Seeking Equilibrium: The Balancing Act of Market Forces

Homework #1 Instruction: You need to show the detailed process to reach your answers. Q.1 (20 points) Assume that turkey meatball and beef meatball are substitutes. Also note that turkey and turkey meatball are two different objects; turkey is a material to make turkey meatball. The same caution applies to beef and beef meatball. (1) We observe that the equilibrium price of turkey meatball falls. Explain whether or not a rise in the price of turkey is responsible for this observation. If the price of turkey rises, then the supply curve will shift to the left, resulting in a higher equilibrium price, contradicting the observation. So, a rise in the price of turkey cannot be responsible for the observation. (2) We also observe that the equilibrium quantity of beef meatball falls. Explain whether or not a rise in the price of turkey is responsible for this observation. If the price of turkey rises, then as we saw in (1), the equilibrium price of turkey meatball rises. Then, the demand curve of beef meatball shifts to the right, resulting in a higher equilibrium quantity of beef meatball, contradicting the observation. So, a rise in the price of turkey cannot be responsible for the observation. Q.2 (20 points) Bert, as a consumer, places the value on a pair of jeans as follows. Value of first pair: $30 Value of second pair: $28 Value of third pair: $26 Value of fourth pair: $24 Value of fifth pair: $21 Value of sixth pair: $19 Value of seventh pair: $17 Ernie, as a producer, pays the following cost to produce jeans. Cost of first pair: $12 Cost of second pair: $15 Cost of third pair: $17 Cost of fourth pair: $19 Cost of fifth pair: $21 Cost of sixth pair: $24 Cost of seventh pair: $26 1 Using the information given above, answer the following questions. (1) Derive the quantity demanded and the quantity supplied at the price of $24. The quantity demanded is 4 units since the consumer is willing to pay $24 for the 4th pair of jeans. Whereas, the quantity supplied at $24 is 6 units since the producer pays $24 to produce the 6th pair of jeans. (2) Derive the equilibrium price and compute the sizes of the consumer and the producer surpluses at the equilibrium price. The equilibrium price is at the 5th pair of jeans which is at $21. The consumer surplus size at the equilibrium price is $45, this size resulted from the sum of the difference between the 1st5th pair of jeans (consumer price-producer price). The producer surplus size at the equilibrium price is also $45 since we are not given a price at which the producer is willing to accept. Keep in mind that producer surplus is the amount that producers receive in excess of what they are willing to accept. So, it can be concluded that the producer will take what the consumer is willing to give up to the equilibrium price which is the 5th pair of jeans. Q.3 (20 points) Suppose that an analyst conducts a study about the relationship between a firm’s sales revenue and the size of the firm’s acquisition of real estate properties, by examining the data from 200 corporations with annual sales revenue exceeding $200 million. The analyst finds that the more a firm spends for acquiring real estate properties, the more revenue the firm generates in subsequent years. Based on the finding, the analyst concludes that an acquisition of real estate property causes an increase in a firm’s revenue. Someone else who is not involved in the study, however, argues that the conclusion has a problem of ‘reversed causality.’ Provide a possible reason why study’s conclusion could have a problem of ‘reversed causality.’ The study’s conclusion could have a problem of ‘reversed casuality’ due to cause and effect. Cause and effect may not follow the timeline, if people take an action based on expectation. If the purchase of real estate property causes an increase in a firm’s revenue, is an action taken by expectation, the timeline is not being followed. Q.4 (20 points) (1) According to Professor Park’s lecture, what is the economic meaning of Qx in the inverse demand function? The economic meaning of Qx in the inverse demand function is the quantity available which is the independent variable. (2) According to Professor Park’s lecture, what is the economic meaning of Qx in the demand function? 2 The economic meaning of Qx in the demand function is the quantity demanded which is the dependent variable. (3) According to Professor Park’s lecture, what is the economic meaning of Px in the inverse supply function? The economic meaning of Px in the inverse supply function is the price that producers/sellers are willing to accept, which is the dependent variable. (4) According to Professor Park’s lecture, what is the economic meaning of Px in the supply function? The economic meaning of Px in the supply function is the price of a good (given price), which is the independent variable. Q.5 (20 points) A Korean BBQ restaurant has four workers for washing jobs: Dane, June, Park, and Pola. Each works eight hours a day and can produce two washing services: washing rice bowls and washing grill racks. In an hour, Dane can either wash 100 rice bowls or wash 130 grill racks; June can either wash 130 rice bowls or wash 130 grill racks; Park can either wash 150 rice bowls or wash 100 grill racks; and Pola can either wash 100 rice bowls or wash 150 grill racks. Graph the production possibilities frontier over one day for this restaurant. In the graph, you must identify the points where transfer of a worker from one job to another starts to take place, by showing the coordinates of the points. In answering this question, you must take into account the fact that every worker works eight hours a day. Look at the picture below. 3 4