Price Theory Problems

In his book, Basic Economics, Thomas Sowell (2015) writes, “the price which one producer is willing to pay for any given ingredient becomes the price that other producers are forced to pay for that same ingredient” (p. 20). With that quote in mind, consider the following scenario: The demand to drink milk rises while the demand for milk in the form of cheese, ice cream, and yogurt remains the same. Assume that the supply of milk is perfectly inelastic. Explain why the elasticities of demand for milk in these other uses determine how much milk will be reallocated from these uses for direct consumption.

According to the Energy Information Administration, crude oil jointly supplies gasoline, heating oil, jet fuel, lubricating oils, asphalt, and many other products. Suppose the widespread adoption of electric vehicles (EVs) reduces gasoline demand but does not affect the demand for the other products jointly supplied by oil. How will the widespread adoption of EVs affect the price of these other products?

Consider a consumer who user her money income to purchase only two goods: X and Y. Suppose the prices of these goods double as does this consumer’s money income. Evaluate: There will be no change in the quantities of X and Y she purchases.

Suppose that cotton and wool are substitutes. In addition, suppose that the supply of cotton is upward sloping while the supply of wool is perfectly elastic. Evaluate: A new production technique that increases the supply of cotton will reduce the quantity of wool supplied, but there will be no change in the price of wool and, thus, no change in the demand for cotton.

Uber offers a membership option that entitles members to a percentage reduction in the price of Uber rides. Suppose an Uber customer is indifferent between becoming an Uber member or paying the standard Uber ride price. Evaluate the following two statements: (1) This customer will never spend less, and, in general, will spend more on Uber rides if the customer becomes a member (assume that Uber rides are a homogenous good); (2) Introducing the membership option can never reduce the number of Uber rides this customer takes.

Some economists have argued that the Fed should raise its inflation target from 2 percent to 3 or even 4 percent. Why might the effect of a higher inflation target on the quantity of real money balances demanded be larger in the long run than in the short run?

Suppose you go out one night to a bar where beer and whiskey cost $10.00. That night you drank three beers and two whiskies. The next night you go out again, but to a different bar, where beer costs $5.00 and whiskey costs $15.00. At that bar, you drink one beer and three whiskies. What do these choices reveal about the consistency of your preferences?

Suppose the market price of gasoline is $5.00 per gallon. Politicians, responding to their constituents who believe that such a price is outrageous, impose a price control of $2.00 per gallon. At this price, you want to buy 9 gallons of gasoline per week but gas stations are now only willing to sell you 5 gallons per week. There is a shortage. Assume that to buy gas, you must wait in line. Doing so gives you the right to purchase gasoline at the controlled price of $2.00 per gallon. Assume also that you would be willing to pay up to $6 per gallon. Finally, assume that your wage is $10 per hour. How long will you wait in line to buy gasoline? What will be your total expenditure on gasoline each week? What price will you pay per gallon? Did the price control reduce the price of gasoline?

One common argument against public assistance taking the form of direct cash handouts is that the recipients will use the money to buy things that taxpayers find objectionable, e.g., illicit drugs, gambling, etc. To avoid this outcome, the argument goes, public assistance should take the form of in-kind transfers, e.g., food, housing, medical care, etc. What does this argument assume about the income elasticities of objectionable goods? Suppose the recipients could costlessly resell the in-kind transfers. In this case, is there any difference between direct cash handouts and in-kind transfers?

Russ buys 5 sirloins per week. True or false: If the price of sirloin rises by $5 dollars apiece, and if Russ’ preferences and income remain constant, he will have $25 a year less to spend on other things.

If the quantity of higher education services supplied does not rise with the price of those services, i.e., supply is perfectly inelastic, then subsidizing the demand for higher education services will primarily benefit universities and their employees.

Over the past several decades the inflation-adjusted price of healthcare has increased. Based on this information alone, can you infer the source of the higher price? If not, what additional data would you need to determine whether higher prices are being driven by changes in supply or demand?

The Texas Minimum Construction Standards require that all plumbing fixtures be WaterSense certified. Examples include low-flow faucets, shower heads, and toilets. Suppose for the sake of argument that before the law went into effect, installing a normal-flow toilet cost $250. Suppose also that installing a low-flow toilet costs plumbers an additional $100, and that their customers value the savings from low-flow toilets at $25 per toilet. Illustrate how the demand and supply curves for toilets shift as a result of the law. What happens to the price of a new toilet (providing a range is sufficient). Who gains from the law: plumbers, their customers, both, or neither? Justify your answer.

Suppose the demand for fentanyl is perfectly inelastic, and that the users of fentanyl steal from others to acquire the money to pay for it. In an effort to crack down on fentanyl use, the government imposes harsher penalties on suppliers of fentanyl, reducing its supply. How will this policy affect the amount of stealing by fentanyl users?