AP Econ Section 2 Review - Sunny Hills High School

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.'A study shows thac eacing a clove ofgarlic a day can help prevent heaj:t dlsease, causing many consumers to demand more garlic. This increase in demand results in a rise in the price of garlic. Consume$J seeing that the price ofgarlic has gone up, reduce their demand for garlic. This causes the demand for garlic to decrease and the price ofgarlic to fall. Therefore, the ultimate effect ofthe study on the price ofgarlic is uncertain." 6. In RollingStone rtaeazine, several fans and rock stars, including Pearl Jam, were bemoaning rhe high price of concert rickecs. One supe$tar argued, "It just isn't worth $75 to see me play. No one should have to pay that much to go to a conceft." Assume this star sold out arenas around the country at ar average ticket price of$75. e. How would you evaluace the arguments that ticket prices are too high? b.Suppose that due to this star's protests) cicket prices were lowered to $50. In what sense is this price too low? Draw a diagram using supply alrd demand curves to suppor! your afgument. c. Suppose Pea.rl Jam really wanted to bring down ticket prices. Since the band controls the supplyofits services, what do you recommend they do? Explain using a supply and demand diagram. d.Suppose the band's next CD was a total dud. Do you chink they would still have to worry about ticket prices being too high? V/hy or why not? Draw a supply and demand diagram ao suPPort your argumena. e. Suppo:e the group announced their nexr rour was going co be their last. Vhat effecc would this likely have on the demand for and price oftickets? Illustrate wich a supply and demand diagram. 7. After several years of decline, the market for handrnade acoustic guitars is making a comeback. These guitats are usually made in small workshops employing relatively few highly skilled luthiers. Assess the impact on the equilibrium price and quantity ofhandmade acoustic guitars as a result of each of che following events. In your answers, indicate which curve(s) shift(s) and in which direccion. a. Environrnentalists succeed in having the use ofBrazilian rosewood banned in the United States, forcing luthiers to seek out alternative, more costlywoods. b,A foreign producer reengineers the guitar-making process and floods the market with identical guitars. c. Music featuring handmade acoustic guitars makes a comeback as audiences tire ofhealy metal and grunge music. d. The country goes into a deep recession and the income of che average American falls sharply. 8. Vill Shalespeare is a struggling ptaywright in sixteenthcentury London. As the price he receives for writing a play increases, he is willing to write more plays. For the following situations, use a diagram ro illustrate how each event affects the equilibrium price and quantity in the market for Shakespeare's plays. a. The playwright Christopher Marlowe, Shakespeare's chief rival, is kilted in a bar brawl. b.The bubonic plague, a deadly infectious disease, breaks out in London. c. To celebrate the defeat of the Spanish Armada, Queen Elizabeth declares severa.l weeks of festivities. which involves commissioning new plays. 9. The small town ofMiddling experiences a sudden doubling of the birth rate. After three years, che birth rate returns to normal. Use a diagram to illustrate the effect of these events on the followidg: a. the market for an hour ofbabysitting serwices in Middling today b.the market for al hour ofbabysitting services 14 years inao che fucure, after the birch rate has returned co normal, by which time children bom today are old enough to work as babysitters c. the market for an hour ofbabysitting serwices 30 years into che future, when children bom today are likely to be having children oftheir own 10. Use a diagram to illustrate how each oFthe following events affects the equilibrium price and quandry ofpizza. a. The price ofmozzarella cheese rises. b,The health hazards ofharnburgers are widely publicized. c. The price ofaomato sauce falls. d. The incomes ofconsumers rise and pizza is an inferior good e. Consumers expect the price ofPizza to fall nqtt week. 11, Although he was a prolific artist, Pablo Picasso painted only 1,000 canvases during his "Blue Period." Picasso is now dead and all of his Blue Period works are currendy on display in museums and private galleries throughout Europe and che United States. a- Draw a supply curve for Picasso Blue Period works. Why is this supply curve different from ones you have seen? b. Given the supply curve from part E the price ofa Picasso Blue Period work will be entirely dependena on what factor(s)? Draw a diagram showing how the equilibrium price ofsuch a work is determined. c. Suppose that rich art collectors decide that it is essential to acquire Picasso Blue Period art for their colleclions. Show the impact ofthis on the market for these paintings. 12. Draw the appropiace curve in each ofthe following cases ls it like or unlike the curves you have seen so far? Explain. a. the demand for cardiac bypass surgery, given that the governmenI Pays the lull cosc for any patienr b. the demand for elective cosmetic Plastic surgery given that rhe parient pays the full cost c. the supply ofRembrandt paintings d. the supply ofreproductions ofRembrandt paintings 13. Suppose it is decided that rent contiol in New York City will be abolished and that market rents will now prevail Assume that all rental units are identical and axe therefore offered ac the same rent. To address che Plighc ofresidents who may be unable to pay the market rent, an income suPplement will be paid to all low-income households equal co the difference between the old controlled rent and the new market reflc. a. Use a diagram to show the effect on the rental market ofthe elimination ofrent control. \I4rat will hapPen to the quality and quantity ofrental housing supplied? summary 97
