Economics Homework Two Answers - Student Thirteen

-AROM

1\. The supply of a good, and the demand for that good, determine both the price and quantity at which the good is sold (assuming it is a free market).

Correct.

2\. P = 30 - Q ; P = 6 + Q

30 - Q = 6 + Q

2Q = 24

Quantity demanded and supplied = 12 Price = $18

Correct again.

3\. When the supply of a good or service increases the price of the good or service goes down. This occurs because the good or service becomes less scarce and more competition in ther marketplace exists as purchasers will have more options. These factors drive price down. Furthermore, as it is known that the supply of a good (such as oil) has increased, consumers will perceive that it is less rare even if the cost to bring that oil to the market has increased. Consequently the perceived scaracity of the resource will have decreased and consumers will be willing to pay less for it. This is the opposite effect of marketing items as being unique that was covered in the previous lecture.

When the demand for a good or service increases the price goes up. This occurs because the relative scarcity of oil has increased as more people are vying to make use of a good that has no increased in quantity. Sellers of oil then realize that they can charge a higher price and still sell all their existing stock of oil and naturally will do so.

Excellent analysis. Could use as a model answer.

4\. Grocery stores will lower the price because they want to sell all of their fruit before it rots and becomes worthless. The downward slope of the demand curve indicates that as prices decrease the quantity demanded of the ripened fruit will increase. Thus, stores realize that if they lower the price they will sell more fruit and can draw down their excess inventory as customers purchase the fruit in greater quantities.

Superb answer again.

5\. A) Based on the data, the Yankees should have built 600 obstructed view seats and the team will make $3000 on obstructed view seats per game. B) The obstructed view seats would sell out under a price ceiling lower than the market price. This is because the value of these seats to the customer is greater than $2 and as a result he would capture a $3 surplus in value. In this instance more people would want the obstructed view seats than could get them and lines would form. In all likelihood scalpers would begin purchasing the $2 tickets and selling them in front of the stadium for between $2.01 and $5. This would allow them to capture the profit that otherwise would have gone to the Yankees. For this reason I would not support this law because it would effectively take money from the team and place it in the hands of scalpers who did not pay to build the stadium and do not add any value to the game itself.

Terrific answer, could use this as a model. Note that the consumer "would capture an ADDITIONAL $3 surplus in value. There would be consumer surplus beyond the $5 for many consumers.

6\. Time is money: This statement refers to the fact that individuals who work have a market value for their time. A worker on minimum wage can expect to make at least $5.85 an hour. Owing to the laws of supply and demand, however, a person may be willing to work more if their wage increases or less if their wage were to fall. Time is money can also refer to the effects of compound interest on loans and savings accounts at banks which grow in value merely through the passing of time and with no additional effort by those who hold the loan or account.

Correct.

7\. If prices are lower than they would be under the free market the quantity of the service supplied will be lower than the quantity of the service demanded. This is because providers will not be incentivized to work more if the price is lower. Simultaneously the demand will be higher because consumers will pay less and be motivated to consume more. As a result, demand will be greater than supply and not all customers will be able to be seen immediately. Consequently, waiting lists and lines develop.

Superb.

10\. My understanding is that one of the present problems with health care is that competition doesn't truly exist because there is no way for consumers to compare prices because there is no "menu" or price list on open display at all hospitals. As a result, it is incredibly difficult and burdensome on consumers to shop around as they would have to spend significant amounts of time and money to be seen by several doctors in order to make an informed decision with respect to what price to pay. This essentially puts the onus of making suppliers compete on the consumer. To the extent that medical service providers are not in price competition because it is difficult to actually compare prices and choose the cheapest the market is not efficient and does not clear. Prices are higher than they would be in the free market if signalling was more efficient and less medical care is given because the quantity demanded decreases as prices rise. If medical service providers were regulated and forced to post their prices for all procedures, for example on an online aggregator that could be searched by geographical area, prices would likely decrease as competition increased and medical care would become more widely accessible for consumers.

Part of the other issue with health care is that the salesperson (the doctor) has incentive to give you procedures and treatments that you may not necessarily need because they are more expensive and he will get paid more. Consumers are not medically sophisticated and do not know enough to question their doctor's recommendations. Instead they can easily get fleeced by "doctors orders." This makes a demand curve difficult to measure with respect to health care because the suppliers are able to artificially inflate the demand through their medical authority by recommending unnecessary procedures or more expensive procedures without presenting the alternatives.

You make many good points, though I think "unnecessary treatments" (such as expensive drugs) is a much bigger problem than "unnecessary procedures," such as surgery. But that's an opinion and your points are well-argued and well-taken.

A perfect paper. Well done! 70/70. Congratulations.--Andy Schlafly 14:55, 20 September 2009 (EDT)