# Microeconomics Unit 4 Assignment

1112 words - 5 pages

Unit 4 Assignment: Problem 1 & 2

Name: Camillo Dall’Oglio
Course Number: BU224
Section Number: -
Unit Number: - 4
Date: 04/22/2014

Problem 1

Suppose that the U.S. Department of Agriculture (USDA) administers the price floor for cheese, set at \$0.17 per pound of cheese. (In real life, the actual price floor was officially set at \$16.10 per hundredweight of cheese. One hundredweight is 100 pounds.) At that price, according to data from the USDA, the quantity of cheese produced in 2009 by U.S. producers was 212.5 billion pounds, and the quantity demanded was 211 billion pounds. To support the price of cheese at the price floor, the USDA had to buy up 1.5 billion pounds of ...view middle of the document...

17 per pound. With the price floor at \$0.17 per pound of cheese, producers sell 212.5 billion pounds of cheese (some to consumers and some to the USDA). How much producer surplus is created now?
The producer surplus created is 11.69.

f. The surplus cheese USDA buys is the difference between the quantity of cheese producers sell (212.5 billions of pounds of cheese) and the quantity of cheese consumers are willing to buy at the price floor (211 billions of pounds of cheese). How much money does the USDA spend on buying up surplus cheese?
USDA spend \$170000000 on buying surplus cheese.

g. Taxes must be collected to pay for the purchases of surplus cheese by the USDA. As a result, total surplus (producer plus consumer) is reduced by the amount the USDA spent on buying surplus cheese. Using your answers for parts d, e, & f, what is the total surplus when there is a price floor?
The total surplus when there is a price floor is 14.85.

h. How does this compare to the total surplus without a price floor from part c?
The difference between the total surplus with a price floor, which is 14.85, and without a price floor, which is14.8, is minimum: 0.5.

Problem 2

The accompanying table shows the price and yearly quantity sold of ice cream cones on Sidfield Island.

|Price of Ice Cream Cones |Quantity of Ice Cream Cones Demanded |
|\$1 |3000 |
|\$2 |2400 |
|\$3 |1600 |
|\$4 |800 |

a. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of an ice cream cone rises from \$1 to \$2.
The price elasticity of demand is -.33.

b. What does this estimate imply about the price elasticity of demand for ice cream cones?
This estimate implies that the price elasticity of demand for ice cream cones is inelastic because it is less than 1.

c. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of an ice cream cone rises from \$3 to \$4.
The price elasticity of demand is -2.33.

d. What does this estimate imply about the price elasticity of demand for ice cream cones?
This estimate implies that the price elasticity of demand for ice cream cones is elastic because it is more than 1.

e. Notice that the estimates from (a) and (c) above are different. Why do price elasticity of demand estimates change along the demand curve?
Price elasticity of demand estimates change along the demand curve because the relationships between demand and price change.
If the demand change is greater than the price change, the price elasticity of demand is more than 1...

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