Principles of Macroeconomics (11th Edition)
11th Edition
ISBN: 9780133023671
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 4, Problem 16P
To determine
Graphical illustration of changes in
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Current Stats for Gasoline:
Government Enforced Price Ceiling - $4.50/gallon
Current Market Equilibrium - $3.00/gallon
OPEC, the largest global supplier of oil used to make gasoline, has decided to reduce output by 50%. This policy change is expected to drive up the cost of gasoline to $5.00/gallon. How does that price change interact with the price ceiling?
A. Changes the Price Ceiling from Binding to Non-Binding
B. Disrupts Oil Supply
C. Changes the Price Ceiling from Non-Binding to Binding
D. No Change
Corn is a very valuable product for which the U.S. government routinely offers subsidies.
With no price support, the equilibrium price for corn is $300 per ton and the equilibrium
quantity is 500 million tons per year. Suppose that the government agrees to pay
farmers $350 for every ton of corn they produce and can't sell in the market. According
to the farmer's market supply curve, 600 million tons per year is supplied at the price of
$350 a ton, so production should increase to this amount. However, domestic users of
corn cut back their purchases. Only 450 million tons a year is demanded at the price of
$350 a ton, and purchases decrease to this amount. Farmers continue to produce 500
million tons of corn per year, so because they produce a greater quantity of corn than
domestic buyers are willing to purchase, something must be done with the surplus. To
make the price support work, the government decides to buy the surplus.
a. In this example, how many million tons does the…
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
Principles of Macroeconomics (11th Edition)
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