tend to regard potatoes and wheat (bread and bakery products) as substitutes. As a result, the demand and supply of Eye-de-ho Potatoes are highly sensitive to changes in both potato and wheat prices.
Demand and supply functions for Eye-de-ho Potatoes are as follows:
where P is the average wholesale price of Eye-de-ho Potatoes ($ per bushel), PW is the average wholesale price of wheat ($ per bushel), Y is income (GNP in $ billions), Pl is the average price of unskilled labor ($ per hour), and R is the average annual rainfall (in inches). Both QD and QS are in millions of bushels of potatoes.
A. When quantity is expressed as a function of price, what are the Eye-de-ho Potatoes demand and supply curves if P = $2, PW = $4, Y = $7,500 billion, Pl = $8, and R = 20 inches?
B. Calculate the surplus or shortage of Eye-de-ho Potatoes when P = $1.50, $2, and $2.50.
C. Calculate the market equilibrium price/output combination.
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