ECONOMIC MARKETS

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1. Assume that the markets for land, fertilizer, solar farms, and coal are all competitive. Land and fertilizer are used to produce wheat, but land can also be used for solar farms. Solar farms and coal are alternative sources of electric power. Based on these facts, analyze the following five separate situations. (They are independent situations; the assumption from one situation does not follow through to the next one.)
For each situation, you identify who in the economy is directly affected, and how that affects their supply or demand in one or two markets. Then show how this initial impact spills over into the other markets. This means that, for each situation, you should draw four supply and demand diagrams. (You will draw 20 diagrams altogether.) Each diagram should: show at least one curve shift; describe briefly why the shift(s) occurs, and indicate whether the equilibrium price in that market rises or falls.
Five situations:
(a) Mining companies discover new coal fields.
(b) The ammonia used to make fertilizer become more expensive.
(c) Hot weather increases the demand for electricity.
(d) Technical improvements improve the efficiency of solar cells.
(e) The demand for wheat increases.
2. Assume that the market for roses is competitive. The supply function is S(P) = 3(P32) and the demand function D(P) = ä31⁄2P, where ä>0 is a constant that represents the price of a related good.
(a) Some possibilities for the related good are: tulips, chocolates, fertilizer, champagne, and rose-scented perfume. Which of these do you think makes the most sense, given the form of the demand function? You should justify your answer, and most of the points depend on your justification. (There may or may not be more than one reasonable answer.)
For the rest of the problem, assume that ä=22.
(b) If the market price is $10, then calculate the excess supply or excess demand in the market. What is the quantity of roses actually traded?
(c) If the market price is $10, then what in this market do you expect to change, to bring the market into
Calculate the equilibrium price and quantity.
Draw the supply and demand curves, showing the exact coordinates of all intercepts and the quilibrium point.
3. Justify your answers and provide supporting facts, but being concise is also a virtue. Nothing is gained by unnecessary length.
A.
(i) What are the basic assumptions underlying the supply and demand model?
(ii) How would you decide whether the that model is a good way to understand a particular market?
(iii) Based on the discussion in lecture, if possible: what is an example of a raw materials market where
the supply and demand model fits fairly well; and what is an example of a raw materials market where the supply and demand is probably the wrong model to use.
B. Who are the United States’ major trading partners, and what are the United States’ major exports? For this question, going into some detail will help your score.

C. (skipping this one)

D. Trade between the United States and China has greatly increased over the past few decades.
(i) Identify at least one reason for this increase.
(ii) According to economists’ usual ways of thinking about trade, what are the benefits and harms of this
increased trade, to persons in the United States? These benefits or harms may or may not be related to the balance between exports and imports.
E.
(i) Provide at least one realistic example of a violation of the Law of Demand.
(ii) Provide at least one realistic example of a violation of the Law of Supply.
F.
(i) What are economists’ two fundamental assumptions about human behavior?
(ii) For each assumption, provide a realistic situation where it is violated.
(iii) Given such violations, how do economists justify the use of models based on faulty assumptions?