Instructor: Akos LadaMid-Career MPA
Harvard Kennedy SchoolSummer Program 2014
Problem/Questionof the Day
Distributed: 7/21/14
Due in Class: 7/22/14
- Consider the market for paperback fictionbooks (You don’t have to worry about whether the prices and quantities are reasonable). Let qD = 40-0.5P represent the demand curve for an individual consumer, and qS = -80+4P represent the supply curve for an individual producer. Furthermore, assume that there are 100 identical consumers and 5 identical producers in the market. The quantity units are books and the currency is US dollars.
- Plot the individual consumer demand curve and individual firm supply curve on separate graphs. (Graphs do not have to be to scale or on graph paper, but please label the important features- intercepts, etc.)
- What are the equations for the market supply and demand curves? Please plot market demand and supply on the same graph. How do these curves compare to those for individual supply and demand?
- What is the equilibrium price and quantity in the market for these paperback books?
- If an individual’s income rises, will he demand more or fewer paperback books? What assumption (in economic terms) did you make to reach this conclusion?
- If the price of hardcover (fiction) booksfalls, what happens to the demand for paperback books? Why? If the price of electricity rises, what happens to demand for books? Why?
- Suppose that the fiction writers’ union recently negotiated higher wages. What happens to the supply of paperbacks? Explain.
- Now suppose that consumer groups lobbied the government to pass a bill to keep the price of paperbacks lower than the equilibrium price. What type of price control would they want to lobby for? What would result, economically speaking, from such a price control if it was passed and enforced?
- Suppose the price control in part (g) was passed at a price of $50. What would be the resulting price and quantity consumed in the market? What would be the amount of shortage/surplus?