.Now use a second diagran-r to show the addicional elfect of the income-supplement policy on rhe market. What effect does it have on the market renc and quantity ofrental hous ing supplied in comparison to your arswers co part a? c, Are tenancs better or worse offas a result ofthese policies? Are landlords better or worse ofl.) d. Ftom a political standpoint, why do you think cities have been more likely to resorc !o renc control rather chan a policy ofincome supplements to help low-income people pay for housing? 14. In rhe late eighteench century) the price ofbread in New York City was controlled, set at a predetermined price above the marke! price. a. Draw a diagram showing the effect ofrhe policy. Did the policy act as a price ceiling or a price floor? b. V4rat kinds ofinefficiencies were likely co have arisen when the controlled price ofbread was above the market price? Explain in decail. One year during chis period, a poor wheat haivest caused a lefcward shift in the supplyofbread and therefore an increase in its rnarket price. New York bakers found that tie controlled price ofbread in New York rvas below the marker price. c. Draw a diagram showing the effect ofthe price control on the market for bread during this one-year period. Did the policy act as a price ceiling or a price floor? d. What kinds ofinefficiencies do you think occurred during this period? Explain in decail. 15, Suppose the U.S. government decides thar the incomes ofdairy farmers should be maincained ac a level that allows the traditional family dairy farm co survive. It thereFore implements a price floot of $ 1 per pint by buying surplus miJk until the market price is $1 per pint. Use the a.companying diagram co answer the following questions. Price of mitk (per pint) $1.20 1.10 1.00 0.90 0-80 l,t t t i i i t t 0 500 550 600 650 700 750 800 850 ouantity of mitk (mitlions of pints per year) a. How much surpius milk will be produced as a result ofthis policy? b. What will be the cosr to the government ofthis policy? c, Since milk is an important source ofprotein and calcium, the government decides to provide rhe surpJus milk it purchases !o elementary schools ac a price ofonly $0-60 per pint- Assume that schools will buy any amount oFmilk available ar chis low price. But parents now reduce their purchases of milk at anyprice by 50 million pints per year because they 98 section z Supply and Demand know their children are getting milk at school. How much will the dairy program now cost the governmenc? d. Give two examples ofinefficiencies arising from wasted re sources that are likely to resuit from this policy. What is the missed opportuniry in each case? 16. As noted in che text, European governments tend to make greater usc ofp ce controls than does che U.S. government. For evample. rhe French governmenr serr rninimum st.rrting yearly wages for new hires who have completedle bac, certiftca tion roughly equivalent to a high school diploma. The demand schedule for new hires with le &a. and che supply schedule for simiLarly credentialed new job seekers are given in the accompanying table. The price here given in euros, the currency used in France-is the same as the yearly wage. Wage (per year) €45,000 Quantity demanded (new job otfers peryeaO 200.000 40,000 220,000 35,000 250,000 30,000 290,000 25,000 370,000 ouantity supplied (new job seekers peryear) 325,000 320,000 310,000 290,000 200,000 e. In the absence ofgovernmenc interference, what is the equi- Iibrium wage and number ofgraduates hired per year? Illus trace with a diagram. Will there be anyone seeking ajob ar the equilibrium wage who is unable to find one that is, will there be anyone who is involuntarily unemployed? b. Suppose the French government sers a minimum yearly wage of35,000 euros. ls there any involuntary unemployment at this wage? Ifso, how much? Illustrate with a diagram. What if che minimum r'"age is set at 40,000 euros? Also illustrate with a diagram. c. Given your aflswer to part b and che inf(]rmation in the table, what do you think is the relationship between the Ievel ofinvoluntary unernploymcnt and the level ofthe minimum wage? Who benefics from such a policy? Who loses? \{4rat is the missed opportuniry here? 17. Until recently, the scandard number ofhours worked per week for a full-time job in France was 39 hours, similar to in the Uniced States. But in response to socia-l unrest over high levels of involuntary unemployment, the French government instituted a 3S-hour workweck a worker could not work mote than 35 hours per u,eck even ifboth the rlrcrker and errrployer wanted it. The motivation behind this polirywas that ifcurrent employees worked fewer hours, employers would be forced to hire more new workers. Assume thar it is costly for employers to train new workers. French employers were greatly opposed to chis policy and threatened to move their operacions to neighboring countries that did not have such employment iestrictions. Can you explain cheir atticude? Give an example ofboth an inefliciency and an illegal activiry that are likely to arise from chis poliry 18, For the last 70 years, the U.S. goverflment has used price supports to provide income assistance to U.S. farmers. At tines the government has used price floors, which it mainrains by
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AP Econ Section 2 Review - Sunny Hills High School

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