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Answering Economic Questions with Graphs and Tables

Suppose that initially, the wheat market is in equilibrium, at a price of \$1.50 per kilogram and quantity of 45 million kilograms per month. Then a flood in several regions of South America disrupts exports from the region, shifting the supply for wheat from S1 to S2. The price of wheat begins to rise and consumers protest. The federal government responds by setting a price ceiling of \$1.50 per Kilogram. Use the graph to answer the following questions.

1. If there were no price ceiling, what would be the equilibrium price of wheat, the quantity of wheat demanded and the quantity of wheat supplied? Now assume that the price ceiling is imposed and that there is no black market in wheat. What is the price of wheat, the quantity of wheat demanded and the quantity of wheat supplied? How large is the shortage of wheat? (2 marks)

2. Assume that the price ceiling is imposed and there is no black market in wheat. Show on the graph the areas representing consumer surplus, producer surplus, and deadweight loss. (2 marks)

3. Now assume that there is a black market and the price of wheat rises to the maximum that consumers are willing to pay for the amount supplied by producers at \$1.50 per kilogram. Show on the graph the areas representing producer surplus, consumer surplus, and deadweight loss. (2 marks)

4. Are consumers made better off with the price ceiling than without it? Explain. (4 marks)

Bestbuy.com is an online provider of consumer technology products and services. Suppose that the company owners want to increase its total revenue to cover the cost of future website renovation. One proposed strategy of marketing specialists is to offer a 10% discount on every gadget they sell online. However, the owners know that their customers react to the discount differently and customers can be divided into two distinct groups. The following table shows the two groups.

 Group 1 Group 2 (Sales per week) (Sales per week) Volume of sales before the 10% discount 1.55 million 1.50 million Volume of sales after the 10% discount 1.65 million 1.70 million
1. Calculate the price elasticity of demand for both Group 1 and Group 2. (4 marks)

2. Explain how the discount will affect the total revenue of both groups. (3 marks)

3. Suppose that bestbuy.com exactly knows which group each customer belongs to and wants to choose whether or not to offer 10% discount. If Bestbuy.com wants to increase its total revenue, should the discount be offered to Group 1 or to Group 2, to neither of the group or to both groups? (3 marks)

Joe has \$70 to spend on smarties and chocolate chips cookies. Smarties have a price of \$10 per box and cookies have a price of \$5 per pack.

1. Use the information in the following table to determine the number of Smarties boxes and the number of cookie packs joe should buy to maximize his utility. Explain your reasoning. (2 marks)
 Quantity Smarties Cookies Quantity MU MU 1 80 40 2 60 36 3 40 30 4 30 10 5 20 5 6 10 2 7 6 1
1. Suppose that the price of cookies increases to \$10 and the price of smarties remains at \$10 and Joe continues to spend \$70 on smarties and chocolate chips cookies. How do this change impact number of Smarties boxes and the number of cookie pack joe should buy to maximize his utility? (2 marks)

2. Over the price range of 5 to 10, draw the demand curve for cookies. Is Joe’s demand curve for cookies elastic or inelastic? What is the cross elasticity of demand for smarties with respect to cookies? Are smarties and cookies substitutes or complements for Joe? (3 marks)

3. Joe loses his job and has to spend \$35 on cookies and smarties when the price of smarties is \$10 per box and cookies have a price of \$5 per pack. How does Joe’s demand for cookies and smarties change? Is cookie an inferior or normal good for Joe? What about smarties? Briefly explain your answer. (3 marks)