University of Calgary - ECON 121Macro238f

Macroeconomics Assignment: Apply Concepts of Production and Trade Page 1 of 5 :_______________ : _________________ Date:__________ (print clearly) 1. A very important economic relationship is that between elasticity ...

Macroeconomics Assignment: Apply Concepts of Production and Trade Page 1 of 5 :_______________ : _________________ Date:__________ (print clearly) 1. A very important economic relationship is that between elasticity and revenue. A. Consider the market for gasoline. Because there are very few good substitutes for gasoline, the demand for gasoline is probably inelastic. i. If the price of gasoline rises by 10%, by what percentage is the quantity demanded likely to fall? (4 points) ii. Suppose the price of gasoline rises by 10% and, as a result, the quantity demanded falls by 5%. Will consumer expenditures on gasoline rise or will they fall? (4 points) ii. In this case, what will happen to Station G's revenues when the price rises? (4 points) acroeconomics Assignment: Apply Concepts of Production and Trade :_______________ : _________________ Date:__________ (print clearly) C. Make a general statement about how revenues will change when the price rises or when it falls if demand is elastic and if it is inelastic. (4 points) D. It is often suggested that increasing gasoline taxes will reduce the quantity of gasoline people will buy and, as a result, reduce air pollution. In the short run would such a policy be effective in reducing air pollution? Would the policy be effective in reducing air pollution in the long run? Why? (6 points) A. Assuming this initial statement is true, show the effect of increased enforcement activities on the market for illegal drugs. Use a demand and supply graph in your explanation. What are the effects on the market price and quantity? (2 points) B. Discuss why, in your opinion, the demand for illegal drugs might be elastic or inelastic. (2 points) C. Elasticity of demand determines whether price increases result in more or less total spending by buyers. Would the dealer find it profitable (consider costs) to elude law enforcement if demand was elastic? Inelastic? (2 points) acroeconomics Assignment: Apply Concepts of Production and Trade Page 3 of 5 :_______________ : _________________ Date:__________ (print clearly) 3. A. In good economic times, demand for labor increases. Show in a supply and demand diagram the effect of this increase on wages and the total quantity of labor exchanged. (2 points) B. Many countries have large numbers of immigrants each year. These immigrants have typically moved to a new country to find work. Show in a supply and demand diagram the effect of this immigration on wages and the total quantity of labor exchanged. (2 points) Macroeconomics Assignment: Apply Concepts of Production and Trade Page 4 of 5 :_______________ : _________________ Date:__________ (print clearly) C. When economic conditions turn bad, the demand for labor usually decreases. However, many people are hesitant to take jobs for less than they made in the past, meaning that wages don't easily fall. Use a supply and demand diagram to show the effect of this phenomenon. Is the effect more similar to that of a price ceiling or of a price floor? (4 points) D. Explain how markets usually move toward equilibrium after a decrease in demand and why, in the situation discussed in part C above, this equilibrium isn't achieved. (4 points) A. Explain what a downward-sloping demand curve means in the context of the credit market. (3 points) Macroeconomics Assignment: Apply Concepts of Production and Trade Page 5 of 5 :_______________ : _________________ Date:__________ (print clearly) B. Explain what an upward-sloping supply curve means in the context of the credit market. (3 points) C. Some governments limit the rate of interest that may be charged on a loan. In these places it may be illegal for a lender to charge a rate of interest above a certain level. Use a supply and demand diagram to show the effect of these limits, assuming that the limit is below the equilibrium interest rate. (5 points) D. What will this do to the total quantity of lending and borrowing done? (5 points)