Question

1. Careful market research has determined the following weekly supply and demand schedules for ballpoint pens in Cambridge, MA:

Q_D =12 - P Qs = 2P

P: Dollars/pen Q: Thousands of pens/ week

a. Find the equilibrium price and quantity in the Cambridge ballpoint pen market. Label your graphs, including where each curve hits the relevant axis. (Remember quantity here is measured in thousands of pens per week)

a.1 The equilibrium price in the Cambridge ballpoint pen market is _______ per pen.

a.2  The equilibrium quantity in the Cambridge ballpoint pen market is _______ pens per week

b. The Cambridge City Council hears testimony from ballpoint pen manufacturers that they cannot seem to turn a reasonable profit. They convince the City Council to implement a price floor of $5 per pen. The City Council also agrees to buy any surplus pens at that floor price.

In a NEW diagram, show the effects of this price floor. How many pens will consumers buy now? How many pens will the Cambridge City Council buy? What will be the cost in $ of this policy to the Cambridge City Council?

b.1 As a result of the price floor, consumers now buy _______ pens/ week.

b.2 As a result of the price floor, the CCC buys_______ pens/ week

b.3 The cost of this policy to the CCC is _________.

c. How have consumer expenditures changed from the original equilibrium to the price floor case? Hint: Give actual numbers. So if the price to consumers were $10 per pen and consumers purchased 2000 pens per week, consumer expenditures would be $20,000 per week. WITHOUT calculating it, what can be said about the price elasticity od demand along this portion of the demand curve? How did you arrive at your answer?

c.1 In the original equilibrium (without the price floor policy in place), consumer expenditures on pens were _____.

c.2 With the price floor policy in place, consumer expenditures are _______.

c.3 Consumer expenditures have ________ as a result of the price floor policy because the % ________ in price is ______ than the % _________ in quantity demanded.

A.increased; increase; smaller; increase

B.decreased; decrease; larger; increase

C.decreased; increase; larger; increase

D.increased; increase; larger;decrease

c.4 Along the relevant portion of the demand curve in this question, demand is_________.

A.elastic

B.inelastic

C.unit elastic

D.not enough information to tell

Answer 1

a) Equilibrium price = $4 per pen

Equilibrium quantity = 8 units.

b) As a result of the price floor, consumers now buy 7 units of pen

and the CCC buy 3 pens per week

The cost of this policy to CCC is $15

c) In the original equilibrium, consumer expenditure on pens were $32

With the price floor, consumer expenditures are $35

Thus, consumer expenditure have increased as a result of this policy because the % increase in price is larger than the percentage decrease in quantity demanded. (D)

Along the relevant portion of the demand curve, demand is (B) inelastic