ECO405

ECO 405: HW 1

Sean Fahle

State University of New York at Buffalo

Fall 2015

Due date: Monday, September 21, 2015.

You are free to collaborate with your classmates on this assignment and are encouraged to do so. However, all students must individually write up and submit their own assignment. Some or all of the problems will be graded. Assignments are due in class at the beginning of the lecture on the due date. Late assignments may receive no credit.

1. Martini-nomics. Show graphically using Supply and Demand the effects of the following on the U.S. vodka market. Here is some information that may help you answer parts (a)-(c). Vodka is a normal good. Vodka and dry vermouth combine to form martinis, which are a popular way to consume vodka. Martinis can be made using gin instead of vodka. Some vodkas are made from potatoes.

(a) The price of dry vermouth decreases.

(b) The price of gin decreases.

(c) At the insistence of domestic potato farmers, Congress imposes a tariff on potato imports.

2. Suppose the pumpkin spice latte (PSL) market is characterized by the following supply and demand curves:

S : q = p + 3

D : q = −2p + 24

(a) Graph the supply and demand curves. Label all axes, intercepts, and curves.

(b) Find the equilibrium price p∗ and quantity q∗ in this market. Identify these in your graph.

(c) Calculate the price elasticity of demand ǫ at the equilibrium price and quantity.

(d) Suppose a price floor of $9 were imposed on PSLs. Draw a new graph that shows both the original equilibrium and the effects of the price floor. What would quantity supplied be? What quantity would be demanded? How much would actually be traded in the market?

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(e) Who benefits from the policy in (d)? Are PSL producers better off? (Hint: to be definitive, you will need to calculate the change in producer surplus.) Calculate the deadweight loss and label it on your graph.

(f) Finally, suppose the government instead puts a $3 tax on PSLs. What is the new price faced by consumers? What price do producers now receive? What is the new quantity traded in the market? How much revenue does the government receive?

3. Explain whether the following statements are true, false, or uncertain. Use graphs and/or equations to support your arguments.

(a) Raising the minimum wage will benefit all workers.

(b) If Jeb buys one pint of milk regardless of its price and $1 worth of cookies every day, then his demand curve for milk and his demand curve for cookies are both price inelastic.

(c) A minimum wage leads to relatively less deadweight loss in labor markets where labor demand is relatively more inelastic.

(d) One average, wages are much higher in Alaska than Arizona. Thus, everyone in Arizona could become wealthier by moving to Alaska.

(e) Raising the minimum wage always increases the total payments from firms to workers. (Total payments from firms to workers equal the wage times the quantity of labor exchanged in the market = w × L.)

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