Microeconomics
Asginment 3 – Team 7
01 In the late summer of 2015, Hurricane Katrina caused a storm
surge and levee breaks that flooded much of New Orleans and
destroyed a large fraction of the city’s housing. Hundreds of
thousands of residents were displaced, and about 250000
relocated to nearby Baton Rouge. The increase in population
was so large that Baton Rouge became the largest city in the
state, and many people started calling the city “New Baton
Rouge”.
Before Katrina, the average price of a single-family home was
$130,000. The increase in the city’s population shifted the
demand curve to the right, causing excess demand for housing
at the original price. Just before the hurricane, there were 3,600
homes listed for sale in the city, but a week after the storm,
there were only 500. The excess demand caused fierce
competition among buyers for the limited supply of homes,
increasing the price. Six months later, the average price had
risen to $156,000.
a. Explain the effects of Hurricane Katrina to demand for
housing in Baton Rouge and to the price and quantity of housing
there. Use a graph to explain.
Hurricane Katrina caused a storm
surge levee breaks that flooded
much of New Orleans and
destroyed a large fraction of the
city’s housing. This leads to a
shortage of accommodation in New
Orleans. Therefore, residents had to
move to nearby Baton Rouge as the
alternative housing market. The
chart below illustrates the impact of
Hurricane Katrina on housing
demand in Baton Rouge
● The line demand D0 stands for the
demand for housing before Katrina and the
line demand D1 stands for the demand for
housing after Katrina. Supposed the line S
(supply) before and after Katrina is constant.
● An increase in population of Baton
Rough leads to an increasing demand for
housing. Supply which stands for the supply
for housing before and after Katrina is
constant. Therefore, the demand curve shifts
to the right and the equilibrium price and
equilibrium quantity rises from P0P1 and E0
to E1 respectively.
● This resulted in the shortage in the number
of housings supplied in Baton Rouge, which
can be described in line HE1 in the graph
b. Suppose that five years after the Hurricane Katrina, half the people
who had relocated to Baton Rouge move back to a rebuilt New
Orleans. Use a demand and supply graph of the Baton Rouge housing
market to show the market effects of the return of people to New
Orleans.
Five years after Katrina, half of people who
had relocated to Baton Rouge move back to
a rebuilt New Orleans => the demand for
housing decrease. Supposed the supply line
is constant.
The demand curve shifts to the left, the new
equilibrium price and the new equilibrium
quantity move from P1 to P2 and E1 to E2
respectively.
This resulted in the redundant in the number
of housings supplied in Baton Rouge, which
can be described in line H2E1 in the graph
In the last few years thousands of honeybee colonies
02
have vanished, a result of bee colony collapse
disorder (CCD). Roughly one-third of the US food
supply- including a wide variety of fruits, vegetables,
and nuts- depends on pollination from bees. The
decline of honeybees threatens $ 15 billion worth of
crops in the US. The decrease in pollination by bees
has decreased the supply of strawberries, raspberries,
and almost, leading to higher prices for these
ingredients for ice cream. The higher price for berries
and nuts has increased the cost of producing food
products, such as ice cream, increasing their prices
as well.
■ The decrease in population of
bee leads to the decrease in
pollination which is ingredients to
create ice cream -> increase input
price (non-price factor) -> the
supply curve shift to the left.
■ The equilibrium point increase
from E0 to E1 and the price of ice
cream increase from p0 to p1 but the
demand curve shift to the left
When a restaurant charges 10$ per meal (per person) it found that Mr.
03 and Mrs. Binh, who are typical customers, dined out once a month, Ceteris
Paribus. When the restaurant, as a promotional device, introduced a
voucher system giving patrons two meals for the price of one, the Binh’s
dined out three times a month.
a. Calculate the elasticity of demand for this restaurant.
- The Binhs used to dine out once per month, now dine out three times a month.
=> Q1: 1 time, Q2: 3 time => The percentage change in quantity demand:
%Qd = Qd/Qd × 100 = (3 – 1)/1 × 100 = 200%
- A meal originally costs $10. When a voucher system is introduced, one meal now costs
half the initial price. => P1: 10$, P2: 5$ => The percentage change in price:
%∆P = ∆P/P × 100 = (5 – 10)/10 × 100 = -50%
The elasticity of demand for this restaurant: Epd = | %∆Q / %∆P| = |200% / -50%| = 4
=> Elastic ( 4>1 )
b. Explain what impact the promotional vouchers had on the Binh’s
monthly expenditure on meals at this restaurant. Is the change in total
expenditure consistent with the value of demand you calculate?
- Without promotional vouchers, the Binh’s buy 2 meals, $10 each, once
a month. => They spend $10 x 2 x 1 = $20 a month without vouchers
With vouchers the Binh’s buy 2 meals for $5 each, 3 times a month
=> They spend $5 x 2 x 3 = $30 a month with vouchers
With the impact of vouchers, the Binh’s monthly spending at this
restaurant rises by $10.
=> The change in total expenditure is consistent with the calculated
value of demand, with other conditions remaining the same.
04 College Enrollment and
Apartment Prices
Consider a college town where the initial price of rental apartments
is $400, and the initial quantity is 1,000 apartments. The price
elasticity of demand for apartments is 1.0 and the price elasticity of
sully of apartments is 0.5.
a. Use demand and supply curves to show the initial
equilibrium, and label the equilibrium point a.
Because the price elasticity of demand for
apartments is 1.0 which is unit elasticity,
therefore, 400$ is the equilibrium point.
We have P1 = $400, Q1 = 1000
Epd = 1, Esp = 0,5
P = a – b.Qd; Epd = |-1/b x P/Q| = 1
=> b = 0,4 => a = 800 (Pe = 400, Qe =1000)
=>The demand equation is P = 800 – 0,4Qd
=> Qd = (P-800)/-0,4
P = c + d.Qs; Eps = |1/cxP/Q| = 0.5
=> d = 0,8 => c = -400
=> The supply equation is P = -400 + 0,8 Qs
=> Qs = (P +400)/0,8
b. Suppose that an increase in college enrollment is expected to increase
the demand for apartments in college town by 15 percent. Use your graph
to show the effects of the increase in demand on the apartments market.
Label the new equilibrium point b.
%∆Q = 15%
The percentage change of the equilibrium
price of apartments
= percentage change in demand/ Es +Ed
= %∆Q / Es+Eq = 15%/ 1+0,5 = 10%
→ Pe2= 400 + 400 x 10% = 440$
Using the supply equation we can
calculate the quantity of apartments with
the price 440$ => Qe2 = 1050
c. Predict the effect of the increase in demand on the
equilibrium price of apartments
The increase in demand leads to the increase in the equilibrium price
of apartments because this is an unit elasticity therefore, the quantity
increases will lead to the increase in price
05 Import Restrictions
and the Price of Steel
Suppose import restrictions on steel decrease the supply of steel by 24
percent. The initial price of steel is $100 per unit, the elasticity of
demand is 0.7, and the elasticity of supply is 2.3. Predict what is the
effect of the import restrictions on the equilibrium price of steel.
Illustrate your answer with a graph that shows the initial point (a)
and the new equilibrium (b)
We have:
Pe1 = $100, Ed = 0,7, Es = 2,3.
%∆Qs = - 24%
=> %∆Pe = |-%∆Qs/(Es +Ed)|
= |24%/(2,3 + 0,7)| = 8% → Pe2 =
108$
The import restrictions decrease
the of steel by 24% will leads to
an increase in the equilibrium
price (from 100 → 108$)
Thanks!
Do you have any questions?
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