Microeconomics (2nd Edition) (Pearson Series in Economics)
2nd Edition
ISBN: 9780134492049
Author: Daron Acemoglu, David Laibson, John List
Publisher: PEARSON
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Chapter 4, Problem 12P
(a)
To determine
Government’s
(b)
To determine
Effect of government policy on domestic sugar prices.
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During the 1980s, most of the world’s supply of lysine was produced by a Japanese company named Ajinomoto. Lysine is an essential amino acid that is an important livestock feed component. At this time, the United States imported most of the world’s supply of lysine—more than 30,000 tons—to use in livestock feed at a price of $1.65 per pound. The worldwide market for lysine, however, fundamentally changed in 1991 when U.S.-based Archer Daniels Midland (ADM) began producing lysine—a move that doubled worldwide production capacity. Experts conjectured that Ajinomoto and ADM had similar cost structures and that the marginal cost of producing and distributing lysine was approximately $0.70 per pound. Despite ADM’s entry into the lysine market, suppose demand remained constant at Q = 208 − 80P (in millions of pounds). Shortly after ADM began producing lysine, the worldwide price dropped to $0.70. By 1993, however, the price of lysine shot back up to $1.65. Use the theories discussed in this…
How is the price of gasoline determined in a competitive market? What predictions can you make about the movement of price and quantity in the U.S.?
To answer this question, you should use $2.00 per gallon as the current equilibrium price and you should assume that producers and consumers in this market are both somewhat price inelastic (though not perfectly inelastic). For the prediction, consider the impact of a hypothetical hurricane in the Gulf of Mexico that negatively impacts oil refineries and crude oil rigs.
Use mathematical equations and graphs.
Refer to Example 2.10, which analyzes the effects of price controls on natural gas. Recall that the free-market wholesale
price of natural gas (PG) is $6.40 per mcf (thousand cubic feet), the average price of crude oil (Po) is $50 per barrel, and
production and consumption of gas (Q) are 23 Tcf (trillion cubic feet).
Suppose the price elasticity of supply of natural gas is 0.20, the cross-price elasticity of supply of natural gas with respect to
the price of oil is 0.12, the price elasticity of demand for natural gas is -0.60, and the cross-price elasticity of demand for
natural gas with respect to the price of oil is 1.25.
If so, then the linear supply curve for natural gas is
OA. Q=1.346-1.638PG +0.055PO
B. Q=12.056+0.368PG -0.495PO-
O C. Q=16.296 +0.495P + 1.638Po
O D. Q=10.562 +1.066PG-0.327Po
O E. Q=15.648+0.719P+0.055Po
Chapter 4 Solutions
Microeconomics (2nd Edition) (Pearson Series in Economics)
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